Investment income in a CCPC

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izzy
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Re: Investment income in a CCPC

Post by izzy »

peter wrote:I have the impression some people here converted professional corporations to pure holding companies, even if that might not be a formal change. Is that to continue to shelter/control money made as professional, or is there an investment benefit?
I think it is mainly in order to trickle out the retained earnings as dividends over time as a form of "pension" much like an RRIF but without the compulsory withdrawal schedule.I don't think there is much in the way of investment benefit since there is still an annual cost to maintaining the corporate structure.Depending on the original share structure there may still be some opportunity to pay dividends to adult off-spring who are in a lower tax bracket of course.
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Re: Investment income in a CCPC

Post by Park »

peter wrote:Is there any size of non-registered portfolio where it would be interesting to look at a holdco? Assuming vanilla investments only, not a professional career? I have the impression some people here converted professional corporations to pure holding companies, even if that might not be a formal change. Is that to continue to shelter/control money made as professional, or is there an investment benefit?
In an operating corp, expenses will be deducted against active business income. Expenses would include salary, loan interest etc. However, inside a holding corp, expenses will be deducted against investment income.

One of the main advantages of incorporation is the lower tax rate of active business income resulting in a tax deferral. But expenses against active business income will result in decreased active businesss income resulting in less tax deferral. By having a holding corp, you preserve more of the tax deferral.

Edited to include the following. Another expense would be the employer's portion of CPP.
Last edited by Park on 08 Dec 2016 17:18, edited 1 time in total.
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Re: Investment income in a CCPC

Post by Park »

Deleted to remove duplicate post.
Last edited by Park on 08 Dec 2016 16:30, edited 1 time in total.
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Koogie
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Re: Investment income in a CCPC

Post by Koogie »

izzy wrote:I think it is mainly in order to trickle out the retained earnings as dividends over time as a form of "pension" much like an RRIF but without the compulsory withdrawal schedule.
Park wrote:One of the main advantages of incorporation is the lower tax rate of active business income resulting in a tax deferral. But expenses against active business income will result in decreased active businesss income resulting in less tax deferral. By having a holding corp, you preserve more of the tax deferral.
Both of the above contributed to why we established a holdco. And also because we did not wish to hold investments, using amassed corporate money, directly in the operating company (under the idea that we might one day have wanted to apply for the LCGE on its sale).

However the main reason by far was for liability reasons and not to do with investing.
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Re: Investment income in a CCPC

Post by Park »

Park wrote:
peter wrote:Is there any size of non-registered portfolio where it would be interesting to look at a holdco? Assuming vanilla investments only, not a professional career? I have the impression some people here converted professional corporations to pure holding companies, even if that might not be a formal change. Is that to continue to shelter/control money made as professional, or is there an investment benefit?
From another thread:
adrian2 wrote:
Park wrote: Are you stating that if the foreign dividends are in a holding corporation and are distributed to the shareholders of the corporation, that the increased taxation of foreign dividends in a CCPC discreases and can sometimes disappear?
Yes, as long as the CCPC's tax payable approaches zero, i.e. when it pays enough salaries and dividends so the tax otherwise due is in balance with the withholding tax on foreign income.
An issue with corporations is that you lose some of the foreign tax credit. Adrian2 has found that this loss of the foreign tax credit goes away, when the above applies. In an operating company, it might not be straightforward to do this. But in a holding corporation, where all income can more readily be paid out as dividends and/or salary, it would be easier. So with a holding corp, you might be in a better position, when it comes to foreign dividends.

http://www.financialwisdomforum.org/for ... 93#p466593
adrian2 wrote:
ClosetIndexer wrote:I just can't see how you could claim a FTC without reducing your RDTOH
You are partly right, and I'm partly right. I've re-analyzed my case, and there is indeed a portion of FTC which wastes the RDTOH, but there is also a reminder of FTC which gets fully used.
[u]Base case[/u] wrote:GIFI Schedule 125
line 8000 Trade sales goods and services $40k
line 8096 Canadian dividends $1000
line 8091 Foreign interest $6000
line 8094 Canadian interest $1000
line 8860 Professional fees $45k
line 9970 Net income/loss before taxes $3000

Schedule 3
line 240 Canadian dividends $1k (eligible)
line 270 Part IV tax $333
line 450 Dividends paid $1800
inclusive of Eligible dividens paid $1000

Schedule 7
Column Foreign total $6000
Column Aggregate total $8000
line 032 total income from property $8000
line 092 $7000 to line 440 on T2
line 019 total income from outside Canada $6000

Schedule 21
line 100 country = US
line 110 foreign non-business income $6000
line 120 foreign non business tax $693
line 180 $693
Provincial credit $0

T2
line 360 taxable income $2000
line 450 refundable part I tax $0
Refundable dividend tax on hand at end of previous tax year $xxx
Deduct: dividend refund for previous tax year $xxx
Box G $0
Part IV tax from Sched 3 $333
Refundable portion of part I from line 450 $0
Line 485 Refundable dividend tax on hand at end of tax year $333
Dividend refund $333
line 550 Base amount of Part I tax $760
line 430 Small business deduction $0
line 604 Refundable tax on CCPC investment income $133
line 608 Federal tax abatement $200
line 632 FTC from sched 21 $693
Part I tax payable $0
line 760 provincial tax $236
line 770 total tax payable $569
line 784 dividend refund from page 6 $333
Balance payable $236 (indirectly all provincial)
[u]Same as above, with an additional $236 in foreign taxes[/u] wrote: GIFI Schedule 125
line 8000 Trade sales goods and services $40k
line 8096 Canadian dividends $1000
line 8091 Foreign interest $6000
line 8094 Canadian interest $1000
line 8860 Professional fees $45k
line 9970 Net income/loss before taxes $3000

Schedule 3
line 240 Canadian dividends $1k (eligible)
line 270 Part IV tax $333
line 450 Dividends paid $1800
inclusive of Eligible dividens paid $1000

Schedule 7
Column Foreign total $6000
Column Aggregate total $8000
line 032 total income from property $8000
line 092 $7000 to line 440 on T2
line 019 total income from outside Canada $6000

Schedule 21
line 100 country = US
line 110 foreign non-business income $6000
line 120 foreign non business tax $929
line 180 $693
Provincial credit $236

T2
line 360 taxable income $2000
line 450 refundable part I tax $0
Refundable dividend tax on hand at end of previous tax year $xxx
Deduct: dividend refund for previous tax year $xxx
Box G $0
Part IV tax from Sched 3 $333
Refundable portion of part I from line 450 $0
Line 485 Refundable dividend tax on hand at end of tax year $333
Dividend refund $333
line 550 Base amount of Part I tax $760
line 430 Small business deduction $0
line 604 Refundable tax on CCPC investment income $133
line 608 Federal tax abatement $200
line 632 FTC from sched 21 $693
Part I tax payable $0
line 760 provincial tax $0
line 770 total tax payable $569
line 784 dividend refund from page 6 $333
Balance payable $0
Every penny of the additional $236 in foreign taxes has gone towards reducing provincial taxes to $0 (100% usability, once federal taxes were down to zero and all amounts owed were provincially).
This is from a post by Adrian2 earlier in this thread. In his example, once the federal taxes were down to zero and only provincial taxes were left, then there wasn't a problem with losing the foreign tax credit.

Thanks Adrian2
Last edited by Park on 08 Dec 2016 18:39, edited 3 times in total.
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Re: Investment income in a CCPC

Post by scorpionman »

You can leave the country and not pay exit tax immediately, one of Canada's most draconian capital and freedom of movement controls that virtually no other country implements. (Of course doesn't apply if you have no capital :D )
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Re: Investment income in a CCPC

Post by Park »

http://www.theglobeandmail.com/globe-in ... /?page=all

Above is a link from Tim Cestnick on holding corporations. It's about transferring money held personally to a hold corp.

First of all, it may decrease probate fees. In Ontario, but I'm not sure elsewhere, you can have a separate will for a corp. It sounds like it's possible for such a will to not pass through probate.

"By having the company declare but not pay dividends each year equal to the after-tax earnings of the company, you create an asset for yourself-a dividend receivable. Upon your death, this asset can be reported on a separate tax return called a rights or things return. This separate return entitles you to the basic personal credit all over again ($10,320 for 2009) and a lower marginal tax rate on the first $40,726 of income...if you need cash flow during your lifetime, you can withdraw cash from the company as a repayment of the loan you made when you transferred your investments to the company."

"the corporation can be a source of earned income for you. Earned income is most commonly paid in the form of director's fees or salary and will provide you with RRSP contribution room"

He also mentions that this scenario may decrease the risk of OAS clawback. Assets in the corp will be taxed by the corp, instead of personally. So there may be less of a problem with OAS clawback.

http://www.thebluntbeancounter.com/2014 ... e-old.html

OTOH, corporate rates on investment income are usually a little higher than the top personal rates. The above link would indicate that you might want to take a large dividend periodically, and have the OAS clawback that year. In that way, you'll be able to get back the higher corporate tax that you paid.

The last link also mentions the downsides to a strategy of transferring personal assets to a holding corp:

"You will most likely have to pay an accountant to prepare financial statements and tax returns, which will eat up around half your OAS savings. In addition, upon your death, or upon the death of your spouse if you leave your assets to them, you will have a deemed disposition of your Holding Company shares. That means your estate must pay tax on the value of your holding company at death. This may cause a double tax on death that can often only be alleviated by undertaking some complicated tax planning."

He also mentions that having the corp declare, but not pay a dividend, may decrease the problem of possible double taxation:

" the value of the company’s shares at the time of your death may have minimal value because the dividend liability owing by the company may be around the same value as the investment assets. This significantly reduces the double tax issue."
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Re: Investment income in a CCPC

Post by Park »

scorpionman wrote:You can leave the country and not pay exit tax immediately, one of Canada's most draconian capital and freedom of movement controls that virtually no other country implements. (Of course doesn't apply if you have no capital :D )
Wouldn't you have to pay exit tax eventually?
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Re: Investment income in a CCPC

Post by scorpionman »

Yes, but it's deferred on your own terms - maybe indefinitely. The personal way you must post security - which may not be possible depending on what you own and then accept to be monitored by a foreign country even though you have nothing to do with the country anymore. I.e. would anyone want to have yearly audits from CRA to ensure the security is adequate when you are half a world away and already dealing with other matters?
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Re: Investment income in a CCPC

Post by Doug »

https://www.renaissanceinvestments.ca/e ... any_En.pdf

Above is a link to an article by Jamie Golombek. Its' about whether your tax rate is lower if you retain investment income in a corporation versus taking out investment income from a corporation. It's from 2014, and if the analysis was done in 2016, the results might be different. Also, it assumes that the investment income would be taxed at the top personal tax rate. He assumes that the investment income is taken out as dividends. He divides investment income into interest, cap gains, eligible dividends, noneligible dividends and foreign dividends.

Results vary for each type of investment income and also depend on the province. In most cases, the differences are small, but not always. The maximum advantage to retaining investment income was foreign dividends in Manitoba: there was an absolute (not relative) advantage of 12.7%. The maximum disadvantage of retaining investment income was eligible dividends in Alberta: there was an absolute disadvantage of 14.0%. Overall, there is usually an advantage to retaining investment income in the corporation.

About taxation of foreign dividends, he goes into detail for Ontario. If you have foreign dividends in a corp and remove those foreign dividends from the corp, the tax rate is 58.6%. If you retain those foreign dividends in the corp, the tax rate is 46.1%. If you have foreign dividends generated personally (nothing to do with a corporation), the tax rate is 49.5%.

He recommends that the 50% of cap gains that is not taxed in a corp should be distributed as a capital dividend as soon as possible.

About return of capital, he points out that it can't be distributed tax free to a corporation owner. However, it will be deducted from the adjusted cost base of the investment.
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Re: Investment income in a CCPC

Post by scorpionman »

Is anyone not batting an eye at the idea of tax rates of 50 percent kicking in at such a low level ? In the US , not even 35 percent kicks in at like half a million per year cad.
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Re: Investment income in a CCPC

Post by Doug »

https://www.ishares.com/uk/individual/e ... &fac=43511

There is the problem of increased tax on foreign dividends in a CCPC. This is because the RDTOH mechanism doesn't take into account all the foreign tax the corp has paid. One solution is to have ETFs where no foreign tax is withheld. I believe that ETFs domiciled in UK or Ireland don't withhold tax on dividends to foreign investors. Even if they do, one solution would be an accumulating ETF, that doesn't distribute dividends, but retains them. A link is provided above. In an accumulating ETF, you would report dividends each year to the CRA and pay tax on those dividends. You would subtract the dividend from the ACB, so you don't pay tax twice on those dividends, when you sell the ETF.

However, foreign domiciled ETFs will very likely have foreign tax withheld on the underlying shares they own. Such tax won't be recoverable. But the same problem applies to US listed ETFs.
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Re: Investment income in a CCPC

Post by scorpionman »

Or borrow to invest and write off foreign dividend income against interest expense .
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Re: Investment income in a CCPC

Post by Penquin007 »

New article from Jamie Golombek (february 2017)

RRSPs: A Smart Choice for Business Owners
http://www.jamiegolombek.com/media/RRSP ... owners.pdf
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Re: Investment income in a CCPC

Post by Doug »

Penquin007 wrote:New article from Jamie Golombek (february 2017)

RRSPs: A Smart Choice for Business Owners
http://www.jamiegolombek.com/media/RRSP ... owners.pdf
Thanks for posting this. It's a good example of why incorporation is not for everyone.

Go to Figure 3. The individual has SBD income of $170K. In option 1, the individual takes it all out of the corp as salary, and makes an RRSP contribution of $26K. In other words, option 1 is basically the unincorporated scenario. In option 2, the individual wants $100K to meet lifestyle costs. The individual takes $122.5K as dividends, which leaves $22K in the corporation.

The advantages of incorporation are primarily tax deferral and income splitting. In this example, there is no income splitting, so that leaves tax deferral. However, there has to be enough tax deferral to make incorporation worthwhile. In this example, it is very debatable whether the $22K in tax deferral justifies incorporation.

It's interesting that if the individual uses option 2, but investment returns are wholly in the form of deferred cap gains, option 2 still beats option 1. This is despite incorporation not making sense.

The most important lesson I learned from this article was investing in a tax efficient manner. This is how Warren Buffett does it. His companies don't pay dividends. Instead, all of the return is in the form of deferred cap gains.

How can I increase return in the form of deferred cap gains? Stocks are better than bonds. And the longer you hold stocks, the better. This leads you to a index portfolio, which commonly have turnover rates in the single percentages. However, index portfolios still distribute dividends. If your need for current income is less than what an index portfolio generates, then such a portfolio is suboptimal from a taxation point of view. How can one decrease dividends, but not increase turnover rate? That's a good question, which I don't have an answer to.

For me, the lesson from this article is to reaffirm the advantage of a index portfolio in a taxable account.
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Re: Investment income in a CCPC

Post by couponstrip »

Doug wrote:
How can one decrease dividends, but not increase turnover rate? That's a good question, which I don't have an answer to.

For me, the lesson from this article is to reaffirm the advantage of a index portfolio in a taxable account.
There is HXT. Dividends are converted to capital gain via swaps. Some will cite counterparty risk, but the counterparty exposure is only 0.2% of NAV.
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Re: Investment income in a CCPC

Post by nile »

link to article by Jamie Golombek

any and all thoughts appreciated

corporate dividends vs rrsp contributions

http://jamiegolombek.com/media/RRSPs-fo ... owners.pdf
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Re: Investment income in a CCPC

Post by izzy »

One advantage of retained corporate earnings is the ability to pay out dividends (and potentially tax split) at any time which may be beneficial in the event of early retirement ,or for those who wish to continue working past "retirement age" since it makes it possible to adjust income as desired rather than having to adhere to a mandatory RRIF schedule. This also has advantages for the long lived.A mixture of the two is probably optimum since it allows maximum flexibility in addition to the tax advantages of the registered regime.
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Re: Investment income in a CCPC

Post by Koogie »

Quite a good article but also disheartening as 2/3rds of our assets are in our Holdco and I've gone the route of paying dividends and investing corporately (with a balanced portfolio). :(

While it seems a good and thorough examination of a hypothetical generic situation, I would say that my biggest problem with it is the sheer amount of moving parts involved and the assumptions he has to make because of that. In fairness, that is acknowledged more than once but do we all really believe that tax rates will remain constant for instance ?

""In summary, when tax rates remain constant over time, corporate investments will likely leave you with less in your pocket than an RRSP, especially
when investment income is highly-taxed.""

Especially considering the changes that may be coming down the pipe next week.

For my personal situation, I think we are to far down our chosen path to make a change even though it would seem advantageous tax-wise. Disposing of our corporate investments and paying the tax on the accrued capital gains alone would be enough to give me a coronary :P

My DW and I have always lived cheaply frugally and taken small salaries most years (small dividends lately). Since we started our own business 15 years ago we have never come close to paying ourselves enough in salaries to max. out the 18% RRSP limit (hell, I think we were in the 20% bracket every year but one) but even if we had paid ourselves more extravagantly the retained earnings would still have been in excess of that and we would have had to do some corporate investing (albeit on a smaller scale admittedly).

Nevertheless, we have accrued fairly large RRSPs (I was highly paid in a prior job and DW is 7 years older) and we'll certainly be letting that money ride until it is conversion time. We have also been taking out corporate funds every year by way of dividends to fund our TFSAs (based in no small part on Golombeks previous paper about that topic).
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Re: Investment income in a CCPC

Post by adrian2 »

Koogie wrote:My DW and I have always lived cheaply frugally and taken small salaries most years (small dividends lately). Since we started our own business 15 years ago we have never come close to paying ourselves enough in salaries to max. out the 18% RRSP limit (hell, I think we were in the 20% bracket every year but one)
+1!

This is the main beef I have with most of the articles outlining comparisons of salary vs. dividend etc., they all assume the top (or close to top) individual tax bracket.
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Re: Investment income in a CCPC

Post by scorpionman »

But how many are living frugally who wouldn't choose that except they are in Canada ? In the USA top rate is 35 percent up to half a million personally and even that rate is likely to drop.
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Re: Investment income in a CCPC

Post by DmDave »

It's a lot easier to demonstrate CCPC vs RRSP with a top rate. Everyone's situation is different, I take out $70k a year and it's enough for my expenses, the rest are invested through my CCPC.

With the path the Liberals are going, HXT, HXS and HBB are starting to be more attractive, as I can defer selling my ETF's until a more welcoming party takes over, which I hope will happen in the next election.
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Re: Investment income in a CCPC

Post by Koogie »

""Beware: your corporation is not a piggy bank""

http://novuscorp.ca/site/archives/8229

I doubt many FWFers would be as stupid, lax or greedy as "Mr S." in the mentioned court case but it is a good reminder
regarding the rules about paying back shareholder loans.
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Re: Investment income in a CCPC

Post by Koogie »

For anyone who may have missed the follow up....

How to get money from your corporation in a tax-friendly way
https://www.theglobeandmail.com/globe-i ... e35504498/
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Re: Investment income in a CCPC

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"Another proposed measure targets passive investment income held by a private corporation.

Individuals can park money in a business, investing in stocks or other financial products, and then withdraw profits later while only paying the lower corporate tax rate. That disadvantages an individual investor who does not hold savings in a business.

Lower tax rates are meant to encourage businesses to re-invest and create jobs, not pay lower rates on a retirement portfolio, for example.

Finance Canada has not yet determined how it will close this loophole but expects to collect substantially more revenue in the future."

From CBC/Moreau's press conference this morning.

anyone have any thoughts on what they are going to do with respect to retained earnings?
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