“Bonus Down” to the SBD or Keep it in the Corp?

A Canadian Controlled Private Corporation (CCPC) that has over $500K of net active business income is taxed at the higher general corporate tax rate (23-30% depending on the province) compared to the lower SBD rate (9-12% range depending on the province).

So, one strategy discussed is called “bonusing down”. That refers to paying a T4 income bonus to the owner to bring the corporate income down to $500K. The bonus does that as a deductible business expense. This is done whether the excess salary is needed personally or not. This is in addition to the salary and dividend mix required to efficiently fund the owner’s consumption requirements. Extra money would be invested in a personal taxable account.

It lowers the corporate tax rate to keep it all at the SBD level. Tax integration of paying a salary versus paying corporate tax plus personal tax on the dividend from retained earnings generally favors salary. Also, tax integration of investment income favors personal investing.

Not bonusing down leaves money taxed at the general corporate tax rate. However, it also means more money is retained in the corporation to grow and be taxed later when you take it out as dividends. That is corporate tax-deferral.

Deferring taxes from a high tax bracket now to a lower one in the future reduces the overall tax bill. The opposite also applies. So, current and future tax rates are important. Fortunately, many corporate owners defer taxes from their high consumption years to lower consumption years in retirement. However, if there is low consumption now, leaving a large corporation in the future, income may be forced into higher tax brackets when it comes out.

The other factor that matters is the tax efficiency of corporate investing. For the model, I will assume all RDTOH is being released by corporate dividends paid out to meet basic consumption. That makes corporate investing similarly efficient compared to a lower personal tax bracket. If not releasing the RDTOH, corporate investment income becomes very inefficient until it is released – close to the top personal tax bracket.

The tax drag on interest and dividends from investments in a personal account is the comparator if you decide to bonus down. That varies based on your personal tax bracket.

The type of investment income (eligible dividends, foreign dividends, and interest) also influences the tax drag and tax integration.

The balance can be looked at a couple of ways.

One way is to compare the tax savings/cost today from bonusing down against the ultimate savings/cost from tax deferral over a fixed time frame. The top chart in the model is a 20-year time frame. There are three tax deferral scenarios: Same current vs future tax bracket, highest future tax bracket, and halved future tax bracket (like could happen with dividend splitting after age 65). Whether bonusing down with those parameters is beneficial or not depends on your tax bracket. Lower current and higher future taxes favors bonusing down (number above zero on the chart).

In that top chart, the personal taxable income is the variable. It also includes the bonus. So, if the advantage was for an income below $100K and I normally take $55K of income, I could consider bonusing down with another $45K.

The second chart shows another way of looking at it. A constant taxable income and variable time frame. This is the second chart and represent how many years of corporate tax deferral it takes to make up for the initial savings of bonusing down.