so to understand what did it heck am I talking about you have to understand a little bit about what how a corporation works and the way a corporation works with your earn the income it's taxed at this low corporate tax rate that leaves us this bigger pot of money to invest which is kind of like a reservoir and the benefit of a corporation is smoothing that cash flow instead of paying all that tax up front as a personal at a personal rate you're allowed to slowly let it leak out release the dam let it flow it as dividends and pay pay tax spread out over time which you know for most of us works great because we earn a lot of income during some years and then other years we may not earn much whether that's in retirement or we just have a pandemic or something you know lots of things can happen along the way or you know we have children and we need to take some time off work uh to deal with that lots of stuff happens and this helps us to smooth that out now that's that's the best that's what corporations were intended for but we also try to use them to invest and so with extra income we invest it and to prevent us from doing that just as a way of investing we pay a high tax upfront pretty close to what the Mer top marginal tax rate is that's collected immediately and you don't get that tax back until you flow the money out the rest of the way and pay the personal tax on it and then you get this refundable dividend tax on hand which is this tax collected some or all of that gets refunded back to the corporation so for Corporation to work well we have to be saving money we can't be spending at all we have to have some to invest but we also have to be flowing enough money out of that corporation that we're keeping that refundable tax being being refunded back to our Corporation otherwise we're just paying the top rate right up front and that's by Design so that's one thing is we have to keep money flowing the other the other sort of myth that's out there is that investing through a corporation is more efficient and this is why I talked about tax Drag versus tax deferral at the very beginning tax drag is when you flow the money out and there's something called tax integration whereas if you take investment income just like any other income flow it through your corporation to yourself you pay corporate taxes you pay personal taxes and those should add up to be roughly the same as what you would have paid on your own but tax deferred integration is not perfect so you pay 50 tax up front you flow out those dividends and you know this is with interest 30 gets refunded back there's about 20 percent that's that's not refunded it's just money that's basically lost and then you pay your own taxes when you pay that money out as dividends that releases that tax but if you add up the amount of tax that your corporation pays net of the refund and that you pay the tax integration does not favor a corporation you're actually more tax efficient investing on your own and that's why if you're able to efficiently get money out of your corporation invest it yourself that money is actually generally more efficient than it is than a corporation and that's what the dividends flowing through if you're not paying dividends out of your corporation then it becomes very inefficient uh most of the time so on the left column here we got the lowest tax bracket so if you're a bottom tax bracket person and the corporation pays 50 tax up front and you're not paying out any dividends well you've paid 51 really tax upfront if you had just earned that personally you would have paid around 20 and your corporation is paying 30 percent more tax per year than you would have just been paying investing it personally now the interesting thing that's happened over the last few years is that our personal tax rates in some provinces have gotten so high that they're actually higher than the 51 so when this system was designed it was designed that this 51 was punitive and going to stop people from leaving money in their corporations well now we have such a high taxes personal in some places like this is the BC rates that I used here in Ontario is the same thing and that's actually a little bit higher than that 50 so on a one-year basis it's more efficient to just leave it in there at some point but at some point you're gonna have to take that money out and then you're gonna have to pay this the extra rest of the tax and then you're going to have some of that tax and efficiency so it depends on how long you leave it in there and this is where something called dividend trapping I don't know if that's a real name or not I kind of made it up uh may come in and this becomes an issue for some people but not most people most people are going to be spending some dividends to live on right so you have this 50 tax that's collected up front you need to spend some dividends to live on that money gets refunded back to your corporation and the net of all of that is a little bit of corporate tax rate but not too bad if you don't need the dividends to live on let's say you're paying yourself you know 160 000 a year in salary to max out your rrsp or 165 000 to Max at your rspe and your spouse has an income and that's all the money that you need you don't need to pay yourself dividends well then you have to decide do I pay Dallas pay myself a dividend just to release this money back to my Corporation or or is that actually more expensive so up to the and the solicitor dividend trapping comes in so this is a a an example uh using BC tax rates just as it to illustrate how it works so if you were to add up the amount of tax that you pay personally and the amount that you pay corporately that's what this this side is here this is your personal income along the bottom and as I showed you know when you're very bottom tax bracket low tax you know it makes much more sense for you to take out the money personally and pay tax at around you know a little bit under 30 percent when the corporations paid 50 tax already so it makes sense to just pay yourself a dividend whether you need the money or not and release that 50 backs to your corporation even though you're paying a bit of tax yourself and this is where they'll just leave everything in the corporation advice is probably actually not accurate even on a one year basis now cortex as you go up into the personal tax brackets it gets closer and closer and closer and at some point the amount of tax that you'd pay whether you take the dividend or not is basically the same but the after that tax after that point paying yourself a dividend just to get the money back to your corporation is now inefficient and that's where that redefundable tax has been collected and not refunded back to your corporation it's trapped there until you decide to pay that money out and that would probably for most of us happen if we have a big expense that we want to cover or in retirement we're not going to pay ourselves a salary anymore we're going to pay ourselves uh dividends so it does get released eventually but along the way you can develop this inefficiency that drags on your growth so what does that look like for other provinces it's interesting for for Manitoba and Saskatchewan Saskatchewan it never happens uh for Alberta it almost never happens unless you're in the highest attack packet but for Manitoba it happens at a hundred thousand dollars for most provinces that happens around 150 160 thousand dollars which interestingly is around the same amount that you'd be paying yourself to be able to use your rrsp now I didn't go through it all but if with eligible dividends those are like the ones that Canadian companies give you so if you buy something on the TSX and it's paying you eligible dividends those are actually very very efficient the amount of tax that's collected is is 38 percent the amount that's refunded is 38 so the tax integration for the corporation is perfect and because eligible Dividends are taxed favorably in our personal hands in most provinces it's never an issue in some provinces like Ontario because our highest tax rate is so high it can happen but not until you're getting up into the 220s and even then it's really really close it's like a one percent difference it probably doesn't really matter I would not sweat it so that was one of the mathy parts of the talk which I you know I address because it's important to understand this to be able to talk to your account because they may say just leave everything in the corporation so you have to know that this exists and it's also one of those things people are always asking about but really the take-home messages of it would be the interests in foreign Dividends are generally less efficient in a corporation than a personal accounts so if you think that your corporations better than investing personally it's not especially for things that are interested in foreign dividends but eligible Dividends are very tax efficient and you have to flow flowing dividends whether you need the money or not is generally actually pretty efficient up until you get these break points in income and then it may become less efficient and that's why when people the people that do run into trouble are the low spender big Savers where they have a huge corporation that's got a lot of passive income but they don't they're not paying much out to live on and if you do have extra money that you're paying out to yourself to release that refundable tax well what do you do with it well you can well you could think about what you're doing and maybe spend on something fun uh you may want to use that as a way of putting money or tfsa or RSP or your personal cash account uh for some funds funding down the road but the main point here the take-home message which is why it's in the green box is to check with your accountant that's your refundable dividend tax is getting released and if it's not ask them whether it makes sense to pay dividends to release it or not and and if they say oh just always leave everything in the corporation ask them whether that makes sense or whether the the Dividends are getting trapped or not not everybody thinks about that it's one of these things I've seen not come up