# Investing through a corporation?



## Kaitlyn (May 13, 2011)

Does anyone here invest through a corporation? I know little about it, but have heard there are some tax advantages (and disadvantages...) in investing through a corporation.

So does anyone here do it? Or has anyone looked into it?


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## wwwkp84 (Sep 7, 2012)

From what I know, you are taxed at the full business rate versus the small business tax rate, because investment income is considered inactive business income.

Let's say you're a consultant earning $150k income in your business.

If you were to pull all of it out as income to you personally, you would be left with about $100k after taxes. 
If you were to pull out minimum salary of or none (let's say none), then you would be left with $127k

Inside of a corporation, investment income is taxed at the full rate (dividends, interest, capital gains) and not the favorable small business tax. Remember that when you pull the money out of the corporation as a dividend, you'll be paying taxes, but only on half of the amount. It ends up being the same thing whichever way you go about it because of full integration.

The only advantage that I see is that you get to defer about 30% of the tax until you pull the dividend, and by having more of your money work for you, you're better off.

I could be wrong, but this is what I understand so far.


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## fatcat (Nov 11, 2009)

not to mention the cost of filing a corporate tax return every year


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## wwwkp84 (Sep 7, 2012)

If you're making a decent income, to be able to defer the tax and invest an extra $27k is much more of an advantage than corporate tax filing being a disadvantage.


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## andrewf (Mar 1, 2010)

Eligible dividends are not taxed within corporations (already taxed once). Capital gains are similar to personal in that only half of the gain is included as passive business income and taxed at ~50%. The other half can be flowed through to the shareholders as a tax-free capital dividend. Interest income or foreign dividends are taxed fully.

This is my understanding. There are some complicated withholding rules as well. You pay a ~50% tax rate on passive business income, but this is partially recovered when you pay ineligible dividends. Effectively, the tax rate should be the same as if you earned the income personally. This step seems to be intended to prevent people from deferring taxation by keeping investment income in a holding company. You pay full whack up front each year, and get a refund if you pay dividends and that individual pays less than the highest marginal rate.


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## wwwkp84 (Sep 7, 2012)

andrewf said:


> This is my understanding. There are some complicated withholding rules as well. You pay a ~50% tax rate on passive business income, but this is partially recovered when you pay ineligible dividends. Effectively, the tax rate should be the same as if you earned the income personally. This step seems to be intended to prevent people from deferring taxation by keeping investment income in a holding company. You pay full whack up front each year, and get a refund if you pay dividends and that individual pays less than the highest marginal rate.


Whether or not you keep the money in the company or personally, you're going to get taxed. Within a corporation, you can defer the tax to a later date (date of dividend). This allows you to invest more of your money versus less of your money as you're taxed more personally right off the bat.


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## andrewf (Mar 1, 2010)

It's more complicated than that. You have tax withheld, in essence, in the year the income is earned. So you can't even really defer taxation (much) by using a holding corp. You can smooth your taxable income over time, which is useful if your personal income is not in the highest marginal tax bracket (on average).


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## Homerhomer (Oct 18, 2010)

It makes sense to set up investment corporation if you have operating corporation (selling shoes for example) and you have enough excess cash, and you want to seperate the investments for liability purposes, and you don't want to be taxed at the personal tax rate.
It doesn't make any sense to set it up and transfer personal money to the corporation to invest.

WWWkp84, corporation earning dividends will pay refundable tax to cra which will be refunded when the dividends are declared to shareholders, that's why it makes sense to declare shareholder dividends the same year the dividends are earned, there is no tax deferral there.

Andrew has it right ;-)


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## wwwkp84 (Sep 7, 2012)

Homerhomer said:


> WWWkp84, corporation earning dividends will pay refundable tax to cra which will be refunded when the dividends are declared to shareholders, that's why it makes sense to declare shareholder dividends the same year the dividends are earned, there is no tax deferral there.


So let's say you have $50,000 left over in a working corporation in 2012. You invest 100% of that into 100% Canadian dividend paying stocks. You received $1000 dividend on those stocks for that year. You would pay approximately $330 (33%) of that to the CRA with a portion of it refunded provided that you pay your self a dividend from your company on December 31st, 2012.


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## andrewf (Mar 1, 2010)

If you received $1000 in eligible dividends it is taxed at the normal (non-small business) rate of ~45-50%, and the tax paid is added to the refundable tax on hand. Then when the corp pays out dividends to shareholders, they are paid out as eligible dividends. If you pay out $1500 in eligible dividends, the corp receives back $500 from the refundable tax on hand.


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## Homerhomer (Oct 18, 2010)

wwwkp84 said:


> You received $1000 dividend on those stocks for that year. You would pay approximately $330 (33%) of that to the CRA with a portion of it refunded provided that you pay your self a dividend from your company on December 31st, 2012.


If you declare $1000 of dividends (basically all earned dividends offset by dividends declared) to the shareholders within the same fiscal year then all (not just the portion) of the tax will be refunded back to the corporation, the corporation will have no tax liability (let's assume this is the only income for the corporation and no expenses for illustration purposes), and the tax liability will be in the hands of shareholders.

If you don't declare the dividends to shareholders the corporation will have to pay refundable tax to cra, it would only make sense if in the current year the tax bracket of the shareholder would be much higher than one in the near future. You would be giving CRA tax free loan, however if one is sure that the future tax liability in the hands of shareholder will be much lower it may make sense. It happens only on rare occassions, in most cases doesn't make sense especially givien challenges of projecting future income.


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