Often private business owners are advised to pay themselves enough of a salary and bonus to ensure they can maximize their retirement contributions each year, regardless of whether they actually need the salary personally. A business report, published by CIBC Wood Gundy, highlighted that if business owners do not need income immediately, a significant tax deferral (upwards of 30%) can be achieved by leaving the money inside the corporation and investing the funds, instead of paying them out as taxable T4 income.
Rethinking Conventional Wisdom
As a business owner, if you have other sources of income to fund your personal living expenses and you’re focused on saving for retirement or investing in general, should you contribute to an RRSP or should you consider saving your money inside your corporation? Conventional wisdom says to contribute to an RRSP because you get an annual deduction and your money grows tax-sheltered, but the downsides are that your money is 100% taxable when withdrawn and you must start withdrawals at age 71.
A lesser known, but more tax-efficient strategy is to leave the money you would normally pay yourself inside your corporation and invest it in the same manner as an RRSP. If you consider that currently the maximum RRSP contribution is $24,000, you would have to pay yourself over $40,000 of T4 or dividend income to net $24,000. Alternatively, you may want to consider investing the $40,000+ of income inside your corporation in a much more tax-efficient manner. So how do you do this? By implementing an investment life insurance contract which essentially acts as a tax-shelter inside your company and allows you to access your money at an anytime.
If you’d like to have more of a conversation on how this solution works, please contact us. For a more in-depth look at how this strategy works, we encourage reading through the attached CIBC Wood Gundy small business report.