Should Business Owners Use RRSPs?

By Matt Redshaw

As a private company owner in Canada, you face a unique choice when planning for retirement. You can invest personally, such as through an RRSP, or you can invest inside of your corporation. The question is – which is a better way to achieve your retirement goals? 

Why invest inside your company?

The main reason to invest inside of your company (usually through a Holding Company, to keep these assets separate from your operating assets), is to take advantage of tax deferral. Corporate earnings are taxed at a lower rate than if they were taken out of the company as salary or dividends. If you own a Canadian Controlled Private Corporation (CCPC) in BC, tax on your first $500,000 of corporate earnings is only 13% in 2016. If you earn more profit in your company than you need to live on personally, you can retain this excess income inside your company, paying only 13% tax up to $500,000 and 26% over $500,000. These “87 cent” and “74 cent” dollars can be invested into a well-managed portfolio inside your company and grow for retirement. Alternatively, if you take these earnings as salary or dividends, you face tax up to 47.7%. You can, however, invest these personal funds into an RRSP, which provides an offsetting tax deduction. So, which of these two options is better? 

RRSP vs. Investing Inside Your Company

In 2010 Jamie Golombek, tax and estate planning expert with CIBC, provided an analysis on this subject.  His example scenario was a business owner earning $150,000 pre-tax income, and only requiring $72,000 of personal income. Because of certain inefficiencies in Canada’s tax system and the advantage of tax deferral, the analysis suggested investing inside your corporation is generally more favourable than withdrawing and investing in an RRSP. 
Sumeet Sangha, Partner at SanghaTone CPA, recently updated this analysis using 2015 tax rates, and came up with the same result: as a rule it makes more sense to invest excess earnings inside of a Holding Company, as opposed to withdrawing personally and contributing to an RRSP. The graph below illustrates, using rounded figures, that with various types of investment allocations, investing in the company (illustrated in blue) leaves you with more money in retirement than withdrawing and investing in an RRSP (illustrated in red). For details on the underlying assumptions of the analysis, read Golombek’s original article here

 
 

When Might an RRSP Be Better?

There are many considerations when deciding whether to invest inside your corporation vs. personally through an RRSP. It is important to work with a good tax advisor. There are cases when an RRSP might make sense. RRSPs can help when planning for income splitting in retirement - by separating contributions between regular and spousal RRSPs today, income can be withdrawn more evenly in retirement. Income splitting can also be achieved with corporate structuring, but planning and advice is required. Another consideration is creditor protection; RRSP and RRIFs may offer greater protection than a corporate structure. A third consideration is the accumulation of CPP entitlement, as paying yourself a salary personally will accrue CPP credit for use in retirement. However, it also adds cost, as business owners have to pay both the employer and employee portion of CPP contributions. All of these and other factors need to be considered and discussed with a proactive and knowledgeable tax advisor. 

Investing Tax-Efficiently

If you are investing inside of your company, tax efficiency becomes very important. Income from investments inside your company is considered “passive income” and is taxed at a very high rate – 49.7% in BC in 2016. This means your corporately held investment portfolio should be constructed to achieve the highest level of tax efficiency. As a MoneySense Approved Financial Advisor, the Tycuda Group specializes in building portfolios for private clients and businesses that have both performance and tax-efficiency in mind. Tycuda’s unique portfolio management system addresses four key factors that affect investor success: Risk, Returns, Recovery(TM) and Tax. 

What Makes Sense for You? 

If you are a business owner looking to determine the best way to invest for retirement, we would be happy to help you figure that out. Give us a call at 1-866-960-1025 or email us at tycuda@3macs.com to arrange a conversation. 

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Disclaimer: This article has been prepared for general information only.  It does not account for the specific investment objectives and financial situation of any person.  Investors should seek professional advice regarding the appropriateness of investing as discussed or recommended in this article and should recognize that statements regarding future prospects may not be realized.

The information presented has been compiled from sources believed to be reliable but no guarantee is made as to it accuracy, completeness or correctness.  All opinions and estimates contained in this report are provided in good faith and are subject to change without notice.