When it comes to financing their future, business owners face a dilemma: should they put excess funds in an investment account held by their corporation, or in their RRSP?
Each decision has its pros and cons. But due to changes in corporate and shareholder taxation over the past several years, an RRSP contribution would be the better option, according to a new report from CIBC.
RRSPs: A Smart Choice for Business Owners
was prepared by Jamie Golombek, managing director, Tax and Estate Planning, CIBC Wealth Strategies Group. In it, he compared corporate investing with investing in an RRSP. He used various scenarios to illustrate that business owners and most specialist practitioners – lawyers, doctors, architects, accountants, and so on – who have incorporated would be better off giving themselves a salary and contributing to an RRSP.
A new CIBC poll of Canadian business owners found 87% holding excess profits in their corporation. When asked what plans they have for profits or excess funds, more preferred to invest in a corporate investment account (27%) rather than an RRSP (21%) or spousal RRSP (11%). Other top plans were to contribute to a TFSA (24%), withdrawing the funds for personal or family use (33%), and reinvesting extra funds back into the business to fund day-to-day operations (39%).
“Business owners who want to get the most from their investments over the longer term should probably consider taking sufficient salary to maximize RRSP contributions,” said Golombek, explaining that doing this rather than declaring dividends may help them benefit from tax-deferred savings.
There are several exceptions: over the short term, corporate investing can outdo RRSP investing. Corporate investments will also always yield more than an RRSP if you could defer 100% of any capital gains and realize no annual income – though it depends on your portfolio construction, and few investors have a good chance of being able to defer 100% of their capital gains over a long time.
Depending on the situation, investing in TFSAs could also produce better results than investing in a corporation – a notion discussed in another report, TFSAs for Business Owners
“Many variables may affect your decision … but the bottom line is that over time, an RRSP or TFSA will likely leave you with more in your pocket,” Golombek said.
More cash-strapped Canadians are dipping into their RRSPs
How can clients get the most out of their RRSPs?