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Corporate Investment Services
“The world’s best asset managers don’t manage million dollar portfolios, they manage billion dollar funds”
Corporately Held Investments
The tax rate on business income earned by a corporation is generally much lower than the top personal marginal tax rate for an individual who earns business income. Until income is withdrawn from a corporation as a dividend, there is a “tax deferral” in the form of personal taxes that are deferred until a dividend is paid.
On the first $500,000 in taxable income in a given year a lower corporate tax rate applies (this is referred to as the small business deduction). The tax deferral on this income ranges from 35.5% to 41% in 2018. For active business income above the small business deduction the 2018 tax deferral ranges from 20.4% to 20.7%. The amount of tax deferred in the corporation results in higher starting capital for investments, compared to an individual investor. So, if the higher amount of after-tax business income is invested inside the corporation, a shareholder may end up with more after-tax income from the corporation (compared to investing personally) at the end of the investment period.
As of 2019, the small business deduction was reduced for Canadian Controlled Private Corporations with over $50,000 of certain investment income — “adjusted aggregate investment income or passive investment income” — in the previous year. The small business deduction will be reduced by $5 for each $1 of passive income that exceeds $50,000 and will reach zero once $150,000 of passive investment income is earned in the previous year. For purposes of calculating the passive investment income threshold, investment income of ALL associated corporations is combined. Private corporations with no active income such as holding companies will not be impacted.
1. Corporate Investments should utilize a “buy and hold” strategy to defer capital gains if a corporation is approaching the $50,000 threshold.
2. Focus on Capital Gains versus dividend or interest income. In terms of asset allocation within different investment accounts, it is more efficient to hold capital gains bearing investments within your corporation due to the higher tax rate. Corporate Class Funds additionally allow for the use of investment management fees to offset gains. They are also designed to increase capital gains versus dividend and interest income which is less tax advantageous. These funds were specifically designed for funds in non-registered and corporate accounts.
3. Consider whether an Individual Pension Plan (IPP) or Retirement Compensation Arrangement (RCA) may be a more efficient place to grow your assets over the long run. Considerations should be made whether or not you plan to keep the corporation open for the long term, the total value of assets in retained earnings and what other investment and retirement assets you hold.
4. Corporately owned exempt life insurance may be appropriate as income earned within these plans is tax sheltered. For assets intended to be passed on to heirs in an estate insurance can also be a very effective place to hold assets in terms of crediting the Capital Dividend Account and paying out benefits tax free.
Frequently Asked Questions
Our advisors have different designations which can be seen in our bios in the “about section”. At minimum your Financial Planning is always completed by a Certified Financial Planner and Investment advice is always completed by a Chartered Investment Manager. Nathan and Eli are both Fellows of the Canadian Securities Institute and Eli holds a number of additional advanced designations that apply to complex financial planning situations. We believe in ongoing education and all of our advisors are currently completing additional designations, furthering the value we can provide clients.
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