The Canadian tax system is a complex web of rules and regulations, especially for businesses like yours. With the rules constantly evolving, seeking the right advice and establishing a solid plan to navigate this complexity is crucial. If you have a Canadian-controlled private corporation (CCPC) and need corporate tax-saving strategies, Ottawa accountants and financial planners can provide the expertise you need. By leveraging their knowledge, you can implement investment strategies that will help you maximize your returns.
Investments and Corporate Taxation
Corporations typically earn two types of income: active business income and investment income. Most business activities generate active business income. Active business income excludes income from personal service businesses and investment income.
Investment income is generally passive income and includes:
- Rental income
- Interest income
- Dividends
- Capital gains
Income is subject to federal and provincial taxes. In the last decade, many changes have been made to reduce the tax advantages of CCPCs. Therefore, using every available tax tool the government offers is essential. Lowering taxes on investment earnings and active business income will ensure you retain more of your wealth and minimize the impact taxes have on your rate of return.
The government developed corporate tax policies so that corporate investing doesn’t give business owners a tax advantage over personal investing. However, corporate investment strategies for business owners can minimize taxes.
Maximizing corporate investments
If you have a CCPC, the small business deduction (SBD) offers a favourable taxation rate for active business income up to 500k (600k in Saskatchewan). You can significantly reduce your tax burden by taking advantage of the SBD. However, if you include investment income of more than 50k, you start to lose the benefit of the SBD.
Fortunately, there are other strategies you can employ to reduce taxes on investment income further, giving you more reasons to be optimistic about your tax situation. Some ways to minimize corporate investment taxes are asset allocation, timing, flow-through shares, tax-exempt insurance policies, and Individual Pension Plans.
Asset allocation
Investments have different tax rates. Interest income is taxed at a higher rate than capital gains or dividend income. Rebalancing your portfolio, known as asset allocation, could reduce your tax bill. This involves deciding how to distribute your investments across different asset classes to achieve your financial goals while minimizing taxes. Before changing your asset mix, it’s essential to consider how your current investments impact your future goals.
Timing
Taxes are inevitable but you can minimize them with the correct timing. Some examples are:
- Choosing investments that allow for tax-deferred growth, so you pay taxes later
- Buying or selling depreciating assets when you can claim the most significant deduction
- Offset gains with eligible losses
Working closely with an accountant and financial planner will help determine the best times to invest, take income, and declare losses.
Flow-through shares
Using flow-through shares can provide tax advantages for corporate investors. These shares allow your corporation to transfer the income, tax deductions and losses, if any, to investors.
Tax exempt life insurance policies
Investing surplus corporate funds in Ontario in a tax-exempt life insurance policy may reduce your corporation’s investment taxes. Some types of policies, such as universal life, allow your investments to grow tax free as long as the funds stay in the policy. These policies also offer a tax-free death benefit.
Set up an IPP
An Individual Pension Plan (IPP) is another way to reduce investment taxes. A corporation deducts the amount it deposits into an IPP, reducing its taxable income. An IPP with higher contribution limits can provide greater tax advantages than an RRSP. Investment growth in an IPP is tax-sheltered and protected from creditors.
Planning for the future
Corporate investment strategies for business owners can build wealth and long-term growth. Understanding tax laws and how they apply to investments will aid the decision-making process. Another critical question is what your short-term, medium-term, and long-term goals are and how to invest to achieve them. Strategically investing surplus corporate funds in Ontario can significantly improve a business’s financial position.
Professional help can dramatically improve your financial position. At MDL Financial, we have over thirty years of experience working with CCPC owners. We offer financial planning, goal setting, tax advice, and additional assistance. For corporate tax-saving strategies in Ottawa, contact us online or at 613-419-9649. We’re here to provide the expertise and guidance you need to minimize your corporate investment taxes and realize your goals, reassuring you that you’re making the right financial decisions.
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