Benefit from the corporate tax rate

Bruce Sellery says investing through a corporation be an effective tax strategy, but it requires a careful plan.

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Question

I am a small business owner and sole director of my company. My business savings have grown and I now want to invest online in shares through the corporation, rather than as an individual. Am I correct to assume I can invest this way?

Answer

Yes. You can invest in shares through your corporation, and it is simple to do. This strategy can be a great way to get the retained earnings from your business working for you and, at the same time, help you build a nest egg for your retirement. Here’s how:

Talk to your accountant

Many people keep the profits from their business inside a corporation for tax reasons. Corporate income tax is generally lower than personal income tax, and the dividends that they pay out are taxed at a lower rate than salary. You can buy and sell shares inside a corporate brokerage account and build up a nest egg for your retirement. Then, down the road when you stop working, the corporation can continue to pay you dividends instead of, or in addition to, drawing down your RRSP. However, offsetting the benefits of keeping your money in the corporation is the fact that you will not be building RRSP contribution room, because you aren’t paying yourself as much in salary.

An accountant can help you think through the many different factors you need to consider, as well as identify the most tax efficient places to hold your investments. For example, he or she will likely recommend that you keep fixed-income investments in your RRSP and equities in your corporate account to minimize the tax implications. There may be the opportunity for you to take advantage of tax credits, set up a trust to split income with your spouse, or contribute to charity through your business more tax efficiently than as an individual.

My point is that it is worth discussing your plan with an accountant to ensure that this approach is the best one for you.

Set up a discount brokerage account

If indeed this strategy does make sense, the first step is to set up a discount brokerage account for your small business. For simplicity, you might choose the one associated with the institution that holds your small business bank accounts. You can then transfer money from your business bank account into your business brokerage account and invest the money as you see fit.

You can invest online on your own, but depending how much you have to invest and the complexity of your finances you might consider hiring a financial adviser at a full service broker.  For example, if you have more than $500,000, you’ll be able to hire someone who provides fee-based services and that may be worth it to you. An adviser will be able to help you think through your cash flow needs and determine a plan for your investments, depending on when you’ll need access to the money.

If you do choose to do it yourself, be sure you think through your cash needs. You don’t want to be in a situation where your corporate portfolio is fully invested in stocks that have fallen sharply, at a time when you need $30,000 to buy a new truck for the business.

Develop an investment plan

The process of investing in shares within your corporation is similar to what you would do as an individual. Develop an investment plan to achieve those goals. It will be important to make sure that your corporate investment plan is connected to your personal one. For example, if you have savings split between the corporation and your personal accounts, like an RRSP, it will be more difficult to keep track of your asset allocation. You will need to stay on top of how much of your total portfolio is in equities versus fixed income so that your risk is not skewed too much in one direction or the other.

Many of the entrepreneurs I work with are so focused on the revenues of their business that they completely ignore profit. This is a big miss given the bottom line really is the bottom line. Focus on building profit for your business, then investing those profits intelligently to get your money working for you.

ask@moneysense.ca

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