hey everybody joe here from avalon accounting and today we're answering a question that we get a lot which is should i invest inside my corporations spoiler alert it depends so if you're just looking for a quick answer that's the answer for you but if you want some detail there i'll break down the sort of four oh four and a half ish factors to consider and uh break those down so you can apply this to your situation so all that and nothing else coming right up [Music] all right so the first factor you're going to want to consider is how much of your original capital are you going to retain so whether that's within a corporation or if you're paying out dividends or salary to you personally how much money after paying that tax is left over for you to actually invest and if you've ever you know done any sort of investment courses you know the more capital you have at the beginning the more that can grow so you want to retain as much capital as you can because as soon as you pay to the government guess what they're not going to give it back so really important to consider this part so in a corporation you're going to retain quite a bit of that capital so here in bc we have an 11 11 small business tax rate which is fantastic and it tends to be quite low all the way across canada so no issue with that you do retain a lot of the capital within your corporation if it's active business income that it's it's developed from you will retain yeah in bc 89 of that capital so that's a plus side for investing inside the corporation you got a larger chunk of that to to work with on the flip side if you're paying that out personally and you're investing personally you're going to have to take that money out of the corporation either through dividends or salary and then invest it and if your marginal tax rates 40 or 30 percent you can see already that you've already whittled away a lot of that original capital so it's really hard to make up those those sort of tax payments that you've made already already to uh to get to the same growth amount that you would have inside the corporation but all is not lost within your personal side so if you have rrsp contribution room this is actually the most tax efficient way to create that cat that original capital and the way you do that is this so you pay through salary to yourself personally you create rrsp contribution room and then you put that money into an rrsp that you would invest otherwise you retain 100 of the capital and plus anything that's growth within that investment is not taxed until you start taking it out so you grow more you have more at the beginning and then all of your gains or investment income is tax free so that's the most efficient way but if you don't have rsp room or you're just totally opposed to paying yourself a salary you know investing inside the corporation might be a good idea all right so the second factor that we want to consider is what is the tax rate on this investment income so we covered rrsps and how you wouldn't pay any taxes in that but let's take that out of the equation for the moment so within the corporation you've decided to invest there you're retaining all that capital now you're starting to get dividend payments from the stocks that you invested in or you have some growth and things what sort of tax rates are you facing there so capital gains is capital gains so you get taxed at 50 of the income at the investment tax rate but let's talk about maybe uh dividends within uh investments that you have within the the corporation that might be through mutual funds or whatnot so that income will be taxed not at the small business tax rate that 11 in bc that i just mentioned or low small business corporate tax rates those tax rates are for active business income and that's very specific it's defined in the income tax act there's no avoiding it if it's if it's investment income you're going to be taxed at investment tax investment income tax rates so in the corporation you're actually these can generally be higher than your personal tax rates so the way the i guess the policy works is that they want to discourage companies from passive investments inside these corporations so you get taxed a little bit higher than you would personally and the reason for that is that you will you know get taxed there and then once you pay that money out as a dividend to yourself personally so it goes through the corporate veil it gets its personal tax rate um going that's when you get a refundable tax or back for the corporation for actually putting that money so they kind of they kind of force your hand on that because you're getting taxed at that high rate high rate that's i mean there's still that the other factor can to consider which is how much capital you're retaining in the first place but you will be taxed likely at a higher tax rate inside the corporation then you would be taxed personally all right the third factor to consider is what is the purpose of this investment so if you have some excess funds maybe seasonally within your corporation and you don't want that cash to sit idle you know investing inside the corporation might be a good idea you want to keep quite liquid assets or short-term assets not really high-risk stuff obviously if you need that money for maybe slower periods of the year where you don't have as many sales but you still want to keep staff on or they're working on other projects or something like that so i think in this scenario where you're you have short-term cash surpluses within your corporation you'll you'll want to make sure you keep that in the corporation do some smart investing within that that is like short term but uh you know just considering the timeline and not doing anything too risky with that money so i think that's a clear-cut example where you would invest inside the corporation if it's longer-term investing or retirement planning that you're doing we're back to sort of do you do that in the corporation and you're considering you know how much capital you're going to retain within the corp and what your tax rates are going to be on that investment income which are sort of opposing forces there or whether you distribute that money to yourself personally and use things like rrsps and tfsas to sort of shelter that investment income so there's no real cut and dry way to think about this but it is a factor that that you do want to consider when thinking about whether to keep that in the corp um and you know if it is short term for cash needs later then maybe just keep that in the corp don't pay out and then pay back from personal back to corporate all right so the fourth factor to consider here when you're deciding whether to invest inside your corporation is what are some of the risk factors of holding those assets within the corporation and what i mean by this is are you running an active business with this corporation is there some legal liability that your customer might sue you and if they were to sue you they may have access to some of these assets that you're sort of holding on to maybe for retirement or something so just something to be really cautious of when you invest in inside the corporation that you may be opening yourself up to some legal risk uh if you were to be sued and the plaintiff was successful in court so just something to consider there if you're creating these you know large investment portfolios that there can be you know overlap with the risk of the business that you're running some ways around this i mean there are legal protections in having a hold coast or holding some of those uh investments within a holding company or in or or holding them personally that may provide a buffer i'm not a lawyer but i know it does provide some level of protection if not definitely not a hundred percent but those are some that is something that you will want to consider when you know holding a lot of investments inside your operating company all right so the sort of last one i guess it's kind of four and a half but uh and not many of our clients are quite here yet but it does happen so you'll want to really watch on the volume of investment income that you are producing within a uh within a corporation so the way the small business deduction rules work is that you get low corporate tax rates for being a small business but one of the things that can claw back the small business deduction these really low corporate tax rates that you get is the amount of investment income that you produce within that corporation or any other corporations that you own so if you're over 50 000 in passive income in a year you're going to start to claw back this small business deduction which is something we definitely want to avoid it's totally gone by the time you hit 150 000 in passive income within your corporation then that that small business deduction is completely gone for you so it's just something to watch for somebody consider um we like i said i don't see a lot of these i don't see a lot of people producing that kind of income passively inside their small business but it is something to watch for and if you are thinking about you know really creating a very uh large investment portfolio within your corporation just this is a big trip wire to watch out for all right so that's it i hope that's been helpful for you to understand whether you should invest inside your corporation i will say overall most for most scenarios i say you know it's not a great idea to invest inside that corporation one because you get the high corporate investment tax rates or passive passive income tax rates so you want to watch for that and there are other avenues like the rrsp to retain the capital that you're kind of aiming for with that corporation but you know if the scenario is just right and you want to hold that and you don't mind paying a little more investment income tax um knowing that you'll get that back eventually when you give it a dividend it out to you yourself personally then you know it might be something to consider for yourself but just know there's no like simple you know i'm going to create this corporation i think that's what people have stars in their eyes about is that i'm going to create this corporation and get these really low tax rates and this is a no-brainer and then they incorporate and find out that hey you know what that's actually not how these things work so hopefully that's been helpful for you um if you if it has been helpful if you enjoyed this video please hit the like button and if you like content like this and or a small business owner yourself in canada please consider subscribing we really appreciate all the support that we get and if you have a particular scenario one more ask which is comment below on your particular scenario or i haven't covered a particular question that you have and we try to answer as many questions as we can and really appreciate all your support so thanks so much and we'll see you on the next one cheers [Music] you