# Tax Planning - Corporation vs Personal cash flow?



## Franko (Mar 31, 2012)

Hi everyone,

I run a one-man corporation doing healthcare relief services. I've built up a decent amount of cash within the corporation, and I'm trying to decide on the most tax-efficient way to invest it.

Background: No debts, no immediate need for any money personally. Goal is to eventually flow all the money through to myself/spouse. For now though, I don't care where the money resides, so long as I can invest it efficiently. However, I am unsure of how long I plan to run the corporation for (may eventually go back to being an employee)

Right now I am considering withdrawing up to the first marginal tax bracket each year and investing it into equities in my personal accounts. Whatever remains in the corporation will eventually go towards real-estate investing through the corp.

My question is - does what I'm doing make sense, or is there a better way to grow my wealth? I've read that the best idea is to just keep everything in the corporation (to avoid the second whammy of personal tax), but I am unsure of how long I will be keeping my corporation for, and thus would like to flow through a minimal amount to myself each year. Thoughts?

Edit: Also, can someone please quickly summarize how equity investing through the corporation differs from personal investing?

Thanks everyone! Much appreciated!

Frank


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## 2tire2work (Jul 20, 2013)

I am in a similar situation. I am leaving all my profits in my business checking account with zero interest. 
If you plan to become an employee you will put yourself in a high tax bracket and will will have to pay tax on your corporation withdraws. So taxes will be paied regardless. 

Advices from anyone else?


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## MoreMiles (Apr 20, 2011)

Try this:

http://www.milliondollarjourney.com/using-universal-life-insurance-with-corporations.htm


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## atrp2biz (Sep 22, 2010)

The logistics of equity investing in a corporation is the same as through personal investments. There may be a little more scrutiny when opening an account. One thing I find attractive is the treatment of capital gains and capital dividends.

Similar to investing personally, 50% of capital gains are taxed. This is where things get interesting. The remaining 50% goes to the capital dividend account and can pass through to the shareholder on a *tax-free basis*. 

Generally, one will want to pass through dividends to the shareholder as received (or by the end of the fiscal year). The corporation essentially acts as a pass through entity and the dividends are taxed at the personal level. If the corporation does not pass through the dividends, the corporation will be subject to Part IV taxes (33%), albeit the corporation will be entitled to a refund of Part IV taxes once the dividends are flowed through.

This is a concise document on taxes and investing through a corporation.


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## uptoolate (Oct 9, 2011)

Thanks for the link artp2biz. Seems I can never look at this stuff too many times! As far as holding a Universal Life Policy inside a corporation, these things are still very expensive products and very opaque (probably for a reason!). Buyer beware!


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## MoreMiles (Apr 20, 2011)

uptoolate said:


> Thanks for the link artp2biz. Seems I can never look at this stuff too many times! As far as holding a Universal Life Policy inside a corporation, these things are still very expensive products and very opaque (probably for a reason!). Buyer beware!


You are not looking at the big picture. You are looking at flowing dividends. How about the capital itself? All the principal money that you have saved from business inside your corporation? Do you know what happens if you die before withdrawing it totally?

Your estate will have to close the corporation, cash out all the assets, and report all lump sum as a one-time tax event in the final tax return. So let's say you have accumulated $1 million, but your wife (or other surviving family member) may pay 30% or about $300,000 in taxes and only get to keep $700,000. It is like withdrawing a RRSP out all at once. It is a massive hit. Like death, taxes are not avoidable... so you need to plan ahead so your family members don't have to grieve for both all at once upon your departure.

Yes, UL is more expensive in fees... but any money you stuff in from your corporation money can be taken out tax free so your wife (or other surviving family member) can take out $1 million out of your $1 million UL-investments.

Many dentists and lawyers have $2-5 million dollar policy in UL. This allows them to save $250k per year of extra cash... they can easily build up $5 million investment in tax-free corporation money for the leftover money. For the money they need during their living years, they write themselves shareholder dividends.

This strategy is so effective that CRA is eliminating, first in 2012 budget, then further in 2013 budget especially the 10/8 arrangement.

http://www.insurance-journal.ca/201...-criteria-for-exempt-life-insurance-policies/
http://blog.riscario.com/2013/03/budget-2013-punishes-innovation-of-10-8.html#.Ukh4bFL5St8

So you have 3 months left to take advantage of this. These changes come into effect for new policies issued after December 31, 2013.

Ask yourself, if they are not so effective in reducing taxes, why would CRA make new laws to eliminate them?


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## MoneyGal (Apr 24, 2009)

^ This.


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## Namael (Jul 14, 2013)

I am a healthcare professional about 1-2 years from completing schooling, would it be wise for me to open some type of universal life insurance in a corporation before the changes? My income is pretty much non-existant right now but will grow substantially in the next few years.


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## MoreMiles (Apr 20, 2011)

Namael said:


> I am a healthcare professional about 1-2 years from completing schooling, would it be wise for me to open some type of universal life insurance in a corporation before the changes? My income is pretty much non-existant right now but will grow substantially in the next few years.


Yes. You may purchase a universal life insurance now under your personal name, as the premium and tax rules are established at the time of contract signing. If there is any change, you will likely be grandfathered under the rules you signed up with.

You then pay only the minimum premium to keep the policy active. You don't contribute anything during your schooling years. Once you start working and owning a corporation, you can then sell or transfer your personal policy. If you are a physician, you may consider MD Management or any qualified insurance broker. https://mdm.ca/wealth-management/incorporation/wealth-management-strategies/

I am also going to teach you a way to extract corporation money tax free! Look at Example #1 on Page 2 of this article.. you can get $400,000 from selling your $1 million policy to your own corporation while you are alive, tax free. http://www.hawkconsult.com/docs/sale_to_corporation.pdf

How can a $1 million UL policy already be worth $400k if there is no investment in it? Can't you just elapse it and buy it again? Aha... that is the catch. If you have a change in your health or insurance situation, which makes a new policy more costly or difficult to buy, your existing policy is already worth something! How much do you ask? You need to hire an actuary to calculate it. Once you have the Fair Market Value (FMV) established, you can sell it to your corporation. In general, the more uninsurable / health deteriorated you become, the more your existing non-cancellable / non-term insurance becomes valuable. This value can then be extracted from your corporation tax free. For example, if you have developed high blood pressure, diabetes (like Tom Hanks in the news these days), or numerous many other possible conditions, you may find it very difficult to get new insurance. So your old ones become very valuable.

It is a relatively complex strategy, but it allows you to take a big $400,000-$1 million lump sum tax free from the corporation saving. If there is anyone with more specific knowledge / advanced idea, please feel free to share it here.


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