If you’re a business owner in Canada you’re probably wondering should I invest in my RRSP or should I keep the money in my corporation and invest in my corporation instead which one is better for you, well one will actually result you in paying more tax than the other, so let’s just say the CRA might just like you a little bit better if you choose the wrong one.
If you’re new here I am Jim a fee only certified financial planner who helps Canadian business owners build their financial harmony plan and in this channel I focus on sharing unbiased personal financial information to help you make informed decisions about money so you can achieve your own definition of financial harmony.
Why This Matters
So let’s take a look at why this matters as a business owner in Canada you have an extra layer of complication when it comes to investing. It’s a big question should you invest through your RRSP or should you keep your investment inside your corporation. This is a big deal because it can impact how much wealth you can actually keep when you retire. Let’s break down the pros and cons of each strategy and by the end you’ll know exactly which one is right for you.
Strategy 1: The RRSP (Registered Retirement Savings Plan)
So let’s start with RRSPs first off RRSPs is also known as the registered retirement savings plan and here’s why many business owners should consider it.
- First tax deferral opportunity: you get a tax deduction when you contribute and your investment grow tax-free until withdrawal. This means you could pay less tax now and in retirement if you withdraw at a lower marginal tax rate.
- Second income splitting: you can income split with your spouse by contributing to a spousal RRSP or when you convert your RRSP to a RIFF which is called a registered retirement income fund. This can help you lower the overall tax within the family.
The Limitations of RRSP
- First the contribution limit: you can only contribute up to 18% of your last year’s income or up to a maximum of $32,490 in the year 2025 if you did not have additional contribution room that you have accumulated from previous years.
- Second RRSP is less flexible: it has more restrictions compared to corporate accounts where it comes to withdrawals and investment options.
Strategy 2: Corporate Investing
Now let’s move on to corporate investing on the other hand investing through your corporation gives you some big advantages.
- First investment flexibility: you can invest in cryptocurrencies in real estate private mortgages and even other businesses more options compared to RRSP.
- Second tax benefit: it can provide you with some tax benefit when it comes to investment returns for example a lot of your gains could be capital gains whereas only 50% of that income is taxable and that is huge if your investment are focused on growth stocks or real estates whereas RRSPs all your gains are taxable as your income.
The Corporate “Catch”
But in corporate investing there’s also a catch first of all you pay quite a bit higher tax when it comes to corporate investment. When it comes to corporate investment the investment income is considered passive income which is taxed heavily in BC it is up to 50.67% ouch and if you have too much passive income and it can also impact your small business deduction also known as the SBD. If your corporation earns over $50,000 in passive income for that year your small business tax rate could increase by 16% in BC.
The Real Numbers: A Comparison
All right now we have broken down the pros and cons of RRSPs and corporate investing let’s put it into real numbers.
Let’s say you invest $100,000 today and let it grow for 30 years at a 6% annual rate of return at that time your average tax rate at withdrawal is around $35%.
- If you invest through RRSP: after tax you can end up with about $373,000 that is after tax money in the pocket and assuming you withdraw the entire amount at that time.
- Now if you invest through your corporation: you will end up at the end in your pocket about $340,000 because not only you have to pay the corporate level of tax you also have to pay a personal level of tax.
Now that’s a $33,000 difference or 9% just by choosing the right strategy you can end up with thousands of dollars more money in your pocket and we’re only talking about $100,000 as an investment capital.
Recommendations for Business Owners
So as a business owner in Canada which strategy should you choose and here’s what I recommend. So now you know that RRSPs may be more beneficial to you then how would you then go ahead and take advantage of RRSPs.
- Pay yourself in salaries: Well first of all in order to gain RRSP contribution room you as a business owner need to pay yourself in salaries that will create RRSP contribution room if you just pay yourself in dividends it actually doesn’t attract RRSP contribution room.
- Check your room: Check your RRSP contribution room you may have already accumulated a boatload of RRSP contribution room you can take advantage of you want to max out what you can if it makes sense for your tax situation.
- Long-term strategy: Second RRSP is a long-term strategy you want to think about holding this for a long period of time and with time and with compound interest RRSP can really be really beneficial for business owners as a asset diversification as well as retirement income.
- Consult a professional: And third if you’re still not sure how to take action well you can consult with a fee only financial planner who will give you a personalized strategy with an unbiased advice that is in your best interest and that’s exactly what we do every day for business owners here at Panorama Financial Planning.
Are you investing through RSP or your corporation and maybe tell me why see you next time.
