Is it wise for small business clients to forsake TFSA and RRSP?

Ottawa-area financial advisor makes a compelling argument why keeping funds within corporation not the best move for high net worth your small business owners

By Ben Felix, PWL Capital

When an individual owns a small business corporation, common advice tends to be that they leave all dollars in excess of their living expenses inside of the corporation to defer paying tax. The idea is that this makes more dollars available for investment, which can be taken out as dividends at a lower tax rate later.

This advice may make sense when the alternative is a non-registered investment account taxed at the highest marginal rate, but when it is considered that funds leaving a corporation could be destined for the TFSA or RRSP, the notion of leaving it all in the corporation can be challenged.

The situation being analyzed begins with an Ontario individual who has already funded their lifestyle expenses for the year.

They have excess business income in their corporation, and they need to decide if they will invest the excess business income in the corporate investment account, take out a dividend and use up the available TFSA room, or pay themselves a bonus to use up their available RRSP room.

In this paper we assume that tax is paid at the marginal rate corresponding to a taxable income between $150,000 and $220,000. This rate will be assumed to apply at the beginning (contribution) and end (withdrawal) of the planning period. We all assume a globally diversified and rebalanced investment portfolio holding 70% stocks and 30% bonds.

Note: To read Ben Felix’s white paper click here.

Ben Felix is an Ottawa-area financial advisor with PWL Capital. In addition to his work in financial services, Ben volunteers as a youth basketball coach, delivers Junior Achievement programs, and sits on the board of directors of Families Matter Co-operative.