One of the many advantages of incorporating your business are the long-term benefits that can come with investment of excess assets. You spend a lifetime try to make your company worth something, and when you finally do, you now have excess cash to work with. What many people don’t realize is that you can essentially create a retirement plan out of your company. The norm these days is to invest in an RRSP, which brings down your taxable income each year. Then, when you reach the age of 71, your RRSP transfers into a RRIF, which then comes into your taxable income each year on your personal taxes. However, you access this same advantage through a company and at an earlier age.

For example, most shareholders decide that they want to pull out all excess cash out of their company as soon as it is available. The drawback to this approach is that you would have to declare these cash draws on your personal taxes each year.  This may not be in your best interest if you are paying that tax in the highest tax bracket. Therefore, to counter this, you may buy RRSP’s as discussed above. To counteract this situation, I usually advise my clients to hold onto excess cash that they don’t need within their company. By this I mean that you should only take cash out each year to live within your means. Save the rest for retirement.

There are 2 advantages to keeping excess funds in your company. One is the tax deferral advantage. The other is ability to reduce your personal tax bracket to a lower level now. What a lot of people do not know is that once you retire you can still keep your company open. At that point you can essentially turn it into an investment company “ie. retirement plan” For example, let’s say you sold your company or ceased operations and retired. Let’s say you have $1,000,000 in cash within your company. At this point you have 2 choices. Your first choice is take the money out immediately and pay tax at the highest tax bracket. Your second choice is to leave the money in the company, invest it, and then slowly draw it out for say the next 15 years. On average, you would report an average of $66,666 on your personal taxes, which is taxed at far below the highest tax bracket. You can therefore see the advantage to such a setup as thousands of dollars can be saved for retirement.

Therefore, if you have the room to do it, why not take less of a wage or dividend out of your company now for a far better future benefit. But then again, it depends on your lifestyle. As discussed above, find a level where you can live within your means. If you find that level, then it’s maybe worth it to have a discussion with your accountant about your options.

If you would like more information on the above we would gladly be able to assist you with your needs.