Investing Through A Professional Corporation

 

In my last post, I reviewed how a Canadian Controlled Private Corporation (CCPC), such as a professional corporation, can be used like a dam to regulate the flow of earned business income. This can smooth our cash flow so that we lose less money to our progressive personal tax system. Also like a dam, a corporation allows us to collect a large reservoir of capital (money) to invest and grow. But beware, if your reservoir becomes stagnant, the tax skeeters can breed. Let’s explore how to avoid that.

There are several phases to how investing through corporation works:

  • Corporate Tax Deferral Advantage (on earned income)
  • Growing Corporate Capital Reservoir (by investing)
  • Minimizing the drag of taxes on investment growth
  • Flowing money out of the corporation and into our personal accounts

This general process is outlined at a high level below and I will spend the rest of the post looking in more detail at each of these segments.

professional corporation investing

The Corporate Tax Deferral Advantage Gives Us More Money To Grow

One of the biggest advantages of the CCPC structure is tax deferral on active business income. The pool of capital left in your corporation after expenses, taxes, and dividends is called the retained earnings.

Those retained earnings have been taxed at the lower corporate rate, leaving us a larger money reservoir than if we took that income personally. A stagnant pool of water doesn’t grow anything except mosquitoes. We need to invest it to grow. The effect of the corporate tax deferral advantage invested for 6% annual growth is shown below.

ccpc investing tax

Understanding Corporate Investment Taxation Is Important

I want to put this “out there” near the beginning of the post because most of us hear “taxation” and our eyes glaze over. When you combine the words “investment” and “taxation”, it’s game over. However, you will note that the above chart ignores the drag on investment returns from the taxation of investment income. We call that unfortunate reality “tax drag“.

Does Tax Drag Matter?

The tax deferral on earned income for a corporation leaves you more money to grow initially. However, in a corporate investment account, there is tax paid on the income generated by those investments. Tax drag blunts the rate of growth.

That tax drag can be minimal or it can be 1-1.5%/yr depending on how you invest and how you dispense money from your corporation. If you applied a 1.5%/yr tax drag to the investment income in the above model, it decreases the annual after-tax return to 4.5% from 6%. That flattens the growth curve as shown below. “Investment Taxation” may be boring, but I bet you could think of some exciting things to do with the money in the “orange tax drag gap”.

Corporation Investment Tax

Fortunately, a 1.5%/yr tax drag would be an extreme example. That is easily reduced with some basic knowledge of how investment income in a corporation is taxed to guide us. So, tape your eyelids open and let’s proceed.

Corporate Investment Accounts

Corporate retained earnings are invested via a corporate investment account. This is an account at a brokerage like Questrade, Qtrade, MD Financial, or your advisor’s affiliated brokerage (if you have one). Your CCPC can have more than one corporate investment account, even at different brokerages. However, that makes tracking for tax purposes more of a pain in the butt.

Setting up a corporate investment account is a simple process and similar to opening a personal one. You fill out some forms. Instead of personal ID for a personal account, you will need to provide a copy of the face sheet from your Articles of Incorporation as your “ID”. We will go through how to do this, step by step, elsewhere.

This account is owned by the corporation. You put money into it from the corporate operational account. For clean accounting, it is also best to transfer money from the investment account back to the operational account before dispensing it to you personally.  The ways to flow money out of your corporation were described in the previous post.

What can you invest in via your professional corporation?

We will focus on investing in financial products via our CCPC. By financial products, I mean stocks, bonds, GICs, or the funds that hold a basket of these products like exchange traded funds (ETFs) or mutual funds. My preferred investing approach is passive index investing using ETFs. That method gives a broad diversification, minimal hassle, and minimal loss of returns to fees. Historically, it also has the strongest record of overall performance.

In addition to passive investment income from financial products, your corporation can hold investments like the real estate and infrastructure used in your practice. For professional corporations, like a Medical Professional Corporation (MPC), there can be restrictions on holding passive real estate or alternative investments that are not directly related to your professional practice. Your professional college regulates that. Dr. Networth has described how to hold real estate in relation to a corporation elsewhere.

Entering the Potential Investment Income Tax Drag Zone

In order to discourage the use of professional corporations for tax deferral, investment income within a corporation is taxed upfront at a rate close to the maximum possible personal tax rate. Like the other attempts at tax integration, there is not a perfect match-up.

As you can see in the chart below, the upfront tax on investment income generally favours corporations in the provinces where individuals get hosed the most with higher personal tax rates. It is also vital to note, that this comparison is assuming top personal tax rates. If you are in a lower personal tax bracket, then the relationship could change to further favour personal investment income.

MPC investing tax

Keep Money Flowing Through Your Corporation To Combat Mosquitoes

Fortunately, this high upfront taxation is not the end of the story. If we pay money out of our corporation (which we do to live on), then tax integration lessens or negates this upfront taxation. In order to avoid this drag on investment growth in our corporate reservoir, we need to keep the money flowing. Stagnate water will allow mosquitoes to propagate. Keeping it flowing will power the “refundable taxes turbine” of our corporate dam further described below. [Editorial Note: Any resemblance between those levying these taxes and blood-sucking insects is purely coincidental.]

Tax Integration for Professional Corporation Investment Income

High tax rates are charged upfront to decrease tax deferral on the investment income generated. However, when money is passed on to personal hands, that tax needs to be refunded. Otherwise, the same investment income would be getting taxed twice (once in the corp and again personally). This is accomplished using four notional accounts (meaning they only exist on paper for the purpose of taxes).

Investment Income Type & The Associated Notional Accounts

Eligible Dividends:

  • Eligible Refundable Dividend Tax On Hand (eRDTOH)
  • General Rate Income Pool (GRIP)

Interest, Foreign Dividends, & the Taxable Half of Capital Gains:

  • Non-Eligible Refundable Dividend Tax On Hand (nRDTOH)

Non-Taxable Half of Capital Gains:

  • Capital Dividend Account (CDA)

In this next section, I will review how each type of investment income works through its associated notional accounts to attempt tax integration.

Eligible Dividend Income

Eligible Refundable Dividend Tax On Hand (eRDTOH)

ccpc investing tax
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One notional account type is the eRDTOH. This account is new for 2018 onwards and I have described the new eRDTOH rules in detail elsewhere. Dividends from investing in Canadian publically traded companies are eligible dividends and taxed favourably.

When your corp is paid an eligible dividend, then it is taxed at close to the highest personal rate (38.33%). That tax is paid to the government from a real account. However, the eligible dividend also affects two notional (on paper only) accounts: eRDTOH and GRIP.

The full amount of tax paid is noted in the eRDTOH account. When your corporation then pays you dividends, the eRDTOH is refunded to your corp when it next files its tax return.

This means that eligible dividend paying investments can pass that income through your corporation without losing anything to tax compared to if you took that money directly (100% tax efficient).

Either an eligible or ineligible dividend paid out from your corp can trigger the release of eRDTOH. However, an eligible dividend is taxed at a lower personal rate so it is preferable.

General Rate Income Pool (GRIP)

To be able to pay out eligible dividends, your corporation needs to generate a balance in its GRIP account. When your corporation receives eligible dividends, the pre-tax dividend amount is added to your corp’s GRIP account. Your CCPC can then pay out eligible dividends up to the GRIP balance.

GRIP and eRDTOH Can Improve Your Personal Cash Flow

If your CCPC has enough excess retained earnings and you need to dispense dividends each year from your corporation to meet your personal cash flow needs, then using eligible dividends can improve your personal cash flow. This is because you end up paying less personal income tax on eligible dividends compared to receiving the usual ineligible dividends from a CCPC.

Eligible Dividend Income Summary:

  • Eligible dividend-paying investments are very tax efficient in a CCPC
  • They may reduce your personal tax bill if you are paying yourself dividends out of your corporation’s retained business earnings annually to meet your personal cash flow needs.
  • Unfortunately, their tax efficiency is lost if your investment income becomes large enough to shrink your corporation’s Small Business Deduction threshold as described later in this post.

Foreign Dividends & Interest Income

Non-Eligible Refundable Dividend Tax On Hand (nRDTOH)

ccpc dividend tax
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When your corporation earns other investment income, it pays the 50.17% tax rate upfront. Of that high upfront tax, 30.67% is directed to the nRDTOH and 19.5% is lost as a non-refundable tax.

When your professional corp gives you ineligible dividends, the nRDTOH is refunded to your corporation. It is important to note that only ineligible dividends trigger nRDTOH release and not eligible ones.

You will also notice that with foreign dividends, some income is lost to foreign withholding tax. That may be partially refundable for countries with tax treaties with Canada. It is a small amount and is applied before the CCPC investment tax. Justin Bender did a full analysis of the impacts of foreign withholding tax for various account types. The impact is small, but slightly worse than in a personal taxable account where the withholding tax is usually fully recoverable.

 

Foreign Dividend & Interest Income Summary:

  • Interest and foreign dividend income in a CCPC are tax inefficient compared to personal investment income. This is because some of the tax on CCPC investment income is not refunded.
  • To get the refundable portion of the tax, your corp must pay out higher taxed ineligible dividends.

Capital Gains

Capital gains only trigger tax when they are realized, meaning that the investment was sold. Further, realized capital gains only have a 50% inclusion rate. This means that half is taxed and passes through the nRDTOH tax mechanism described above. The other half avoids tax and goes into the third notional account type, the Capital Dividend Account.

The Capital Dividend Account (CDA)

capital dividend
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This is the notional account that the non-taxable half of realized capital gains go into. This account is tracked because if you had earned the capital gain personally, rather than in a CCPC, then half would have have been tax exempt also.

The balance that you build up in your CDA can be used to dispense a tax-free capital dividend. That’s right. You can pass money from your CCPC financial capital reservoir into your personal hands tax-free.

This raises all sorts of fun tax planning possibilities because it allows you to get your hands on tax-free money to live on while regulating the taxable cash flow out of your corporation. That could be used to optimize against marginal tax brackets and Old Age Security clawbacks. I also wonder if it could be used in Ontario to live on and draw no taxable income while your kids get free tuition for University due to your low personal income.

Oh, the impure thoughts…

While Capital Dividends may be tax-free, they do come with some accounting fees – generally in the $750-$1500 range. So, you would want to make sure that you dispense capital dividends in large enough aliquots to justify that cost.

Capital Gains Summary:

  • Capital gains are not taxed until realized. The larger initial capital available to invest from the corporate tax deferral advantage, coupled with the tax-deferred growth of unrealized capital gains, make this a real winner in a corporate account.
  • When realized, the taxable half is slightly less efficient than in a personal account due to the tax loss in the nRDTOH mechanism.
  • Together, these first two points hit home an important message. Capital gains oriented investments are awesome in a CCPC – unless you frequently realize capital gains. Don’t crystalize gains by selling unless you have a compelling reason to.
  • The CDA generated through realized capital gains can be useful for tax planning.

Dividends should be paid out of your active income, if possible.

As mentioned, the RDTOH and CDA are notional accounts. All dividends that you pay yourself have to come from a real account, like your corp’s operational account. If you have to sell investments or use the investment income generated by your investments to pay out dividends, then you are sacrificing some of the growth in your portfolio to do that.

While working and accumulating financial capital for your future, you should pay dividends from your corporation’s operational account that is filled by earning active business income. Paying dividends out of the net active income of your corporation still triggers the release of RDTOH, and allows you to fully take advantage of tax-deferred growth in your corporate investment portfolio. To do that means spending less than you earn.

How big of a dividend does your corporation need to dispense to trigger RDTOH?

A dividend of $2.61 will release $1 of RDTOH. That would need to be an eligible dividend to release eRDTOH. An ineligible dividend can release either eRDTOH or nRDTOH. Personally, if I had an eRDTOH balance, I would want to dispense the lower taxed eligible dividends. I suppose that if the higher gross-up of eligible dividends resulted in an Old Age Security (OAS) clawback, that could make eligible dividends less appealing.

I am too young to bother with the math on that one, yet. It just gives me one more reason to keep emptying out that eRDTOH account while I am young and spendy. Further, I hope to so massively fatFIRE that OAS won’t play much of a role in my retirement income.

Limits On Corporate Investment Size and Income

 

Mosquito statue from Komarno, MB

Corporations that have more than $10MM in assets lose their small business deduction linearly until it is eliminated by $15MM. Reasonable. Wish I had that problem.

 

Recently, the Federal Government imported some genetically modified tax skeeters from Manitoba in its attempts to further discourage tax deferred investing via small corporations. Passive investment income, starting in 2018, will affect the small business deduction for active income in the following year. The full list of what counts as passive investment income for CCPC business tax is called adjusted aggregate investment income (AAII).

How the New Active-Passive Small Business Tax Threshold Works

For every dollar of AAII that your corporation earns above $50K/yr, the small business deduction threshold will shrink by $5 for the subsequent year. For example, if your corporation earns $75K passive income this year, then the SBD threshold will shrink by $25K times 5 = $125K. That means if you earn more than $375K active income the following year, the excess active income will get taxed at the higher general rate.

business investment tax

If you have “too much” AAII coupled with “too much” active income, you will pay the higher general corporate tax rate (~28% vs 12-13%) on your active business income over that amount. That blunts the corporate tax deferral advantage significantly, but doesn’t eliminate it.

What does this all mean for planning our corporation investment account and overall portfolio?

  • A corporation preserves more money up front to invest. You could have 70-88% of your earned income to initially invest compared to half personally.
  • However, investment income in a corporate account is not tax-sheltered. A high rate of tax is charged upfront. It is close to the top marginal tax rate, but lower than the top bracket in provinces where you really get hosed personally.
  • You can minimize the drag on income from that upfront tax by paying dividends from your corporation to trigger the release of RDTOH.
  • Even with the release of RDTOH, interest income and foreign dividend income are less tax efficient in a corporate account than personally. Consider holding investments that produce larger amounts of these income types elsewhere, if possible. Unfortunately, we may need to if there is not enough space in our tax-sheltered accounts to fit our overall planned asset allocation. Asset allocation is always our number one priority.
  • Eligible dividend paying investments held in a CCPC can be very tax efficient, if you pass the income through to yourself personally as eligible dividends to fund your lifestyle. Unfortunately, that efficiency is lost if the dividend income bumps your CCPC out of the small business tax rate. When building our portfolio, we may want to preferentially hold our Canadian dividend paying equities/funds in our corporation up to the SBD threshold. After that, we would need to use other strategies.
  • Capital gains focused investments are very tax efficient in a corporate account. Capital gains are efficient in a personal account also. However, a corporate account is where they can really shine. Part of this is because there is more initial capital to invest. That can grow exponentially since it does not trigger tax until the capital gains are realized. Investment account growth from unrealized capital gains also does not count towards the small business active-passive income threshold. When a capital gain is realized, only half of it is taxed and counts towards the small business income threshold.
  • Frequently cashing in and realizing capital gains is tax inefficient. This holds true with personal taxable investment accounts also. However, slightly more of the taxable half of a realized capital gain is lost than it would be personally due to the inefficient nature of nRDTOH. So, don’t realize capital gains unless you have a good reason to.
  • If you do crystalize capital gainsthen it does generate a balance in your capital dividend account. I would not sell just to do this, but the CDA does offer some tax planning opportunities.

Disclaimer: I would recommend discussing with your accountant and advisor. For incorporated professionals, a good accountant is mandatory. A financial advisor may be optional. However, if you use one, this kind of strategic planning for your portfolio is what they should be talking about to add value. Accountants and financial advisors may be experts at tax planning and financial planning respectively, but it is important to blend both to get the optimal outcome. Being an educated client helps to bridge this divide.

33 comments

  1. Mark, another excellent post! I’m not sure if I’m understanding the following correctly – I pay myself a salary to maximize my RRSP, which is enough for us to live on. On occasion, I need a bit more, in which case I spend from my personal taxable account built up from pre incorporation days. Are you saying I should be paying out eligible dividends from my Corp to release RDTOH if I need more than my salary, or even if I don’t need more in a given year?

    On another topic, should we tax loss harvest in a Corporation? I haven’t been able to get a straight answer from my accountant about this. My thinking is no, because even if you empty out the CDA account before doing it (which you must do or you reduce the amount in the CDA account by half of the loss), the CDA account goes negative, so when you go to capital gains harvest in retirement (to avoid the OAS clawback etc.) you have to get the CDA account back up to zero before you will have any money in it to get a tax free dividend.

    1. Thanks Grant! Those are great questions. I would honestly run it by a CPA since everyone’s situation is unique and I am an amateur. That said, I will take a crack at it.

      Basically, the corp has already paid 38.33% tax on the eligible dividend upfront. So, if you needed extra money, paying an eligible dividend would release that back to the corp and you would pay personal tax at a lower rate. For example, if you needed $10K and paid that out as an eligible dividend: your corp would get $3833 refunded and you would pay ~$3K of personal tax on the dividend if you were in the $145-160K income range in ON. So, between you and your corp, you would be up $800 after-tax overall. On the other side of the equation is whether you would be triggering tax taking money from the personal account via selling something. That would push it further in favour of taking from the corp due to tax on the realized gain. If it was existing income from the taxable account, then you are no worse off since you are paying tax on it anyway and can just re-invest that rather than take it out. To me, that would all favour taking an eligible dividend.

      It is an interesting question about taking money out of the corp even if you don’t need it. It would depend on what tax bracket that bumped you into and whether it triggered OAS clawbacks. In ON, only the >$220K tax bracket has a higher tax rate (39.34%) on eligible dividends than what your corp has already paid upfront. The optimal drawdown strategy for a corp is complex (I think). Kind of like an RRSP, the corp is a tax deferral vehicle. Bleeding the money out of it to melt it down tax efficiently may be better than big lump sums later. There are also fancy (and expensive) maneuvers, like surplus stripping, to remove large sums. I am still in the accumulation phase and this dilemma is definitely getting into the expert accountant/planner realm.

      Great question about tax loss harvesting in a corp account. In short, I don’t know the answer! However, I think that I would rather just build my CDA account for tax planning later as you suggest. The one time where I would consider it is if I had realized a capital gain that was going to push me over the active-passive SBD threshold. Still, that would be tricky to do because capital losses can’t carry forward to a future year for purposes of the new SBD threshold rule (nasty bit of fine print). You’d basically have to have a major winner and loser in the same year.

      Thanks again for the great brain teasers!
      -LD

      1. Here’s another twist on this – assuming you need $145k to live on and have $10K ineligible dividends in your Corp, do you take $145k as salary in order to maximize your RRSP, or do you take $135k as salary, so not enough to maximize your RRSP, and $10k eligible dividends to boost your financial assets by $800?

        1. Ooo. Good one. I will add it to my “dividend dilemmas” list. It is easy to flow everything when drawing big money and so much more of a brain teaser when you have to decide one or the other!

  2. Thank for doing this LD!! Thanks Grant for asking re the tax loss harvesting in the CCPC. That is the part that is really irking me. Do I even need to tax loss harvest and how much of a gain before I even bother with tax gain harvesting.

    I tell my accountant my overall strategy and his job is to make it as tax efficient as possible while side stepping land mines. We certainly take out a blend of salaries and dividends since dribbling monies out of the Corp is the optimal way to go.

    I will be increasing our salaries when we breach the SBD wall and that’s about it. But it hasn’t gone fully live yet in terms of first final tax year end so shall be interesting to compare notes in a year.

    1. Hey Dr. MB. I will be following your adventures with interest. It is great to see what those further ahead on the career/life curve are thinking about and doing. It is less discussed and in my mind more complex.
      -LD

    2. I think it makes sense to not tax loss harvest in a Corp (to avoid making the CDA go negative) and delay tax gains harvesting until retirement. Then you keep the capital compounding over the years, and then tax gain harvesting enough each year or so in retirement to give you enough tax free dividends to avoid going into the next tax bracket, avoid OAS clawback etc.

  3. This is one of the most clearly articulated explainations I’ve read in this topic. It’s very very well done so thank you LD.

    1. Thanks Neil. I do find this stuff a bit dizzying. Breaking it into small chunks to make diagrams and linking those with why it matters helped me also. I keep finding things that I could have done better in my personal portfolio!
      -LD

  4. if you were to withdraw only dividends from a corp to live on…..would it be best to take this out as active business income generated dividends (I guess these would be deemed to be ineligible dividends? for tax purposes) or use the proceeds from your canadian dividend paying stocks that are in your corp? I am a bit confused by which is more tax advantageous and how this all fits in with the RDOTH

    1. Hi Sue. Great question! This is where I think there is an opportunity for people (and where it is confusing!). When you pay a dividend out of your corp’s operational account, it doesn’t matter where the money came from (active income or investments). Example: I have $10K in my operational account from active income that I want to pay out to live on. My corp investment account got $10K of eligible dividend income. I can re-invest those eligible dividends in my investment account (this is what I do via DRIP). I don’t need to move the “eligible dividend money” from the investment account to pay that out. My corp will develop a GRIP balance of $10K due to receiving those eligible dividends. That means when I want to pay myself a dividend, I have the option of making it an eligible dividend or an ineligible one.

      NOTE: I had to correct my original response here.
      If my corp pays me a $10K eligible dividend, then my corp would be fully refunded the $3833 tax that it paid for receiving the eligible dividend (net tax of zero). If I were in the ~$150K ON personal tax bracket, I would pay ~$3K in personal tax on receiving the dividend from my corp.
      If my corp pays me a $10K ineligible dividend, then my corp pays $3833 tax for receiving the eligible dividend and is refunded that (net tax of zero). I would also pay ~$3800 personal tax on the ineligible dividend in the $150K ON personal tax bracket.
      So, in this situation – by paying an eligible dividend from my active business income I pay $800 less personal tax on moving the same amount of money out of my corp compared to using an ineligible dividend. Receiving eligible dividend income to generate GRIP is what gave my corp the ability to pay an eligible dividend. If I were to pay the ineligible dividend now, then I still have that GRIP room and can pay a tax saving eligible dividend later. The difference is not letting the government keep my money longer than necessary when I could use it instead.

      It is important when using GRIP and paying out eligible dividends to execute it all properly with the help of your accountant. I hope that answers your question. There are other wrinkles that can come up, but I don’t want to muddy the waters too much. This is a lot to digest already, but I plan on making a “sim lab” post to give some real-life examples of how this all works. My goal with this article was to give an overview with some general rules of thumb about what investments are efficient in a corp account versus other accounts. That will hopefully lay the groundwork for deciding how to organize our corporate account meshed in with other accounts like RRSPs, TFSAs, and personal taxable accounts.

      Thanks again for asking a great question. I am sure there are many others with the same one. I tried to simplify it with diagrams, but I still have to think it through step by step!
      -LD

      1. thank you for getting back to me. Does your accountant decide if you are issuing yourself an eligible or ineligible dividend? so lets say for example you decided that for a corporate year, without taking any salary from the corporation, you issue yourself a cheque every month as a dividend from your corporate bank account. Lets say this amount was 60000 a year (so 5k a month). How does this work with whether it is deemed to be an ineligible dividend or eligible dividend? I thought all corporate issued dividends from a professional corporation were ineligible and only those issued from a dividend paying canadian corporation (stock) were deemed to be eligible? I guess I”m confused about how you go about dispensing yourself an eligible dividend. I hope I am asking my question the right way. It looks like one needs to have had investment income in the form of dividends in using your example, to make this work? and if you don’t have any investment income the 10K lets say you take out of your operational account (I think corporate bank account ?) and issue yourself a cheque you are using the example that you can decide if its an eligible or ineligible because you also had 10K of eligible dividends that were generated and are on paper anyway part of the GRIP balance that you can access? and deem this to be an eligible dividend for tax purposes if you want to? so the bottom line for us newbies it to start generating dividend income via tax efficient canadian dividends so you can build up a GRIP balance to have more options and consult with your accountant who hopefully knows about this and can advise at the end of the corp year about what will be a corp. ineligible dividend vs eligible and hopefully help you reduce your taxes owing (I am in Ontario).

        1. Ah, I see. Not all dividends from a small corp need to be ineligible. I go over the process of how a small corp can give eligible dividends here. You do have the right bottom line though – invest to build some GRIP (as long as you don’t bump yourself over the passive income threshold) and work with your accountant to figure out dispensing eligible dividends when able.

          Basically, a small corp (like an MPC) can give an eligible dividend if it has a balance in its paper GRIP account. It gets that GRIP balance from either earning income above the SBD threshold and paying some tax at the higher general corp rate and/or from getting eligible dividend income. Your accountant needs to calculate your GRIP balance at tax time. You need to declare and minute it as an eligible dividend when you write yourself a cheque. Personally, I do this together with my accountant when we meet face to face for my corp tax filing and to plan for the year ahead or liase with him via email on it if unexpected things come up. It is important to get the paper trail right.

          1. does your account go over with your what your GRIP balance is when you meet for your year end review? and from there, you and the accountant then determine what you can take out as an eligible dividend and what would be ineligible based on what amount you have as a GRIP balance. So subsequently, if you issue yourself a cheque each month, some or all may be eligible or ineligible or a blend depending on this scenario and what makes the most sense from a tax saving point of view. If I have issued myself a dividend I only write on the cheque it was a dividend paid for month “x”, not identifying if it was for an eligible or ineligible dividend- I guess this matters a lot moving forward if you start to accumulate a GRIP balance? should an excel spread sheet I use for the dividend column I use when I issue myself a cheque be separated to include both of these distinctive dividend cheque types? Your response really clarified a lot for me. Thank you

          2. My pleasure! Good practical questions.

            My corp year end is Jul 31st and we do my corp taxes in early Sept. That is when we meet. My accountant goes over my revenue, expenses, taxes, retained earnings, cumulative realized capital gains/losses, GRIP, and RDTOH balance with me. We plan what I want to have as my dividends etc for the calendar year (personal tax year). Admittedly, I had no idea what he was talking about and just did what he suggested until this past year. I discovered that I have been carrying a GRIP balance despite paying out lots of dividends. There was a loop-hole that made that a reasonable strategy in the past, but the last Federal budget closed it. We discussed and will be emptying my GRIP and eRDTOH as much as possible moving forward.

            I like having my corp tax year end in the summer because it gives a few months to sort these things out before the end of the personal tax year (Dec). It is also a less busy time of year for him – so he takes his time with me. Meeting in Sept also gives a few months to tidy up eligible versus ineligible dividends over Sept-Dec. I then get my personal T-slips showing those dividends done in January for the preceding year. Eligible dividends are supposed to be declared as such when given. That basically means noting it as such in the corporate minutes and your accountant tracks it on the tax filings. I should probably note it in my spreadsheet too – good idea. Every accountant probably handles the mechanics of the process a bit differenly I suspect.

      2. I’m afraid I’m confused about this sentence in your comment “If my corp pays me a $10K ineligible dividend, then my corp pays $3833 tax for receiving the eligible dividend.” Could you elaborate? Thanks!

        1. Ah! You are right! Good catch. Paying an ineligible dividend will also release eRDTOH. eRDTOH is released by either an ineligible or eligible dividend. Releasing eRDTOH using a higher taxed ineligible dividend would be pretty inefficient, but allowed. The GRIP balance would be carried forward to allow an eligible dividend later. Personally, I would want the cash in hand asap. nRDTOH is only released by ineligible dividends. The new rules splitting the original RDTOH into two got me. I need to fix this and email Sue.
          -LD

  5. my corp year end is June 30 so I will talk with my accountant about the types of things you discuss with yours. Really just starting out with being able to invest in the corp….style trying to figure out if its best to take a blend of salary/dividends…..ie to get max cpp or just do all dividends. I do get some T4 income for child care benefit unless my spouse claims it. It is good that there can be flexibility about how one goes about paying themselves in a calendar year. Does your accountant use T3s and T5’s to figure out your dividend/income for tax purposes for the corp or use your statements? given that these are issued for a calendar year and your year end is July.

    1. Hey Sue. I was just about to email you. I made a small correction to one of my responses above. See – this stuff makes my head spin too. I was trying to answer and keep my kids at bay for a few minutes at the same time yesterday.

      I use a combination of salary and dividends. I like the RRSP room from salary plus some dividends to keep my corp investment tax flowing. I also spend enough that I don’t really need to choose one over the other. It is a bit different for everyone. The more I learn, the more I appreciate my accountant. I give him both my detailed transaction statements from my corp investment accounts and the T-slips that get issued and he just does it. I am not sure what exactly he relies on.
      -LD

  6. Great post by the way…Just to change gear or topics for the moment…why is there no talk of an IPP, it can be a good source for another income stream and is tax deductible from your corp. I just set one up this year after a LOT of research and likely annoyed my accountant with all my questions, Excel sheets, etc…at the end of the day, it helps create a deduction from your corp., Gives you another income source in retirement…any thoughts on an IPP?

    1. Hi Hipeonmoney! Thanks for stopping by. IPPs have been on my todo list. I mentioned them in my overview of strategies post back in April but haven’t made it back yet. Having spent so much time researching/testing, you probably know more than me. My general take is that they can be helpful when you get a bit older – especially if you missed building an RRSP or want to roll more money into that type of structure. I don’t think I will use one personally because I have a pretty good multi-source plan with my RRSPs, TFSAs, Corp Account, and my lower income wife’s taxable account. I may also retire well before age 55 also – which may complicate an IPP a bit. They do come with more rules and fees. That may be worth it for some situations and not others. I honestly need to spend some time looking at them in more detail. What do you see as the major advantages/disadvantages and where an IPP would work best?
      -LD

      1. Yes, they certainly do have some interesting rules…the only major disadvantage I can see is they are controlled like any other pension – basically yearly payment is 2% of total T4 income over the years…for me personally, its another income source: RRSPs, IPP, TFSA’s, Corp Account, rental properties etc…advantages – if you have lots of income/retained earnings/excess cash each month/year and are closing in on your SBD, then it allows you to funnel some of your retained earnings with a tax deduction…it also assumes 7.5% return each year…if it is less, then you can top it up again with a tax deduction to your corp…if you retire before 55, you can also do a bridge lump sum contribution to fund the years between retirement which again is tax deductible…I guess I was wondering more about your thoughts…not much written out there about them and was looking for some other perspectives and justification on me setting one up! 🙂

        1. I hear you. One of my friends who is financially pretty savvy has been thinking about it and trying to research. We are both undecided but still in our early 40s. I actually spent some time directly speaking to a financial advisor that does deal in them to get as much info as I did in that previous post. I couldn’t find much on the internet either. Are you able to invest in whatever you want or does it have to be specified funds?

          1. Yes, definitely you can choose your investments/securities/asset allocation…in order to open one you need to be at least 40 and have past years of T4 income…something to look into nonetheless and as you mention in most of your posts, each individual needs to see if their situation makes it worthwhile.

          2. The IPP has a few disadvantages :from an article in the medical post (edited)

            1) unlike a spousal RSP, you cannot split income with your spouse;
            2) since you require ongoing services of an actuary, the administrative expenses are higher than with the RRSP
            3) you don’t have the ability to withdraw funds prior to retirement; and
            4) you need T4 earnings to maximize the current IPP contribution, which is similar to maximizing your RRSP contributions. (not as much an issue since income splitting via dividends is pretty much toast)

  7. Thank you, love your blog…very detailed and accurate…maybe one or 2 people will have some interest in some of the topics I have on the slate to write about. 🙂

  8. Great blog post, one of your best. This stuff took me ages to learn and comprehend and you’ve summarized everything in an extremely straightforward manner.

    Just curious as to your thoughts on portfolio asset class allocation based on the tax ramifications of investments held inside a corp.

    There’s articles online addressing asset allocation for TFSA vs RRSP vs non-registered but nothing comparing TFSA vs RRSP vs corp.

    Here’s my (amateur) opinion:

    -Corp: prioritize cdn equities first, avoid interest income (unless held in a swap etf)

    -TFSA: prioritize US and international equities

    -RRSP: prioritize interest income +/- US listed ETFs to avoid witholding tax?

  9. Hi LD, thanks for a great post. Question re: CDA – you said “While Capital Dividends may be tax-free, they do come with some accounting fees – generally in the $750-$1500 range.”
    is this $750-$1500 included in one’s regular accountant corp taxes fees, or do accountants regularly charge EXTRA for managing a CDA on top of their regular corp tax fees?
    Thanks for answering my noob question!

  10. Hi Yan,

    That is not a noob question, but a good one. My understanding is that it is in addition. However, different accountants will likely have different fees to a degree. Some may also depend on how clean your record keeping for investments are therefore how much time it takes them to sort out. Personally, I haven’t done any capital dividends yet (I am waiting until I am older). That was just the price range I have heard bantered around. Perhaps a reader who has dipensed from their CDA can comment.
    -LD

  11. Great blog LD .
    I did a CD for 100 k a few years ago. It cost my corp about $500 extra. I prepared the resolution for the minute book (no lawyer needed) so this may have saved me a bit.

    I will wait until my CDA balance is over 100 k to do another (unless I need the cash before then) .

    I was told not to withdraw the entire CDA balance as their would be penalties (if overdrawn) so I left 15k in to be safe. You can request your CDA balance annually when your T2 return is filed but if its calculated incorrectly, its your problem , not theirs

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