# Drawing down RRSP when starting a business



## Rainey (Mar 18, 2012)

Morning everyone, I have been looking for some online information on the following scenario, but thought this group might provide me with additional food for thought. 

Situation:

I have approximately 40K in my RSP, 25K in my TFSA, and 40k in RSP contribution room.

I am hoping to start a business next year and thinking through options to use these funds to finance my lifestyle in a tax efficient manner through a likely lean start up period, which I expect to be about 12 to 18 months. I calculate these costs to be 3k a month for a total of between 36 - 48K.

If it worked out, I'd like to get rid of my RSP and shift to living off of company dividends so the obvious thing (to me) would be to draw down my RSPs while my income is so low and plow any revenue into building up the company account. The complicating factor (not that I'm complaining) is that my wife makes 100K.

View appreciated, as usual.

Note -- in case anyone thinks I might be adopting the YOLO model of spending, I have a significant DB pension and CPP contributions which limits my retirement exposure


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## MoneyGal (Apr 24, 2009)

I read this on the way to work this morning but didn't get a chance to respond until now. 

I'm not sure why you are connecting the various things in your post that you are. It sounds like you plan to take advantage of low-income years to withdraw funds from your RRSP and pay tax at lower rates than when you contributed the funds originally, which is a form of tax arbitrage that is one of the main functions of RRSPs - so no comments there, other than the obligatory "but you lose the contribution room" comment. 

However, this isn't necessarily a "tax-efficient" way to fund a business - it's just a tax-efficient way to get the funds out of the RRSP. If you are looking for tax-efficient ways to fund the business, there are a couple of other methods to consider, depending on your overall circumstances, which range from a regular bank loan to a HELOC to a prescribed-rate loan from your spouse (presuming she has available income/capital to loan). (Also, I'm not sure why your wife's income is relevant, except perhaps to indicate that you don't need the income from the business to fund lifestyle while you are getting the business established? I can't think of a tax consequence for you associated with your plan that implicates your wife's income.)

Finally, just for clarification, when you withdraw funds from your RRSP, it doesn't make sense to put them in a company account of any kind (and I'm assuming you will incorporate, based on your comments about dividends). Dividends are paid from corporate retained earnings; contributions from you (that happen to have been withdrawn from your RRSP) don't qualify. The comment about "building up the company account" is a bit mystifying to me - I'm hoping you mean that you will fund company requirements with RRSP draws so that the business can get through the startup hurtle, not that you will withdraw funds from an RRSP to put them in a corporate bank account; this doesn't make any sense.


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## MoneyGal (Apr 24, 2009)

p.s. The comment about "the YOLO model of spending" was genius. :encouragement:


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## Rainey (Mar 18, 2012)

Thanks MoneyGal. Your post, combined with a Globe article yesterday on -- coincidentally -- almost exactly what I was asking about, cleared things up.
I included my wife's income as I'm never quite sure when individual versus family income matters for tax purposes. If you can't think of a tax consequence that implicates my wife's income -- perfect!
Indeed, my accountant would second your point on separating RRSP and the corporate finances. I'll draw down the RRSPs to cover my personal bills while I work on the business. Hopefully, by the time thats depleted the corporate account will be in good shape and I can shift to a dividend payout.
The only complication is that I likely will leave my current job mid year so, off the bat, my income will not be low enough to realize significant tax efficiencies on RRSP withdrawals. I may end up bridging with TFSA funds until the new year.
Thanks again for taking the time.


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