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FP Answers: How do I shelter investment income through a corporation? – Financial Post

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3 years ago

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Accountants, lawyers and financial planners will all give you different advice when you’re deciding whether to incorporate. Here’s a road map to decide whether incorporation is worth it for you

Author of the article:

Julie Cazzin

The best time to incorporate is after you have maxed out your RRSPs and TFSAs. Photo by Getty Images

By Julie Cazzin, with Allan Norman

Q: How can incorporating help me shelter investment income? And at what point do I know if incorporating is worth it for me? — Maria S.

FP ANSWERS: Maria, if you were to ask an accountant, lawyer and a financial planner when to incorporate, you’d get three different answers for three very different reasons.

From a pure investment point of view, the best time to incorporate is after you have maximized all your available registered retirement savings plan (RRSP) contribution room and possibly your tax-free savings account (TFSA), which I’ll explain later.

The advantages of investing inside your corporation include: an initial deferral of tax so you have more money to invest, the ability to pay yourself dividends at a future date, income splitting with a spouse after you turn age 65 (if you have a spouse and different classes of shares), and possibly some estate planning and other cost savings benefits as well.

Consider this example of an Ontario resident at the top marginal tax rate. If they retain $100,000 in their corporation, it will pay corporate tax of 12.2 per cent if it qualifies for the small business tax rate, leaving $87,800 to invest in the corporation. Conversely, if they drew $100,000 as salary, they would only be left with $46,470 after tax to invest personally, assuming they are not contributing to an RRSP.

Having an extra $41,330 to invest in your corporation sounds good, and it is, but you will have to pay tax at a rate very close to the highest marginal tax rate in your province on any realized interest, dividends and capital gains.

When you pay tax on your distributions, you lose the compound growth on that amount. For instance, if you earn $2,000 in interest, you will lose about $1,000 to tax, so the taxation of distributions can be a significant hurdle to overcome in your corporation.

Now, it’s not all bad news since there are refund mechanisms and nominal accounts, which your accountant will refer to, that allow you to recapture some of the tax paid when you finally sell an investment and make a dividend payment to yourself.

Because of the taxation of distributions, you’ll want your investments to be as tax efficient as possible. Investments earning interest are the least tax efficient, dividend-oriented investments are better, and investments that allow you to defer capital gains are the best. Of course, you have to be comfortable with the investment risk you are taking, and interest-oriented investments tend to be the safer investments while equities tend to be the most volatile or risky.

This is the reason I suggested holding off incorporating until you have maximized your RRSPs and possibly your TFSAs. If you are going to hold investments that generate interest or dividends, investing in the RRSP first is likely the better option.


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Tax expert Jamie Golombek provides the supporting math in his research paper that shows the RRSP-first strategy is best, unless you are an aggressive investor, investing only for capital gains.

Finally, remember you will have to pay tax when you draw the money from your corporation, although as a dividend, it is not taxed as heavily as income drawn from a registered retirement income fund (RRIF).

Maria, incorporating and investing in your corporation will add complications and opportunities. My suggestion is to model this out with your planner or accountant so you can see the implications today and in the future. Once you see that, you will be in a much better position to make a good decision.

Allan Norman, M.Sc., CFP, CIM, RWM, is both a fee-only certified financial planner with Atlantis Financial Inc. and a fully licensed investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca . This commentary is provided as a general source of information and is intended for Canadian residents only.

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Economy

S&P/TSX composite down more than 200 points, U.S. stock markets also fall

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1 week ago

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September 6, 2024

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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.

The S&P/TSX composite index was down 239.24 points at 22,749.04.

In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.

The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.

The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.

The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.

This report by The Canadian Press was first published Sept. 6, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Economy

S&P/TSX composite up more than 150 points, U.S. stock markets also higher

Published

2 weeks ago

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August 29, 2024

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TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.

The S&P/TSX composite index was up 171.41 points at 23,298.39.

In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.

The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.

The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.

The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.

This report by The Canadian Press was first published Aug. 29, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

The Canadian Press. All rights reserved.

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Investment

Crypto Market Bloodbath Amid Broader Economic Concerns

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1 month ago

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August 5, 2024

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The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.

The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.

Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.

The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.

Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.

Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.

Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.

Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.

The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.

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