In all Canadian provinces, corporations enjoy a relatively low tax rate. In fact, most business owners and incorporated professionals are better off leaving their retained earnings in a holding company, rather than taking them as personal income or contributing to their RRSP. They can typically defer personal income tax until they take money out of their corporation to spend it. Every business owner who has retained earnings in their private corporation should be aware of the various tax planning options to grow and later remove those earnings – without paying unnecessary taxes. This white paper highlights five strategies you can use to efficiently grow and remove retained earnings from your corporation.
To remove funds from your corporation tax efficiently, invest for dividends or realized capital gains – these taxable events provide a benefit when you wish to remove funds from your corporation. Avoid interest income and rental income in your holding company.
You don’t have to die to benefit from using life insurance owned by your corporation. But you can benefit from tax-free cash flow to fund your lifestyle or retirement. Participating Whole Life insurance provides a way for business owners to grow their wealth without attracting tax and a mechanism to remove funds from the corporation tax free.
The cash value of these policies:
• Will never decrease unless you surrender part of the policy to access the cash
• Has historically grown at an attractive rate
• Can be used to finance the operations of your business when there is a need to finance expenditures. Instead of using funds saved in a bank account earning almost nothing, or a line of credit with borrowing costs. This provides a smarter way for business owners to finance their operations by accumulating wealth in the cash value of their insurance, and borrowing against it when they have expenditures – effectively banking on themselves.
• Can be used to secure a loan to fund their retirement tax free
Of course, corporate-owned life insurance also has excellent estate planning benefits; upon death, most of the proceeds of a life insurance policy can be paid to the shareholders tax-free through the capital dividend account. These proceeds can be used to offset capital gains on disposition of the shares that will occur as part of the probate process.
It makes sense for most business owners to own Critical Illness Insurance on themselves and their key employees to protect their business. Integrating Critical Illness coverage with an Executive Health Plan allows the shareholder or key employee to achieve an after-tax rate of return on their savings comparable to a GIC yielding approximately 10%**,with no investment risk. If you already have Critical Illness Insurance, consider replacing it with an Executive Health Plan.
Could your business survive without you for six months? A critical illness benefit would pay a lump sum to your corporation if you were to suffer a critical illness like heart attack or cancer.
A family trust may allow you to split income with a spouse when you draw funds from your holding company to fund your retirement. A trust may also be required to retain the Small Business Capital Gains Exemption when you sell your operating company.
A Private Health Services Plan allows your business to offer a tax-free benefit to employees for eligible health expenses, with no monthly premiums required.
The single most important ingredient of your long-term financial success is working with an Investment Advisor you can trust to develop a comprehensive wealth plan – one that is tailored to your specific goals and helps you grow and preserve your wealth. Whether you’re just beginning your financial journey or planning a legacy for generations to come, our skilled and experienced Investment Advisors can help you reach your destination with confidence and peace of mind.
**The rate of return depends on the age and time horizon of the participant in the Executive Health Savings Plan. The rates are determined when the plan is setup and not dependent on interest rates or stock market returns.
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In all Canadian provinces, corporations enjoy a relatively low tax rate. In fact, most business owners and incorporated professionals are better off leaving their retained earnings in a ho...Read More
The best place to save for retirement and grow your wealth may be your corporation, not an RRSP or IPP. Examples below are based on 2021 personal and corporate tax rates for BC taxpayers. Does your business earn $500,000 or less? In 2021, the tax rate on corporate income below the small business deduction threshold of...Read More