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Discussion Starter #1 (Edited)
I have an incorporated business which generates about 200K. I give myself a salary to fill out 27K allowable RRSP. My wife is employed in a good company with $110 K salary. I’m 61, she is 55.
My RRSP is full, she has a lot ( more than 100k) unused contribution.I have a TFSA with 60K. She doesn’t have one,
I have about 120K trapped in my business account. ( retained earnings) I was thinking to open an account in my corporation and invest in it to grow the money and eventually use it for our retirement.
We are thinking to retire in 10 years. Only 350K in our RRSP but we actively increase it every month. We have a 400K mortgage too that with current rates I’m not worried about it and it will be completely paid before we retire.
Questions:

-Is it a good idea to invest inside the company? Or should I take it out, pay a lot of taxes of course and put it in my wife’s RRSP.?
-If I want to invest inside the business, is it better (more tax efficient) to buy etf, mutual funds or stocks? What about US stocks?

Any suggestion is appreciated.
Thank you!
 

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I don't know what you mean about "paying a lot of taxes" if you take the money out. I believe you would just be paying standard taxes that are typical of any income earner at your level. Quite fair.

Since the money belongs to the corporation, why don't you use that money to grow your business, invest in new resources, or hire employees? That's what a corporation is supposed to do.

But based on what you wrote, I'm going to assume that you're treating all this money as yours and don't intend to expand your business or hire people. In that case, I think the most sensible thing is to take the money out using salaries/dividends, and not accumulate it inside the corp.

The RRSP/TFSA + some non-registered are better places to focus your retirement savings than using a corporation to try sheltering against taxes. Even non-registered investments are pretty sweet due to capital gains taxes, plus they are "free and clear" of tax liability. Overall, these standard mechanisms (RRSP, TFSA, non-reg) offer significant sheltering and tax efficiency.

I speak from experience here because (until recently) I had a similar income level to you. Instead of using a corp, I paid regular income tax on it, and then took what remained and aggressively invested it into these 'standard mechanisms'. It added up pretty quickly.

Here's my argument:

Corporate structures are not fundamentally meant for this purpose. They have been adopted by rich people as a tax shelter mechanism but that's not what a corp is for. There is a big danger if you try accumulating a lot of money inside your corporation to avoid paying immediate income taxes. Some of the corporate tax loopholes for this purpose have already been closed but it's possible there could be more legislation in the future to more fairly tax people who have been using the corporations for tax avoidance ... and if you accumulate large amounts inside the corp, you could be hit by that.

The second reason is that RRSP/TFSA provides enough sheltering capacity to build up enormous tax sheltered/deferred portfolios. And unlike corporate tricks, they are meant for this purpose which means it's very likely we get to keep them going forward. Myself, I've been focusing on putting as much money into these two vehicles as possible, plus non registered with a capital gains focus.

Check out this paper from PWL Capital. They write: "The analysis shows that, on an after-tax basis, the RRSP and TFSA can accommodate greater long-term wealth accumulation compared to a taxable corporate investment account. This result is driven by the higher after-tax returns that can be earned in the RRSP and TFSA compared to taxable investments held in a corporation."
 

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Firstly you need to max out both your TFSA's ASAP.

Secondly, if I were you, I'd cut your spending significantly. At age 60 with 300k household income you only have a net worth of ~130k unless I am missing something. What are your plans for retirement?
 

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Discussion Starter #4
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Firstly you need to max out both your TFSA's ASAP.

Secondly, if I were you, I'd cut your spending significantly. At age 60 with 300k household income you only have a net worth of ~130k unless I am missing something. What are your plans for retirement?
It is only a few years that that we have this income (very long story) and we were under a lot of (family) debt (another story) that was paid . I think we spend decently.
We have about 600k home equity and also my business will be sold eventually. So although we are not in a good financial shape at all, our net worth is more than 130 k.
 

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It is only a few years that that we have this income (very long story) and we were under a lot of (family) debt (another story) that was paid . I think we spend decently.
We have about 600k home equity and also my business will be sold eventually. So although we are not in a good financial shape at all, our net worth is more than 130 k.
That's good. I hadn't thought about the business being saleable, if it is, hopefully that will bring you a good amount when it happens. Still, it's always good to review your expenses and see if there is any low-hanging fruit that can be cut.
 

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Discussion Starter #6 (Edited)
Check out this paper from PWL Capital. They write: "The analysis shows that, on an after-tax basis, the RRSP and TFSA can accommodate greater long-term wealth accumulation compared to a taxable corporate investment account. This result is driven by the higher after-tax returns that can be earned in the RRSP and TFSA compared to taxable investments held in a corporation."
Thanks for the link.
I read the article. It concludes that registered accounts out perform non-registered on long term ( 15 years or more). I don’t have that time frame unfortunately.
 

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You can borrow the money from the corporation at 1% interest and invest the money in TFSA /RRSP/NON Reg accounts. That interest is also tax-deductible. This is an option to consider as well.
 

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Discussion Starter #8 (Edited)
You can borrow the money from the corporation at 1% interest and invest the money in TFSA /RRSP/NON Reg accounts. That interest is also tax-deductible. This is an option to consider as well.
If I borrow from the corporation, then I should return the money by December of the year after the latest, otherwise it will be considered income.
 

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Would be careful putting money in RRSP. Government spending money like crazy with taxes on the rise. The United Nations has to much control in Canada might be soon time to exit Canada.
 

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I don't know what you mean about "paying a lot of taxes" if you take the money out ...
Where the extra withdrawn from the company is used to contribute to a spousal RRSP, the deduction from income should be wiping out the additional income (i.e. take an extra $10K out, contribute all of it to a spousal RRSP and deduct $10K = the same taxable personal income as not doing it).

At the corporate level, if it's paid as a salary - there will be CPP to pay as well the employee's CPP contributions. Maybe some other stuff too.
If the extra is taken out via a dividend, likely it's better as long as one is okay with forgoing the CPP benefit.

Maybe someone with more direct experience can outline the choices. Just keep in mind that contributing to a spouse's RRSP or giving the spouse money to contribution is not allowed. A spousal RRSP is the way to do this.



If the choice is having the corporation invest where the investing is not part of the main business, the rules were changed a couple of years ago so that my understanding is that the investments will be taxed more heavily than the usual business income. Again, if someone who has direct experience can comment, that would be helpful.


Cheers
 

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You can borrow the money from the corporation at 1% interest and invest the money in TFSA /RRSP/NON Reg accounts. That interest is also tax-deductible. This is an option to consider as well.
My understanding is that only qualified investments in a non-registered account will be tax deductible, while interest is being charged.

Non-deductible interest, carrying charges and investment expenses include:
- interest on money borrowed to contribute to RRSPs, TFSAs or DPSPs.
However, if investments are purchased with borrowed money in a non-registered account, and transferred to the RRSP after the loan is repaid, the interest is tax deductible. If part of the loan is still outstanding when the investments are transferred to an RRSP, the interest is no longer deductible.



Cheers
 

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If your wife is a shareholder or co-owner in the business, the corporation can pay her dividends. She is in a lower tax bracket, tax payable can be minimized. if you pay her 50k as dividends, she can then contribute that 50k into her RRSP/TFSA ..that way every year money can be taken from the corporation. Also, you might need to contribute to spousal RRSP first, then to your own RRSP. Since RRSPs need to be converted to RRIF at 71.
 

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Discussion Starter #13
Where the extra withdrawn from the company is used to contribute to a spousal RRSP, the deduction from income should be wiping out the additional income (i.e. take an extra $10K out, contribute all of it to a spousal RRSP and deduct $10K = the same taxable personal income as not doing it).
What I understand from spousal RRSP is that MYSELF should have enough contribution limit to contribute to that account. I don.t have any unused contribution. But my wife , who earns less than me, has a lot. In this case I am not sure if spousal RRSP works for us.
Am I missing something?
 

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If you don't have RRSP contribution room left then the "put it in her RRSP" is a no-go.

You can take it out, gift it to her to make a TFSA contribution but you will have more taxable income than you would have had without doing it.

Or you can take it out, pay for more of the household expenses so that she has more available cash to make registered account contributions.

Cheers
 

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Maybe someone with more direct experience can outline the choices. Just keep in mind that contributing to a spouse's RRSP or giving the spouse money to contribution is not allowed. A spousal RRSP is the way to do this.
I admit that I don't know the mechanics of the RRSP for the spouse. I just assumed there would be some way to both take the money out of the corp, and have the spouse do an RRSP contribution & matching deduction
 

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Not directly, but it can be accomplished: have the OP pay all household expenses from OP's income and distributions from the corp, so the spouse can save more. Then the spouse uses their income to contribute to their RRSP, which uses her room and grants her the deduction. Some extra bookkeeping but the spouse can use up their contribution room pretty quickly given their income.
 

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Discussion Starter #17
Not directly, but it can be accomplished: have the OP pay all household expenses from OP's income and distributions from the corp, so the spouse can save more. Then the spouse uses their income to contribute to their RRSP, which uses her room and grants her the deduction. Some extra bookkeeping but the spouse can use up their contribution room pretty quickly given their income.
Actually we have a joint account and whatever we both earn goes there and all bills is paid from there. Whatever remains will be saved to whatever is more beneficial for the family.
The reason that my wife has a lot of unused contributions is that for a few years I was not able to work and she worked..As I wrote I (we) have a TSFA too. We created it for two reasons:
we should have an emergency fund
-Were thinking of lowering our mortgage next year at renewal.
Now in thinking maybe I take some money out of it, put them in my wife’s RRSP and deposit the tax resulted from it back to the TSFA.
My main question is that what should we do with the money trapped in the corporation.
 

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I admit that I don't know the mechanics of the RRSP for the spouse ..
I was referring more to the corporation parts and the changes to the tax rates for investments that are not part of the main business for the "somone with experience to comment".

The Spousal RRSP just has a few more options and restrictions than a regular RRSP. The holder is the one who owns it but both spouses can contribute (unlike a personal RRSP).
Whichever spouse makes the contribution has to have the RRSP contribution room and is the one to take the income deduction but only the owner controls when to convert to a RRIF or make a withdrawal.

There are also attribution rules that may send the taxable withdrawal income back to the contributor, if the rules aren't followed. As the most common use is to have the high income spouse make contributions/take the income deduction - attribution of the taxable withdrawal (or part) to the contributor is usually not a desired situation. 'Course it's a YMMV situation.


... I just assumed there would be some way to both take the money out of the corp, and have the spouse do an RRSP contribution & matching deduction
The OP says no RRSP contribution room is available so until there is, an RRSP contribution (personal or spousal) is off the table.


Cheers
 

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... Now in thinking maybe I take some money out of it, put them in my wife’s RRSP and deposit the tax resulted from it back to the TSFA.
If you are the company owner where she is not a shareholder or owner - your lack of RRSP contribution room prevents using a spousal RRSP (or your own). This is why there is talk about having you pay more of the expenses to free up cash for her to put into registered accounts.



Cheers
 

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Discussion Starter #20
I was referring more to the corporation parts and the changes to the tax rates for investments that are not part of the main business for the "somone with experience to comment".

The Spousal RRSP just has a few more options and restrictions than a regular RRSP. The holder is the one who owns it but both spouses can contribute (unlike a personal RRSP).
Whichever spouse makes the contribution has to have the RRSP contribution room and is the one to take the income deduction but only the owner controls when to convert to a RRIF or make a withdrawal.

There are also attribution rules that may send the taxable withdrawal income back to the contributor, if the rules aren't followed. As the most common use is to have the high income spouse make contributions/take the income deduction - attribution of the taxable withdrawal (or part) to the contributor is usually not a desired situation. 'Course it's a YMMV situation.


The OP says no RRSP contribution room is available so until there is, an RRSP contribution (personal or spousal) is off the table.


Cheers
I said I don’t have any contribution room. My wife has still about $k130 to contribute.
 
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