How to Invest and Save Tax Using Your Corporation

September 5, 2023

Too many business owners are not properly using their corporations to invest and save tax. The good news is, it’s never too late to start.

If you want to get to financial freedom sooner and start doing more of what you love, here are five corporate strategies to maximize your investments and save taxes using the power of your corporation.

5 Strategies to Invest and Save Tax Using Your Corporation

1. Pay yourself dividends, not a salary

If you pay yourself a dividend instead of a salary, you can avoid paying into the Canada Pension Plan, leaving an additional $7,000 in your corporation to invest how you want. With that, you can save $280,000 over 40 years, giving you more control over your money and retirement plan.

(How should you pay yourself? Learn more about salary vs. dividends)

2. Keep as much money as you can inside your corporation

Only pay yourself what you need to live your ideal lifestyle and achieve short-term goals such as a well-deserved vacation. One big mistake many business owners make is taking money out of their corporations to save inside an RRSP and TFSA. Although the traditional route to building a retirement fund for most Canadians is by using RSPs, there are often better ways business owners can save for retirement.

RRSPs are designed for you to invest in when you’re in a high-income bracket and withdraw when you’re in a lower tax bracket, which is often at retirement. The intention is to pay fewer taxes when you withdraw. However, part of being an entrepreneur involves building multiple sources of passive income to take advantage of when you retire. From real estate, mutual funds, and investments in other businesses, you will likely continue to be in a high-income bracket at retirement. If you invest in an RRSP, you risk giving up to 50% of your money to the CRA upon withdrawing. A winning strategy is to leave this money inside your corporation and invest it there. You will avoid paying that extra layer of personal tax, and your investments will grow larger and much faster.

3. Invest in capital gains-producing investments

Invest in capital gains-producing investments such as stocks, ETFs, corporate-class mutual funds, and real estate. Capital gains are taxed much more favourably than dividends or interest income. It lowers your tax payable and creates Capital Dividend Account credits to withdraw money from your corporation tax-free.

Corporate-class mutual funds are one of the most tax-efficient tools to invest in when you have a corporation. Investing in corporate-class mutual funds converts your interest income (from GICs, high-interest saving accounts, etc.) into capital gains, saving you half the tax payable.

4. Use your Capital Dividend Account

The Capital Dividend Account (CDA) is one of the most powerful tools available to business owners with a Canadian-Controlled Private Corporation. This account provides a phenomenal tax advantage, potentially saving you millions of dollars in tax. It allows you to withdraw money from your corporation completely tax-free.

Here are two ways of the many ways you can make use of the CDA:

When a Canadian-Controlled Private Corporation earns capital gains, 50% of that gain (known as the non-taxable portion) can flow out of the corporation tax-free through the CDA to shareholders in the form of capital dividends. For example, if you earn a $100,000 capital gain, 50% ($50,000) is taxable. The other 50% ($50,000) is non-taxable, which you can withdraw out of the corporation tax-free using the CDA.
If you own life insurance inside your corporation, the death benefits can be paid tax-free through the CDA.

5. Own life insurance inside your corporation

Having your corporation as the owner and payer of your life insurance policies means you can pay the premiums with dollars taxed at a lower corporate rate of 11% (in British Columbia), as opposed to your personal tax rate, which could be as high as 50%.

Death benefits can be distributed tax-free to the beneficiaries of your choice via the CDA. This is a frequently overlooked method to save taxes, but it’s one that can pay off in a big way.

(Here are 5 benefits of owning life insurance inside your corporation)

Life insurance can also be used as an investment strategy. Investments inside corporately-owned universal life or whole life insurance policies grow tax-deferred. You can use the money from these investments to supplement your retirement income and create a tax-efficient retirement. This is a great strategy for business owners to grow tax-exempt wealth and ensure that the money left inside their corporation will go to their loved ones, not the CRA.

To properly set up life insurance inside your corporation, you want to set up the corporation as the owner, payor and beneficiary of any life insurance policy you have on yourself or your spouse.

Achieve Your Financial Goals

If you own a corporation and you’re not implementing most of these strategies, you’re missing out on opportunities to save money, which can affect your ability to achieve your goals.

Book a call today, we will coach you through how these strategies apply to your personal situation and build a clear road map to reach your goals while maintaining your ideal lifestyle.