Canadian Corporate Tax Planning: On Investing Retained Earnings

What should I do with my Corporate Retained Earnings?

As a Vancouver tax advisor to small, privately held Canadian corporations, many of my new clients are often unaware of all the investment options and tax benefits of investing their hard-earned corporate retained earnings.

The small business corporate tax rate is only 13.5% on the first $500,000 of profits. That is incredibly low. A successful and diligent business can accumulate retained earnings quickly within this tax rate.

After-tax funds retained by the corporation can be invested, just as RRSP contributions can be invested. However, tax laws restrict the type of investments an RRSP can hold. For example, an RRSP account cannot hold hard assets such as a parcel of real estate, a gold bar, or foreign cash. Corporate funds, on the other hand, can be used to invest in these hard assets in addition to the traditional mutual funds, publicly traded shares, and bonds. In other words, your corporate retained earnings can be used to diversify your investments on a grander scale.

Capital gains earned by a corporation are 50% taxable only. Plus, the non-taxable 50% can be extracted tax-free by the shareholder through the capital dividend account. Many corporate shareholders use this provision to extract the non-taxable half of the capital gains to pay down their mortgage. Note that an RRSP contribution is tax deductible but any withdrawals which will include the initial capital, investment income and/or capital  gains is fully taxable. In other words, capital gains earned in an RRSP are not tax-efficient.
The third advantage of corporate retained earnings is that they can be distributed as  dividends to shareholders when it is tax efficient to do so. This provides great tax planning flexibility and many opportunities such as income splitting.

For all of my self-employed entrepreneurs out there, the corporate structure presents many advantages, along with RRSPs and now TFSAs – all of which can be used to kick your retirement planning up a notch.

If you have any questions or would like to know how we can help you further, contact us.

Disclaimer: All Rights Reserved for Mew & Company. This blog post is designed to provide information for personal use only. Please consult your professional tax advisor for further information. Mew & Company is not responsible for any legal disputes resulting form the content of this blog post.