Investment income in a CCPC

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Koogie
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Re: Investment income in a CCPC

Post by Koogie »

Very interesting post on the blog of the Blunt Bean Counter:

Should You Fund your TFSA with Corporate Funds
http://www.thebluntbeancounter.com/2015 ... -with.html

Essentially examining if owners of CCPCs benefit by funding their TFSAs with corporate funds when no other funds are available. The answer ? It varies of course :P He does a short comparison with the top Ontario MTR, Ontario CCPC tax rate and three types of income over a 30 year period.

I agree with one of the article commenters that owners of a CCPC should fund their TFSAs with corporate funds (if necessary) as a means of furthering diversification (provided all taxation issues on the funds used are close to being equal) I for one am guilty of having to many eggs in the CCPC basket and that opens me up to risk in the form of future changes to the CCPC tax regime.
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Re: Investment income in a CCPC

Post by DmDave »

Thanks for the link. I'm in the camp of funding my TFSA with money from the CCPC, just because of the uncertainty of taxation of CCPC in the future.

One more thing to add is that with the new budget, there is now a lower tax on CCPC but a higher tax on non-eligible dividends, making things equal. But money that were earned in prior years when CCPC tax was higher will get hit with a higher non-eligible tax hence forth, so basically a double whammy. This makes me want to withdraw more money out of my CCPC over the next few years, as the tax rate gradually adjust, to fund my TFSA.
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Re: Investment income in a CCPC

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My plan was to retire at 65 and live off dividends from my CCPC until 72, when I would start withdrawing from RRIFs. However, watching the financial rectitude of the Ontario government (S & P has just downgraded) I fear major income tax increases, including non-eligible dividends, and so I have essentially paid out all the remaining retained earnings and will wind down the CCPC later this year.

I didn't want the tax hit of all those dividends in one year, so paid most of it to the kids -- explaining that this was their inheritance come early.

As it turns out, I'm working again, but I am doing so as a sole proprietor, i.e. outside the corporation. Thus I still don't need money from my RRSP/RRIF and the plan to start drawing down RRIFs at 72 is unchanged. (I'm 69.)

YMMV

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adrian2
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Re: Investment income in a CCPC

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DmDave wrote:but a higher tax on non-eligible dividends, making things equal. But money that were earned in prior years when CCPC tax was higher will get hit with a higher non-eligible tax hence forth, so basically a double whammy.
Well, as usual, it all depends.

There is a higher ON tax on non-eligible dividends in the higher tax brackets.
There is a lower ON tax on non-eligible dividends in the lower tax brackets.
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Re: Investment income in a CCPC

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Jamie Golombek has a new article to answer the CCPC vs TFSA question.

http://www.jamiegolombek.com/media/TFSA ... ers-EN.PDF

Assuming top marginal bracket for non-eligible dividend, interest and eligible dividend are better with TFSA. Cap gain realized annually is a wash. Deferred cap gain is much better within CCPC.
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Re: Investment income in a CCPC

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DmDave wrote:Jamie Golombek has a new article to answer the CCPC vs TFSA question.

http://www.jamiegolombek.com/media/TFSA ... ers-EN.PDF

Assuming top marginal bracket for non-eligible dividend, interest and eligible dividend are better with TFSA. Cap gain realized annually is a wash. Deferred cap gain is much better within CCPC.
Thanks, good read.
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Re: Investment income in a CCPC

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Food for thoughts before October 19th.

Is Trudeau challenging small business tax benefits?
http://achenhenderson.ca/is-trudeau-cha ... -benefits/
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Re: Investment income in a CCPC

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Penquin007 wrote:Food for thoughts before October 19th.

Is Trudeau challenging small business tax benefits?
http://achenhenderson.ca/is-trudeau-cha ... -benefits/
Post election now...this is a big issue. I'm curious how it is going to play out. There were 4 main pillars of the liberal financial platform, and one of them was eliminating tax advantage to wealthy Canadians using CCPC as a tax deferral for investment income. That's basically what this entire thread is predicated on. There are some measures that could be taken that would be highly punitive for existing CCPC assets...for example expanding the definition of and enforcing the rules for a personal services business.

For any Alberta CCPC's out there, the small business PC is attractive on its own merits, but especially to high income earners facing a whopping 23% increase in the top marginal rate (from 39% to 48%) in 2016. Yet the liberal rhetoric is unsettling. For those who have a CCPC, it is time to hold our collective breath. If you are thinking of setting one up, do you wait to see what the liberals are going to do?

I have also run some numbers through the tax forms, and I notice that there will now be a penalty on passive income earned in a PC: About 5% more tax than the same income earned personally. The integration has been lost with the changes the NDP made effective Oct 1, 2015, but largely affecting 2016 income.

Before Jan 1, it would be prudent to empty the RDTOH account. After Jan 1, rather than flowing out CDN dividends from the CCPC, we will defer allowing the RDTOH to accumulate with the hopes that the integration will be fixed at some point.

One final point of interest: much of our discussion and calculations on FWF assume stable tax rates over decades. It's remarkable how quickly new government policy can throw away careful personal finance planning and execution. This is perhaps the greatest risk to any financial plan designed to optimize tax efficiency.
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Re: Investment income in a CCPC

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Random question about a CCPC - something I haven't thought clearly through.... perhaps someone else has:

#1. normally tax-loss harvesting is considered a "good thing".

#2. is this the same thing in a CCPC? Is there any reason to think of this differently?

(the reason for my question: in a CCPC, 50% of capital gains can be stored in the Capital Dividend Account, which can then be distributed tax free... Is there some logic by which it would be more beneficial to avoid tax loss harvesting thereby allowing for greater tax-free distribution in the shorter term?)

I suspect the answer is that tax loss harvesting should be pursued the same way - but was hoping for some wisdom.
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Re: Investment income in a CCPC

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Yoder wrote:(the reason for my question: in a CCPC, 50% of capital gains can be stored in the Capital Dividend Account, which can then be distributed tax free... Is there some logic by which it would be more beneficial to avoid tax loss harvesting thereby allowing for greater tax-free distribution in the shorter term?)
The CDA is a red herring, IMHO.
The logic you describe is in the same vein as "I won't pick a 3% GIC / HISA over a 1% version, because I'm paying so much tax on the interest".
No tax / deferred tax is better than paying tax in the CCPC and having a greater CDA balance.
Yoder wrote:I suspect the answer is that tax loss harvesting should be pursued the same way - but was hoping for some wisdom.
Tax loss harvesting should be pursued the same way.
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Re: Investment income in a CCPC

Post by Yoder »

Yep - thanks Adrian: I figured the logic ran that way - but helpful to have someone with experience say it explicitly!
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Re: Investment income in a CCPC

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Now that I am retired the only income in my corporation is interest etc on retained earnings.I have been
"deducting "charitable donations from my personal income (tax credits). My accountant seems to think that if I make the donations at the corporate level they will be deductible dollar for dollar from the corporations income instead of just generating a tax credit personally.Can any of the experts here confirm?
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Re: Investment income in a CCPC

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I would be very surprised if you came out ahead by deducting donations from corporate income!! At the personal level, donations in excess of 200$ give rise to a 53% tax credit (in PQ). Irrespective of personal income, a 100$ donation will result in a tax credit of about 50$. To get the same advantage from a deduction, I would have to have a 50% (or more) MTR. It is unlikely that this would be the case in a CCPC.

But, I know little about CCPC's. Personally, since tax integration is fairly efficient, I am of the opinion that they are useless as investment vehicles. They are great for income splitting. They are also great if you are growing your business (presumably this is why they have the tax structure that they have).
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Re: Investment income in a CCPC

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I've been soliciting a number of opinions regarding my risk with the CCPC structure which I use as a professional (MD) as an investment vehicle to minimize tax like thousands of others in Canada do.

On Friday, I met with an accountant and lawyer from a firm that believes it is likely that the rules will be changed to more strictly allow the SBD for only those Canadians running true small businesses as defined by number of employees or specific sectors (excluding professionals) much as Quebec did in their 2015 budget.

In addition, they believe there is smaller, but real risk that the liberals are going to be more aggressive with the definition of a personal services business which could very well be applied to professionals like me (and them). If you are not aware of how punitive being declared a personal services business can be, see this post by the Blunt Bean Counter.

A substantial portion of professionals net worth is at stake if this were to happen. There are things that can be done before such a draconian policy potentially takes place, but the uncertainty makes it difficult to know how to proceed. In addition, there is a deadline for optimization (if partial or complete withdrawal of CCPC assets is being considered) since non-elig dividends will be taxed much lower before Jan 1. Yet, a CCPC is exactly what is needed to find shelter from the drastic increase in the top marginal tax rate.

Hopefully more information will be available from the new liberal government before the end of the year.
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Re: Investment income in a CCPC

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couponstrip wrote:I've been soliciting a number of opinions regarding my risk with the CCPC structure which I use as a professional (MD) as an investment vehicle to minimize tax like thousands of others in Canada do.

On Friday, I met with an accountant and lawyer from a firm that believes it is likely that the rules will be changed to more strictly allow the SBD for only those Canadians running true small businesses as defined by number of employees or specific sectors (excluding professionals) much as Quebec did in their 2015 budget.

In addition, they believe there is smaller, but real risk that the liberals are going to be more aggressive with the definition of a personal services business which could very well be applied to professionals like me (and them). If you are not aware of how punitive being declared a personal services business can be, see this post by the Blunt Bean Counter.

A substantial portion of professionals net worth is at stake if this were to happen. There are things that can be done before such a draconian policy potentially takes place, but the uncertainty makes it difficult to know how to proceed. In addition, there is a deadline for optimization (if partial or complete withdrawal of CCPC assets is being considered) since non-elig dividends will be taxed much lower before Jan 1. Yet, a CCPC is exactly what is needed to find shelter from the drastic increase in the top marginal tax rate.

Hopefully more information will be available from the new liberal government before the end of the year.
Considering that the right to incorporate was offered in most cases to persuade doctors to accept lower fees, such a change,especially if retroactive, would likely result in a mass exodus of younger doctors .If personal service rules were retroactively enforced on those who are no longer in the workforce ,having converted to a holding company and who are therefore no longer eligible for the small business deduction anyway,the number of retired physician bankruptcies would skyrocket and the lesson would not be lost on those who are more mobile.Doctors willingness to buy into the medicare system is based largely on trust after all.
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Re: Investment income in a CCPC

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Agreed.

Also, I can't see them going after all the engineers, lawyers, doctors and accountants and reassessing previous years' income. That sounds like a logistical nightmare. Though possibly not pragmatic, it's not beyond their power. There is a CRA published case I can't find right now where CRA declared an IT professional working for a megacorp a PSB and reassessed several previous years returns taxing everything at the highly punitive rate and then stripping him of the CCPC status. Plus interest penalties. Plus fines. Plus fees.

I think most likely they will target the ability to income split dividends/salary paid out of a CCPC and attribute all distributions back to the primary shareholder for any dividends paid out to spouse or kids. This will negatively affect everyone with a CCPC/holding company, but at least only prospectively. They may also take away the SBD for certain professionals like lawyers, accountants, engineers, and MD's going forward. However many MD's may still qualify as a small business depending on the exact rules. For example Quebec's CCPC changes would still count a lot of MD's as small businesses.

Still, there is small, but real risk of something much more aggressive like declaring some CCPC's PSB's.

I suspect the tax and CCPC changes will be on top of the "to do" list for the new liberal government in their first session which opens Dec 3.
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Re: Investment income in a CCPC

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http://www.investmentexecutive.com/-/co ... porations-

Article from Jamie Golombek on what the Liberals might do with CCPCs. He speculates that they might remove the small business deduction for those having less than 3 employees in the service and construction sectors. This is what Quebec will be doing as of January 1, 2017. Another possibility is to remove the ability to income split with spouse and adult children. He expects the changes to be announced in the Liberal's first budget, expected early in 2016.

If I had to hazard a guess, the changes to CCPCs won't occur until at least 2017. If incorporation eligiblity is left unchanged, there would still be the ability to tax defer, although less. In Ontario, that would mean a tax rate of 26.5%, instead of 15.5%.

But this is all speculation.
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Re: Investment income in a CCPC

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This is the problem with any new government who try to appease to the lowest common denominator, namely those who just want government handouts and not take any responsibility for their own finance.

Having said that, it's quite scary that the new government might approach CCPC's and see that as a golden goose. I'm not entirely sure it will be that easy for the Liberals to separate small businesses from holding companies, as I suspect that would affect a large number of MP's who actually have a holding companies. Not to mention that Trudeau has a few companies himself.

I suspect once the new policies come out, there would be ways around it. This makes me more willing to leave Canada and become a non-resident, as we are in a global economy with non restrictions on capital flow.
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Re: Investment income in a CCPC

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Is there a website that explains how a CCPC functions when it comes to investing?
Income splitting is of no benefit to me, so I'm just looking to find out how it may benefit me from an investment standpoint. As in how are you taxed on capital gains, dividends, etc in a corporation versus just investing it in personal accounts.
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Re: Investment income in a CCPC

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nisser wrote:Is there a website that explains how a CCPC functions when it comes to investing?
Income splitting is of no benefit to me, so I'm just looking to find out how it may benefit me from an investment standpoint. As in how are you taxed on capital gains, dividends, etc in a corporation versus just investing it in personal accounts.
You can still income split with your older self which is useful if you are an immigrant or spent many years out of the workforce and have not had time to build up enough in your RRSP or are earning your living in a high taxed province but are intending to move to a lower taxed one.Otherwise it's mainly useful if you need to invest in an active business rather than investing-passively but then that's what it was designed for! Taxation of passive investment income is designed to be passed through to the shareholder in the same year otherwise it's punitive by design.
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Re: Investment income in a CCPC

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nisser wrote:Is there a website that explains how a CCPC functions when it comes to investing?
Income splitting is of no benefit to me, so I'm just looking to find out how it may benefit me from an investment standpoint. As in how are you taxed on capital gains, dividends, etc in a corporation versus just investing it in personal accounts.
Theoretically, it should make no difference due to integration. In practice, it can vary a little (as I understand it). However, there are other potentially positive considerations as you probably know (tax deferment and estate issues being fairly substantial).

This doesn't fully address your questions but is a recent post and looks at non-eligible dividends in a CCPC:
early-retirement-on-non-eligible-dividend-income.htm
http://www.milliondollarjourney.com/ear ... income.htm

Same person also has an older post dealing with eligible dividend investing in a CCPC:
dividend-investing-strategy-invest-through-your-corporation.htm
http://www.milliondollarjourney.com/div ... ration.htm

Rumours currently abound about how the T2 government is going to shaft us change the rules for non eligible dividends in the upcoming budget. It will be horrifying interesting to see what Mr. Morneau does in the end.
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Re: Investment income in a CCPC

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Not sure how T2 and the gang will shaft us (people with CCPC) on non-eligible dividends without screwing up tax integration. Unless T2 thinks we are secondary Canadian citizens and should be taxed heavier.
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Re: Investment income in a CCPC

Post by Peculiar_Investor »

Can we please keep the political discussions/jibes in Watercooler.
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Re: Investment income in a CCPC

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DmDave wrote:Not sure how T2 and the gang will shaft us (people with CCPC) on non-eligible dividends without screwing up tax integration. Unless T2 thinks we are secondary Canadian citizens and should be taxed heavier.
Those of us with the most to lose are the ones who already "screw up tax integration"--to our benefit. Tax integration works generally as intended as long as people in some way need to spend -- and therefore ultimately in some way withdraw -- their incorporated earnings in the same year. There the gov't may pay whackamole with family dividend splitting, and whittling down what businesses are eligible for low corporate tax rates, but that's about it.

But there's another probably sizeable pot of foregone tax revenue from those of us who use corporate structures to smooth out income over time, especially those who earn pretty big incorporated $ temporarily and intend to dribble them out over years of otherwise low personal income (e.g. early retirement). I'm not personally happy about the likely future change, but I recognize that those of us running these types of low-capital-requirement, low-expenses, high-revenue small businesses are currently enjoying a windfall which is probably not long-term sustainable.
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Re: Investment income in a CCPC

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Why business owners shouldn’t bother with an RRSP
http://business.financialpost.com/perso ... th-an-rrsp


I'm surprised to see another article about avoiding RRSP for business owners, especially since the liberals are planning to change the benefits for business owners in the next budget..

According to my accountant, his firm expect that the new budget will eliminate the small business tax rate for incorporated professionals with only a few employees, just like they did in Quebec last year.
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