At this time of year, RRSPs are top of mind for a lot of people. The February 29th deadline is hardwired into us as Canadians and many are scrambling to make contributions before that time. Despite the introduction of TFSAs, RRSPs are still the most popular savings vehicle for Canadians.
However, if you are an incorporated business owner, RRSP contributions may not be the best savings vehicle for you. Here are some reasons why:
- Deferral of personal income taxes – by retaining corporate profits in the corporation and only withdrawing amounts that are needed for personal living expenses, the business owner can defer a significant amount of personal income taxes, leaving more money available for savings and investments.
- Potential creation of your own savings vehicle – by setting up a separate holding corporation, business owners create their own savings vehicle. This is a way to creditor proof funds retained in the corporation by the owner. This separate corporation would be connected by virtue of owning 10% or more of the operating company. This allows the operating corporation to pay tax free dividends to the holding corporation. This money can then be held and invested in the holding corporation for an indefinite period of time.
- Additional investment options – Unlike RRSPs, corporate investments have many more investment options, including real estate, private corporations and private loans.
As the nest egg grows and the business owner enters retirement, having their savings in a corporate vehicle allows many more advantages.
- Unlike RRSPs, there are no minimum withdrawals. The business owner may withdraw however much they want, whenever they want.
- The cost of withdrawing dividends from a corporation in retirement can result in lower personal taxes than making RRSP withdrawals, which are fully taxable.
- Amounts can be paid out to other family members, including children and potentially grandchildren, which is not possible with an RRSP. Through the use of a family trust, the business owner can allocate funds to family members that most need it and where it will be most tax effective.
- RRSPs on death can benefit from spousal rollovers and can also be left directly to beneficiaries. However, the use of corporate holdings allows for much more flexibility and many more estate planning options, such as estate freezes, which can be very tax effective.
Business owners need not withdraw corporate money simply to max out their RRSPs this time of year. It is worth considering that other options may be more valuable.
Talk to your advisor to determine the strategy that best suits your needs
Peter Berry, CPA, CA