Should I Invest Inside My Corporation?

Introduction

• Presenter: Joe from Avalon Accounting
• Question Addressed: Should I invest inside my corporation?
  • Quick Answer: It depends

Key Factors to Consider

1. Retention of Original Capital

• Importance: More initial capital means more growth potential
• Corporate Tax Rate in BC: 11% small business tax rate
  • Retain 89% of capital in BC
• Personal Tax Rate: Higher when taking out as dividends/salary (30-40%)
• RRSPs: Most tax-efficient way
  • Pay salary → Create RRSP room → Invest
  • Retain 100% of capital with tax-free growth
• No RRSP Room/Salaries: Investing inside the corporation may be better

2. Tax Rate on Investment Income

• Within Corporation: Retain capital but higher tax rates for investment income
  • Capital Gains: Taxed at 50% of income
  • Dividends: Investment income taxed higher than personal tax rates
• Policy: Discourages passive investments within corporations
  • Higher corporate investment tax rates
  • Refundable tax when paid out as dividends
• Personal Investment: Generally lower tax rates for investment income

3. Purpose of Investment

• Short-Term Surplus: Invest within the corporation in liquid/short-term assets
  • Avoid high-risk investments
  • Useful for seasonal cash needs
• Long-Term/Retirement: Consider retaining capital and tax rates
  • Use RRSPs and TFSAs for sheltering investment income
  • Weigh opposing forces of capital retention and tax efficiency

4. Risk Factors

• Legal Liability: Active business risks (e.g., legal suits)
  • Risk of losing investment assets if sued
  • Consider holding investments in a holding company or personally
  • Provides some legal protection (consult a lawyer)

5. Volume of Investment Income

• Small Business Deduction: Low corporate tax rates for small businesses
  • Clawback: Over $50,000 in passive income reduces small business deduction
  • Threshold: Deduction completely gone at $150,000 in passive income
• Watch Out: For high passive income within the corporation

Conclusion

• General Advice: Not usually a great idea to invest inside the corporation
  • High corporate investment tax rates
  • Utilize RRSPs for retaining capital
• Specific Scenarios: Might be viable if willing to pay higher taxes and gain refundable tax credits
• Reality Check: Incorporating for low tax rates is complex and not always beneficial

Final Notes

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• Engage: Comment below with specific scenarios/questions
• Appreciation: Thanks for the support