HXCN vs ZCN Tax Efficiency in a Private Corporation

The taxes on passive income in a Canadian private corporation (CCPC) can vary dramatically. From minor to brutal. So, the impact of converting income to unrealized capital gains using a corporate class ETF ranges from minor to massive. The corp class structure does carry a tax risk if the income isn’t manageable. However, when functioning as intended it is very tax efficient. This week, I will compare the fee and tax drag of the HXCN vs ZCN ETFs that cover Canadian equity markets.

There are times when HXCN can be a silver bullet for the tax werewolf. However, eligible dividend income can boost corporate tax deferral. So, if the tax werewolf never comes knocking, then you may actually shoot yourself in the foot.

Horizons bond etf

When modeling tax drag in a corporate investment account, it can vary wildly. The big benefits of corporate investing hinge on tax deferral. To keep things fair, the tax code also has measures to discourage too much tax deferral. However, eligible dividend income in a corporation may actually increase tax deferral.

On the other hand, the tax werewolf can show up if they sniff out too much passive income. Including eligible dividends. Your CCPC can either pass some income out voluntarily with some minor claw marks. Or hold it in and get eviscerated.

Eligible Dividends Decrease Personal Taxes

When a CCPC receives an eligible dividend, it also gains the ability to pay out an eligible dividend of the same amount. If you would alternatively use salary to compensate yourself, substituting that with an eligible dividend results in less personal tax. The enhanced dividend tax credit applied to the eligible dividend means a lower net personal tax rate.

The personal tax savings vary by tax bracket and province. However, it is generally 14-30% less than regular income. That is to account for the fact that the publicly-traded company that the income originated with already paid tax at the general corporate rate.

In retirement, you would probably not be using salary, but non-eligible dividends from the retained earnings from the past active income. Eligible dividends are ~8-20% less personal tax than non-eligible ones depending on province and tax bracket.

Eligible Dividends May Increase CCPC Tax Deferral

Either way, that lower personal tax rate means that the CCPC doesn’t need to pay out as much money for the owner to have the same after-tax personal cash to spend. That leaves more in the corporation. Eventually, you will have to move out those retained earnings in the future and pay personal taxes. So, it is only corporate tax deferral. Whether that tax deferral is ultimately good or bad depends on the owner’s future tax rate. Deferring from a high-income tax rate now to a lower one in the future saves tax. The reverse is also true.

The tax deferral relative to salary is greater than compared to non-eligible dividends. I illustrate both situations below (you can click to magnify). There is no savings if no corporate owner compensation is required, but that is rare.

Trapped nRDTOH

Interest, dividends, and the included half of capital gains are taxed at a high rate upfront. Approximately, the top personal rate. All or some of that is refunded via the RDTOH mechanism when the corresponding dividends are paid out to the business owners.

That is reasonably efficient when you need dividends to live off of. However, it can drag on investment growth if you do not need enough dividends to release the RDTOH refund to the corp. If your personal tax rate on those dividends is higher than the refund, the RDTOH is essentially trapped until you do need the money.

When paying out dividends to fund consumption and release RDTOH, you’d use the more efficient eligible ones first. If that is enough to fund consumption, and there is still unreleased nRDTOH. That nRDTOH is trapped until you need the money. So, extra eligible dividend income to a CCPC can indirectly cause a 30.67% tax drag from trapped nRDTOH.

Trapped eRDTOH

High levels of eligible dividend income relative to personal spending can also result in trapped eRDTOH. In some provinces (ON, PQ, NS, NL), the top tax rate on eligible dividends is over 38.33%. So, it is also possible to have trapped eRDTOH if the amount of eRDTOH generated from eligible dividend income exceeds the personal tax rate and more dividends aren’t needed to fund personal consumption.

When eligible dividends are passed through a corporation, there is no net corporate tax. The corporation pays 38.33% tax upfront and gets a 38.33% eRDTOH refund when it is paid out. However, when the eRDTOH is not released, it is a 38.33% tax drag on the CCPC’s excess eligible dividend income due to the upfront corporate tax collected.

Passive Income Limits

The other way that passive income can bring the tax werewolf out is the active-passive income limit. If your corporation has >$50K of passive income in a year, the small business deduction (SBD) threshold shrinks. The shrinkage applies to the following fiscal year and is at a 5:1 clip.

So, instead of income under $500K being taxed at the low SBD rate, that $500K threshold shrinks and disappears with $150K of passive income. That represents a 60-75% corporate tax bump for every dollar of passive income that triggers this.

You can attenuate the impact of shrinking the SBD if you pay out more eligible dividends to live on from the income bumped to the general corporate tax rate. Or if you pay out more salary to lower your corporate income to come in under the SBD. Either means more personal tax now and loss of corporate tax deferral, if you don’t otherwise need that money.

The passive income limits don’t matter if the CCPC doesn’t have access to the SBD for other reasons. Like not meeting the special requirements in Quebec. It also doesn’t matter if the corporation is not earning any net active income. Like in retirement.

I will present the results for each equity ETF using five different states of corporate tax efficiency. As you can tell from the previous section, it is a more complex situation than with simple interest income.

All eRDTOH & nRDTOH Released

First, is an efficient corporation that is releasing all the RDTOH using dividends to fund personal consumption. In that case, eligible dividend income offers some personal tax savings and increased corporate tax deferral (less tax drag now). That could be by using Less Salary or by using Less Non-Elig Divs to get the amount of after-tax personal income required. I will use the highest marginal tax rates, but the tax deferral from using eligible dividends increases in lower tax brackets.

nRDTOH or eRDTOH Trapping

If extra dividends are not required for personal consumption, then RDTOH can be trapped (more tax drag now). Indirectly Trapped nRDTOH would happen first due to preferentially using eligible dividends to release eRDTOH. It amounts to ~50% due to the high upfront tax on passive income.

In some provinces, trapped eRDTOH could also occur if the eligible dividends received exceed the amount needed personally. That is a 38.33% corporate tax drag on the excess eligible dividend income. Trapped eRDTOH would happen after nRDTOH trapping and be really uncommon. So, I will omit it for simplicity.

Over CCPC Active-Passive Income Limits

Over Passive Limit & Elig Divs Used: If the passive income from the ETF results in SBD shrinkage that bumps active corporate income tax, that has two states. Paying extra eligible dividends using the GRIP generated by the higher corporate tax instead of non-eligible ones to live on attenuates the impact. In Ontario and New Brunswick, the personal savings from the eligible dividends can actually exceed the corporate tax bump. So, I will use an example from BC and Ontario for the ETF comparison when the passive income limits are in play.

Over Passive Limit & No Elig Divs : If you don’t benefit from more eligible dividends for personal spending, that is a full werewolf mauling. A 60-75% corporate income tax bump. The blood is lost until you pay out more dividends, and the personal tax on them.

Horizons have a whole family of corporate class ETFs, with several that focus on different aspects of the Canadian market. Like banks, energy, and REITs. They also have a couple that cover the broader Canadian market. They have HXT which covers the TSX 60. It has an ultra-low MER of 0.03% compared to its conventional counterparts like XIU (0.25%).

The S&P/TSX Canadian Capped Composite Index

Most ETF providers have more options that track the broader Canadian market. They track more stocks and have more mid-cap exposure than the TSX 60. That means more diversification and also less of a large cap factor weighting. So, I am going to use Horizons’ HXCN corporate class ETF that tracks the S&P/TSX Capped Composite Index. It tracks the largest Canadian companies but caps any single stock at 10%. That translates to about 225 companies that make up 95% of the Canadian equity market.

For the conventional ETF, I will use ZCN which tracks the same index. Blackrock’s XIC also tracks the S&P/TSX Capped Composite Index. The very similar VCN ETF tracks the FTSE Canadian All-Cap Index. So, this comparison should hold up amongst all of those ETFs.

Dividend Yield & MER

The gross eligible dividend yield has most recently been well over 3%. However, over the long term, it is usually more in the 2.8%/yr range. It fluctuates due to the dividends, but also the price – which is volatile. For simplicity, I will use a yield of 3% minus the MER. Both the conventional and corporate class ETFs have an MER of 0.06%. So, you would expect to get a 2.94% distribution from the conventional ETF as eligible dividends each year. That would be captured as an increase in share price for the corp class ETF.

Otherwise, I have kept the capital gains at zero for both ETFs. They would both rise the same, and the main tax drag during growth is from dividends and not unrealized capital gains.

Other Risks With Horizons’ Structure

For this modeling, I am assuming that Horizons’ mutual fund corporation has no net income. That means income from dividends, interest, or settling swaps is offset by losses. I described Horizons’ loss pool in a previous post. If there is net corporate income, then the embedded taxes rise quickly. That materializes as a capital loss. Currently, the structure is working as intended, but the risk is there.

One aspect that can increase the risk of income is if Horizons has to settle the swap contracts that they use. That could happen to manage their counterparty risk. Currently, the counterparty exposure for HXCN is 22.84% to National Bank. That is not very high but could rise rapidly if the markets take off to the upside.

When considering whether a corporate class ETF offers a potential tax advantage, comparing it to conventional income distribution matters. Eligible dividends from publicly traded Canadian companies flow very tax efficiently through private corporations. As long as enough dividends are needed personally to release the RDTOH, there is no net corporate tax. If used instead of salary or non-eligible dividends to fund personal consumption, then the corporation actually has more money to keep invested. Increased corporate tax deferral, as described earlier.

In a situation where a CCPC is flowing its investment income through to shareholders efficiently, the conventional ETF functionally has a negative tax drag (good). That is due to the personal taxes saved relative to using salary or non-eligible dividends to live on.

That situation describes most incorporated professionals unless they have a high passive income and low personal spending. In those cases, there could be RDTOH trapping or passive income limit troubles that change the math.

If there is a high level of corporate passive income relative to the dividends paid out to fund consumption, then RDTOH trapping can develop. That only affects the income above which the RDTOH refund isn’t paid out. So, it would likely be a small amount at first. As described in the earlier corporate tax efficiency section, that would likely mean indirect nRDTOH trapping initially. Then, in some provinces, eRDTOH trapping could also be possible.

When Bought & Held

You could make adjustments if or when RDTOH trapping becomes an issue. One way to address that issue is to spend more personally by using dividends to fund that. Another option is to use a corporate class ETF to avoid the extra dividend income. In this situation, HXCN has a definitive advantage. In BC and most provinces, only indirect nRDTOH can happen. However, during the peak earning and consumption years, passive income limits are likely to kick in first. So, this is more of a retirement issue for most. Again, you can’t take the money with you when you die. I vote for spending/giving more as the solution. But, HXCN works too.

In ON, NS, NL, and PQ more passive income beyond nRDTOH trapping can also trap eRDTOH. However, that only happens at very high personal income which implies a truly massive amount of passive income. Unlikely, except in an extreme scenario.

When Sold & Capital Gains Flow Through

HXCN becomes even more interesting when it is eventually sold and all of the capital gains generated by the corporate class structure are flowed through. When a capital gain is realized, the excluded half goes to the corporation’s capital dividend account (CDA). That half can be paid out personally tax-free as a capital dividend. Analogous to eligible dividends, that improves corporate tax deferral by reducing the salary or taxable dividends needed.

Using a capital dividend defers about 51% of corporate income vs using salary, or 38% vs using non-eligible dividends. If you don’t use the capital dividend, then there is no tax deferral. It sounds awesome and harvesting capital gains on purpose is a useful corporate tax strategy. However, the catch is that there are accounting fees to file the special election for a capital dividend. That ranges from “included in your corporate tax filing fees” to $5K, The cost is usually in the $500 to $1K range. So, you would need a large enough CDA balance to justify the cost. You also need a personal use for the money.

Capital Gains Flow Through vs RDTOH Trapped Dividends

In the situation where there is RDTOH trapping, reducing dividends paid just results in more trapping. So, using capital dividends to reduce regularly taxed dividends doesn’t really help immediately. However, the excess personal cash from using a capital dividend could be invested personally instead. The future growth from that re-invested money would at least not be worsening the corporation’s “too much passive income problem.”

If simply realizing the capital gains without using a capital dividend. Then, there is still a 0.75% advantage for corporate class ETFs vs having received more dividend income. In the future, when you do decide to use a capital dividend to move some extra money out, there is a 1.7% advantage by using the CDA vs using regular and release of the trapped nRDTOH (data not shown).

When the punitive taxes due to exceeding the passive income limits kick in, corporate class ETFs really shine. Like a polished silver bullet for the tax werewolf. That holds true with HXCN vs ZCN. Eligible dividend income is taxed as brutally as other passive income when over the limits.

Recall that when passive income shrinks the SBD, corporate active income may get bumped up to the general corporate tax rate. That translates into a massive 60-75% tax rate. However, some GRIP is also generated. If you can use the extra eligible dividends from that, it attenuates the tax bump somewhat. In ON and NB, it may save more personal tax than the corporate tax bump and be beneficial due to a complex anomaly.

When Bought & Held

When HXCN is bought and held, there is no annual income distribution. The yield is just added as an unrealized capital gain. So, the only drag is the fee and it avoids shrinking the SBD further. That is an advantage compared to getting more eligible dividends from a conventional ETF for most provinces. How much depends on tax integration and whether the extra eligible dividends generated by the income bumped to the general corporate tax rate are used. For BC, it is only a 0.04%/yr advantage for HXCN compared to a conventional ETF because integration is pretty efficient there. However, if not able to use the extra GRIP generated by the passive income bump in corporate taxes, the gap widens to 2.35%/yr.

The are two notable exceptions. In Ontario and New Brunswick, the passive income from ZCN may reduce personal taxes more than the corporate tax bump. In New Brunswick, the impact is even greater (-0.99%/yr; data not shown). That only applies when all of the eligible dividends from corporate active income are passed through. If the excess GRIP isn’t used, then there is excess drag relative to HXCN until it is used.

Capital Gains Flow Through vs Dividends Over Passive Limits

If the capital gains accrued for HXCN instead of conventional income are realized, HXCN can be efficient. When passed through as a capital dividend instead of using salary or regular dividends, the HXCN advantage of 0.1% (data not shown). That only works if the corporation can also use all of its GRIP from the passive income limit bumping active income. If the accounting fees make a capital dividend unattractive, ZCN could easily pull ahead.

If unable to use the GRIP generated from the income bumped to the general corporate tax rate, then HXCN has a ~1.4% advantage. That assumes that you also can’t make use of a capital dividend since you don’t need all of the eligible dividends available from the GRIP. When the CDA is used at some point in the future, it offers another ~0.32% savings at that time compared to using an eligible dividend. If that is at the expense of paying general corp taxes and not using the GRIP, then the advantage still goes to conventional ETFs.

In Ontario and New Brunswick, the tax integration anomaly due to those provinces not following the lead on the Federal tax grab complicates things. If able to use the GRIP generated by the Federal tax bump, then dividends from conventional ETFs are better. There is an even larger difference in NB of ~1.7%, favoring conventional ETF income (data not shown). If able to use capital dividends, it is closer, but ZCN still edges HXCN out.

There are times when HXCN is like a silver bullet. When the tax werewolf is knocking, it is very effective. However, if you are just scared of the big bad werewolf and don’t have a corporate tax efficiency problem. You risk shooting yourself in the foot. Not only with the extra risks of the corporate class structure. But also by not taking advantage of efficient eligible dividend flow through instead of more expensive compensation. In Ontario and New Brunswick, the tax werewolf may even be more of a cuddly puppy where a tax anomaly makes the passive income limit a potentially good thing. I have summarized this below.

ZCN is better for most corporations

The vast majority of CCPC owners require income from their corporations to live on. It is usually enough to release the RDTOH and keep the corporate investments reasonably efficient. In the case of dividends from Canadian stocks, there is even a tax deferral advantage if they can displace the use of salary or non-eligible dividends.

HXCN HXT corporation

In this model, the efficiency of eligible dividends gives ZCN the edge. However, the same should apply to the other ETFs covering parts of the Canadian market.

That is without even considering the additional risks embedded in the corporate class swap ETF structure. In this case, they may be shooting themselves in the foot with HXCN.

High-Income Corporations With Frugal Owners

Corporations can become less tax efficient if they develop too much passive income. That is on purpose. The tax werewolf is hungry and won’t put off eating forever. Fortunately, you can usually avoid ever seeing the tax werewolf by moving money out of the corporation and feeding yourself instead. They still get personal taxes. However, that is like scraps in the garbage relative to letting them eat at the table via RDTOH trapping or the passive income limits.

Most corporate owners who do find the tax werewolf sniffing around, won’t do so until later in their careers. Earning less or spending more may be the most attractive option. Donating appreciated ETF units to charity from a CCPC could even supercharge tax efficiency. However, there are some high-income professionals who are aggressively saving towards Mo-FIRE. Or they simply love their jobs and are happy with their current spending. For them, HXCN could be a silver bullet.

They may want to use conventional ETFs before the full moon, and then add HXCN as it approaches. That implies a large portfolio. Not only does that avoid excess passive income when it matters. A large portfolio also makes it likely that harvesting capital gains and using capital dividends each year is more cost-effective.


  1. Bank of Canada policy aims for an inflation rate of 2%. It’s likely that the inflation rate will be a little higher than that. With a fiat currency, an inflation rate greater than 2% is more likely than an inflation rate of less than 2%. Assume the passive income limits of 50-150K don’t change. Assume you’re retaining active business income in a CCPC over the next 30 years. That means the passive income limits will be increasingly important. And that means that investment products, such as HXCN, become increasingly attractive with time.

    But I’m reluctant to use such products. ETFS providers – other than Horizons – are not fools. And the people at the CRA are not fools either. Horizons is the only ETF provider that I know of that sells such products. If this is such a good idea, why is only one company – which is not one of the major players in the Canadian ETF market – selling these products?

    I’m in the accumulation phase, and I’m interested in investment products that generate less investment income in a CCPC. Less investment income can not only be good from a tax deferral perspective. Less investment income gives me greater control over how much investment income I realize and when I realize it. There’s always the option of creating DIY dividends by selling stocks.

    When it comes to asset location and what to hold personally versus in a CCPC, Canadian stocks tend to make more sense in a CCPC than nonCanadian stocks. In that situation, one way to decrease investment income would be to tilt to small and/or growth Canadian stocks in a CCPC. But I have some reservations about small and growth Canadian ETFs.

    So for now, I’m sticking to the plain vanilla products, similar to ZCN. I realize that sticking to such products means more tax. But I’m concerned that this is an example of “if something sounds like it’s too good to be true, it probably is”.

    1. Hi Park,

      That is a good point about the passive income limits effectively being eroded by inflation over time making them worse. It is not indexed to inflation like personal tax brackets are.

      I am not sure that I would call Horizons fools. They make niche ETFs and these are definitely niche both for their corporate class and the swap structures. From a business case standpoint, they dominate that niche and it probably isn’t worth the risk for another company to go to the trouble. The other reason it is probably not worth it for others is the difficulty in managing income to keep the structure efficient. That is why most corp class funds ultimately close. I wrote about that here. That is a real risk and I think limits the life-expectancy of corporate class funds. Horizons has some runway, but they are using it up over time so far. If they do get income, the advantage while over passive income limits for a CCPC is so big that it could still be worth it – even with some tax inefficiency embedded in the fund. With personal accounts, the benefit is so narrow that it would be a problem very quickly and I suspect Horizons (not being fools) would move the funds back to a conventional fund trust structure before then. If they see it coming and take appropriate action – that is the biggest risk in my mind.

      Either way, in an efficiently running private corporation (which is most of them), the conventional ETFs (like ZCN or XIC) have an advantage. Plus, without taking the above risks. If getting clobbered by the passive income limits, then they are an option, but keeping an eye on Horizons’ loss pool and understanding the risk of that is important. I share your concern about the long term viability of the bonus efficiency, but it could be useful in the interim for a small subset of CCPC owners. Personally, for Canadian equity coverage in my CCPC, I stick with conventional eligible dividends too.

      1. About the passive income limits effectively decreasing with time due to inflation, there’s a corollary to that. It increases the incentive to retain active business income now in the CCPC, as opposed to later.

        P.S. I don’t think Horizons are fools. They’re trying to succeed in a market already dominated by others. It wouldn’t be easy to go head to head against a product like ZCN. So as you point out, they have a tendency to sell niche products.

  2. Interesting ideas.
    In my CCPC I have roughly half US$ and C$.
    For US$ to minimize dividends I’m mostly in BRK.B, SPY and some supposed growth stocks like GOOG.
    I plan to keep long term and slowly cash out when I need the capital gains.

    Do you have any suggestions for other US$ ETF or stocks with low or no dividends?

    Thanks again Mark
    I heard saw your talk at Surrey Hospital in BC

    1. Hey Dad MD,

      I have used a similar strategy. I have my Canadian stocks/ETFs in my corp. Canadian dividends are a good thing, as I mention in this article.

      For the US, I have used Brk.B and QQQ in the past. I ditched the BRK.B at some point just because I wanted to diversify more. I actually added AVUV to get a US small cap value and profitability tilt. The dividend is smallish.
      That way the AVUV tilts counteract the QQQ large cap growth tilt. The QQQ also helps to balance out the fact that Canada is way overweight financials and oil/gas/commodities and QQQ excludes that. This is probably a more complex strategy than most people should use. Maybe even me 🙂 I will likely simplify it further soon. Perhaps simply use ZCN,HXS, and a dash of AVUV. I am thinking about it. We hold our non-NA developed etc in other accounts, but I will be modeling HXS, HXDM and HXEM in the coming weeks. Followed by a big picture summary. 

      I am not really aware of other US ETFs with little to no dividend that isn’t getting too narrow and therefore taking on uncompensated risk.

      Hope you enjoyed my Surrey MSA talk. I am restarting the seminar series from part 1-6 starting next month. The organizers are a real pleasure to work with and it is refreshing to see an MSA with the resources and will to do that for their members.

      1. Great ideas. I have QQQ as well. Great advice to keep diversified with US$. Hedging my bets as they say because who knows what will happen in the future! Other than GIC’s money market ETFs, not buying anything for a while until the dust settles with interest rates

  3. Thankyou for a great write-up. I’m all invested in Horizon’s HXS, HXT, HXF, HXQ, HXDM right now, and drawing non-eligible dividends from CCPC. I will now look for Canadian Eligible Dividend paying ETFs. This write-up helps me understand the accounting a bit better.

    1. Thanks Maggie. Just a regular broad Canadian markets has a pretty hefty dividend yield. I have found the dividend-focused ones to have higher fees for a marginally higher dividend and are less diversified. Plus, even though eligible dividends are great, capital gains are even better. When a company gives dividends, it does so at the expense of the capital gains portion of the total return. So, that is why I like a simple Canadian All-Cap ETF like the ones I used here.

  4. Great work Mark!

    It is hard to ignore the tax efficiency of Horizon ETFs. What I like about dividends and distributions, it is that you know how much income you are getting every month and it takes a huge psychological burden off your shoulders. I am not good at making sell decisions in my portfolio for capital gains. I hate touching the capital for which I have worked so hard. If you could visibly hoard money, I would end up on the Hoarders TV show.

    With dividends, I know exactly how to plan my spending and how much I can splurge to improve my quality of life. I do not debate small expenses. I am more generous. I do not feel stressed at work because I know that my current passive income covers my monthly expenses and working for extra investment income is like a game now.

    My advice to young attendings: do not pay yourselves 40K per year from your corp. I did that for a couple of years and now I regret it because I will run into an asset decumulation problem. I am getting the full eRDTOH out each year, but the GRIP… not too sure how to tackle that.

    Another issue will be RRSP withdrawals. I know already that I will not qualify for OAS and I will probably not be in a lower tax bracket in the future than I am now (unless there are major dividend cuts across the board from multiple companies). Thus, I am evaluating the pros and cons of starting to draw down small amounts from my RRSP now in my forties.

    I wish taxes in Canada were not that complicated.


    1. Hey Mai,

      I totally agree. There is a psychological advantage to getting income. That said, some of the ETF providers are addressing that. For example, BMO ETFs have ZGRO.T and ZBAL.T versions of their asset allocation ETFs. They distribute 6%/yr automatically doing the selling and rebalancing to do that. So, money hits your account each month without thinking. If you wanted a lower distribution like 3%, you could simply use have “T-version” and half regular. With a corporation, Canadian dividends are efficient anyway, but that could be a good solution for an all-in-one option.

      Your insight into the problem of tax deferral is very pertinent. Tax deferral is great if you defer from a high rate to a low one. However, if you defer so much that you are forced to take it all at a higher rate later. Not so great. You starved yourself to have an ultimately higher tax bill and less after-tax money. It is much better to smooth it. Sometimes that means taking a bit extra when it is efficient to do so. Investing the extra personally is actually handy and has less embedded taxes to fund splurges. Or taking a hard look at where you are and where you need to be. If way ahead of the savings curve, then spend a bit more, work a bit less, or give some to charity (tax-efficiently of course).

      Drawing slowly from a corp and RRSP are a bit different. You have to consider where the excess money is going to go. For example, the RRSP is also tax sheltered. So, if investing personally the tax drag could undo the benefit of smoothing the tax deferral. Ben Felix and I will talk about this in one of the episodes of The Money Scope Podcast(coming soon!). For a corporation, drawing down in advance makes sense more often. One reason is that the dividends are grossed up. That grossed-up (1.15 or 1.38X) is the income used for OAS clawback while an RRSP is just 1X. Personal capital gains 0.5X. TFSA zero. So, I would suck out from the corp first and build some personal accounts. We are doing that actually. The other issue is that personal investing is generally more tax efficient from an annual drag standpoint than a corp. So, in contrast to an RRSP where you are shifting from tax-shelter to tax-exposed. With a corp you are shifting from tax-exposed to tax-exposed and usually slightly less tax drag. It depends on personal situation and modelling. I actually built a calculator to do it, but it is too complex for the internet to handle it 😉

      Generally, if you have unused GRIP, you should be using dividends (even if that means less or no salary) to pay yourself and empty it smoothly over time. Left in the corp, its buying power erodes and it means a grossed-up OAS clawback later. Disclaimer: none of this is specific investing or tax advice, but it is what I would ask my tax planner or financial planners about and specifically bring up the above issues if they don’t consider them on their own.

      1. Great insight. Lots to think about, especially about planning to get the GRIP out. I will definitely ask my accountant about it.

        For the RRSP, tax-free growth can counterbalance the high taxation later in life, although the details are way over my head. I might treat it as an old age ”emergency account” in case I need long-term care. I am looking forward to your podcasts.

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