[Doug]

Outside an RRSP/TFSA, it can be difficult to stay ahead of inflation and taxes in fixed income. I'm wondering whether I should have my fixed income outside of my RRSP/TFSA in my CCPC. All other things being equal (which they never are), returns inside the CCPC will be about 1.5 times what they are in a nonregistered account. This uses top marginal Ontario tax rates. With a return increased by 50%, I'm much more confident that I won't lose money after taxes and inflation.

The downside is the loss of growth potential by not having common stocks inside a CCPC. However, you can make the same case about loss of growth potential by not having common stocks in an RRSP. Indeed, with a 46.41% tax deduction and tax free growth in an RRSP, the loss of growth potential is greater inside an RRSP than a CCPC. Yet conventional wisdom is to have your fixed income in your RRSP/TFSA, and stocks in your nonregistered account.

 

[CanadianCapitalist]

Outside an RRSP/TFSA, it can be difficult to stay ahead of inflation and taxes in fixed income. I'm wondering whether I should have my fixed income outside of my RRSP/TFSA in my CCPC. All other things being equal (which they never are), returns inside the CCPC will be about 1.5 times what they are in a nonregistered account. This uses top marginal Ontario tax rates. With a return increased by 50%, I'm much more confident that I won't lose money after taxes and inflation.

The downside is the loss of growth potential by not having common stocks inside a CCPC. However, you can make the same case about loss of growth potential by not having common stocks in an RRSP. Indeed, with a 46.41% tax deduction and tax free growth in an RRSP, the loss of growth potential is greater inside an RRSP than a CCPC. Yet conventional wisdom is to have your fixed income in your RRSP/TFSA, and stocks in your nonregistered account.

I don't understand how you can have higher after-tax returns within a CCPC than in a personal taxable account. I'm no tax expert but my understanding is passive income in private corporations are taxed at the highest marginal rate. The small business tax rate is available for active business income, not investment income.

The conventional wisdom does not say have all your RRSP money in fixed income. It says have all your fixed income within tax-sheltered accounts.

 

[leslie]

Ditto.

Also, the comparison of returns must be done on the basis of eventual receipt of the cash OUTSIDE the CCPC.

Your comments about not having common shares within a CCPC made no sense to me.

concl: I think you are trying way too hard to wheel and deal. I see no upside for your idea.

 

[Doug]

In a CCPC, active business income is taxed at 16.5% in Ontario. For an incorporated professional, this income outside a CCPC would be most likely taxed at 46.41% (top Ontario marginal tax rate). After the 16.5% tax, you can then invest the remainder inside the corporation. Inside a CCPC, the remainder would be 83.5% of the original income; outside a CCPC, it would be 53.59% of the original income. 83.5 divided by 53.59 leaves 1.558; in other words, you have about 1.5 times as much to invest in a CCPC than you would outside a CCPC. Other things being equal (which rarely happens), your return will be approximately 1.5 times greater in a CCPC than outside a CCPC. Eventually, you will take the money outside of the CCPC and pay tax on it. At that point, the overall tax will be the same inside or outside a CCPC. The exception is if your income at the time you take it out of the CCPC is less than it is presently. This is somewhat similar to an RRSP, except the tax deferral is 46.41%-16.5%=29.91% in the CCPC as opposed to a tax deferral of 46.41% in an RRSP. Also, there is no tax free growth inside a CCPC. In some ways, investing in a CCPC is a watered down version of investing in an RRSP.

Inside a CCPC, you'll pay slightly more tax on income and capital gains than you would outside a CCPC. The tax on dividends is the same.

I don't have enough room in my RRSP/TFSA to meet my desired fixed income allocation. My question is whether I should invest in stocks or fixed income inside my CCPC. In a nonregistered account, it can be difficult to stay above water after inflation and taxes with fixed income. If one invests in fixed income in a CCPC, one's return will be approximately 1.5 times greater than it will be in nonregistered account. This will significantly increase the probability of not losing money after inflation and taxes. However, common stocks in a CCPC will have greater growth potential than in an nonregistered account. Once again, this is somewhat analogous to investment decision making in an RRSP. Any insights as to how I should invest in a CCPC are appreciated.

 

[billiam]

Perhaps the commentary in this link may assist you:

http://dynamiclawyers.com/DL_blog/tag/refundable-tax/

 

[leslie]

Doug you are continuing to ignore the point made above about the tax on non-active income.

RRSP do not defer tax. They protect from tax. You cannot compare until you understand how RRSPs work. Watch at least the 2nd video of this series https://www.youtube.com/channel/UCYf70uCj5q4GRWYC0wVtdxg

"Any insights as to how I should invest in a CCPC are appreciated?" Don't. Take the $$ out and invest it outside.

 

[Doug]

About my comment "Inside a CCPC, you'll pay slightly more tax on income and capital gains than you would outside a CCPC. The tax on dividends is the same.", this assumes one is paying the top marginal tax rate outside a CCPC. If one is not paying the top marginal tax rate outside a CCPC, then it becomes debatable whether one should incorporate. In the future, one's marginal tax rate outside a CCPC may no longer be the top rate. In that case, it makes sense to get the money out of the CCPC. By keeping the money in the CCPC until your marginal tax rate is no longer the top rate, you'll likely pay less tax then you would if the money had never been in a CCPC.

About RRSPs, the money I invest is not subject to the 46.41% tax it otherwise would. There is no Canadian tax on any investment return in the RRSP. Unfortunately, when I take money out of the RRSP/RRIF, it is not protected from tax and I will pay tax on any withdrawal as income. Instead of paying tax now, I am paying it later.

I would agree that any investment return in a CCPC should be withdrawn. However, I would disagree with withdrawing the active business income that you paid 16.5% tax on. An exception would be when your marginal tax rate outside the CCPC is no longer the top rate.