# Professional Corporation - how to invest retained earnings?



## Oilers82 (Jan 17, 2011)

Hi all, I love reading this forum and have gained a lot of insight reading the discussions here. 

I've got a question regarding how best to invest the retained earnings I have within a professional corporation. I just finished the paperwork to gain corporation status about a month ago.

Background:
-I am self-incorporated in a professional corporation. I get paid monthly lump sum, and taxed at year-end.
-I then pay myself a salary and keep the rest (retained earnings) in my corporation
-corporate tax rate is 15% which is what I'd be paying on my retained earnings.

My plan going forward for _personal_ investment is to do max contributions to TFSA and RRSP, and I currently have set up a couch potato type portfolio to which I'll keep adding. My portfolio:

XIC - 25%
TD e-series US fund - 15%
VXUS - 15%
PHN Bond Fund D - 15%
GLD - 10%
REI.UN - 10%
Cash - 10%

My question is, for my _corporation_, what type of portfolio should I use? A similar couch potato strategy, or picking individual dividend stocks with a history of strong dividend increases? Which method would be more beneficial and maximize the benefits of investing within the corporation (which is essentially at $0.85 on the dollar instead of $0.56).


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## larry81 (Nov 22, 2010)

as a rule of thumb, you should consider your different account as ONE UNIQUE PORTFOLIO and try to minimize tax by placing the proper investment in the proper vehicle (ex: fixed income in rrsp, canadian dividends in corporation account, etc).


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## FrugalTrader (Oct 13, 2008)

Oilers, you should consult an accountant about this, but take note that interest earned within a corp is taxed at the highest possible rate. If you are a dividend investor, you can flow through dividends to shareholders. This will allow the dividends to be taxed in the hands of shareholders personally rather than through the high rate of a corp.


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## Oilers82 (Jan 17, 2011)

Cool. @larry81 I currently only have one bond fund (fixed income) and that is in my RRSP. I actually don't have much invested outside of my RRSP and TFSA at this point. That's good advice and I've heard similar too to think of everything as 1 portfolio.

@FrugalTrader that's good advice too, since my dad is retired he could probably benefit a lot from the dividend flow-through. I'm not a dividend investor at the moment (more of a couch potato guy) but I'd be open to creating a portfolio of dividend stocks if that's the best/most efficient way to utilize my corporation to my advantage.


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## FrugalTrader (Oct 13, 2008)

I've been told by a couple of accountants that the best thing to do is to get the money out of the corporation to invest personally. However, that's not always practical if the corp has excess cash, and withdrawing it causes a spike in tax rates.

I've read to avoid "interest" income within a corp as it's taxed at the highest rate. 50% of capital gains from investments are taxed at the highest rate, the other half can flow through to shareholders tax free.


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## andrewf (Mar 1, 2010)

Isn't the corporate/personal tax system structured so that interest income earned in a corp and then immediately distributed to the shareholder is taxed equivalently to interest income earned by that shareholder directly.

There are ways around this, at any rate. Claymore has their 'advantaged' fixed income products that distribute return of capital/capital gains rather than 'other income'. They seem like a good option in corporations where you do not want to immediately distribute interest income.


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## cato (Jul 4, 2011)

larry81 said:


> as a rule of thumb, you should consider your different account as ONE UNIQUE PORTFOLIO and try to minimize tax by placing the proper investment in the proper vehicle (ex: fixed income in rrsp, canadian dividends in corporation account, etc).


+1

i) USA shares in the RRSP, and FI in the RRSP as far as possible.
ii) Discuss with your accountant as to how you are going to withdraw your income from the CCPC - you have a choice - Dividends or Salary or a combination of both. Salary = RRSP room, dividends not.
ii) If you have a 20+ accumulation period ahead, you really need to make good use of the money you are borrowing interest free from the taxman - and I would tilt the portfolio towards growth rather than conservative(capital gains tax more favorably taxed). Total return = dividend and capital appreciation -> if you ever decide to become a stockpicker, go for low dividend but high growth initially. 

my 2c


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## Oilers82 (Jan 17, 2011)

All good advice guys, thanks so much! Keep it coming.

@Cato yes I have much more than 20 years time horizon; so I guess you'd be in favor of overall gains more than stability and dividends.

I guess in the end I need to meet with my accountant before I set up my investments; I was thinking I could get this started on my own but I'd better get some professional advice. You've all given me some great things to think about and discuss with him though.


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## larry81 (Nov 22, 2010)

Oilers82 said:


> All good advice guys, thanks so much! Keep it coming.
> 
> @Cato yes I have much more than 20 years time horizon; so I guess you'd be in favor of overall gains more than stability and dividends.
> 
> I guess in the end I need to meet with my accountant before I set up my investments; I was thinking I could get this started on my own but I'd better get some professional advice. You've all given me some great things to think about and discuss with him though.


1. give yourself minimum salary (find the best mix dividends and salary)
2. keep profit in corporation
3. invest directly in corporation


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## marina628 (Dec 14, 2010)

Definitely discuss with your Accountant , there is no black and white answer to this.Definitely keep your business strong ,build business credit up and have adequate cash flow.Keep all your taxes up to date and be organized


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## Ihatetaxes (May 5, 2010)

larry81 said:


> 1. give yourself minimum salary (find the best mix dividends and salary)
> 2. keep profit in corporation
> 3. invest directly in corporation


Larry you sound like my Accountant who wants me to keep money in my corporation due to the 15% tax vs 46% I generally get nailed on when taking large bonuses. I agree with him to some extent but also feel like I should take a good chunk as salary to build wealth outside the company. I've paid off my mortgage and started putting bigger chunks into non-registered investments after maxing RSP/TFSA accounts for both my wife and I. We just finished a record fiscal year and have lots of retained earnings, $200k of which is in our downpayment fund to buy an office but I have the rest sitting in my bank account earning nothing but I like looking at a $300k balance and not worrying too much about meeting payroll and payables!


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## marina628 (Dec 14, 2010)

I am keeping quite a bit in my company ,when we get enough and right opportunity comes we will buy some real estate with it.But we pay ourselves a decent paycheck just Max our RSP and TFSA so the sting is not so bad on tax day.Some people drain their business account and pay that 46% tax ,never could understand that idea.Obviously if you are carrying debt it makes sense to take enough out to cover the debt ,you can also take a shareholder loan but have to repay it before tax year end or it will have to show on your year end T4.
A good accountant will explain all this for you :0


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## andrewf (Mar 1, 2010)

Ihatetaxes said:


> Larry you sound like my Accountant who wants me to keep money in my corporation due to the 15% tax vs 46% I generally get nailed on when taking large bonuses. I agree with her some some extent but also feel like I should take a good chunk as salary to build wealth outside the company. I've paid off my mortgage and started putting bigger chunks into non-registered investments after maxing RSP/TFSA accounts for both my wife and I. We just finished a record fiscal year and have lots of retained earnings, $200k of which is in our downpayment fund to buy an office but I have the rest sitting in my bank account earning nothing but I like looking at a $300k balance and not worrying too much about meeting payroll and payables!


~15% small business tax rate only applies to active business income--ie, not from passive investments in stocks, bonds, GICs, etc. That income is taxed at a much higher effective rate.


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## PlaidShirt (Nov 9, 2011)

hey oilers, i was recently presented something that may interest you. Check out NexGen Financial's tax-managed mutual fund lineup. Most of their funds can be purchased in 4 different structures; Compound Growth, Annual Capital Gains, Monthly ROC and Monthly Dividend.

The key here is that you can buy a bond fund that could be paid out as a dividend or allowed to compound without a distribution. 

https://secure.nexgenfinancial.ca/nexgen_innovation/intro.html

It's an interesting structure that is potentially one up on a good corporate class mutual fund lineup.

I am not affiliated with NexGen. And yes this is my first post and I hope it's useful to you. PS


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## Oilers82 (Jan 17, 2011)

But would the MERs eat away at any advantage I might get through taxation benefits? My highest MER now is 0.59 for my PHN Bond Fund D.


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## andrewf (Mar 1, 2010)

^ Yes. The MERs destroy any tax advantage. Show me a low-cost ETF that does the same thing and I might be interested.


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## atrp2biz (Sep 22, 2010)

Passive income would be taxed at the hightest rate in the PC, but wouldn't you be able to distribute earnings from passive income as eligible dividends since the earnings would contribute to GRIP? Thus the argument for taking money out of the PC ASAP is moot?


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## andrewf (Mar 1, 2010)

If you earn capital gains income, you can distribute half the gain tax free. The whole mechanism for corporate taxes seems rather complicated. I was doing research earlier and could not find good, clear explanations of how various forms of income are taxed. The idea, though, is that someone is the highest marginal tax bracket should be indifferent about earning income in a corporation or personally. The main benefit of corporations to me seem to be the opportunity to smooth income, sprinkle dividends, and protect your assets from liability.


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## Mike59 (May 22, 2010)

*been there done that...*

As the owner of a ccpc, i've spent a ton of time researching investment options. I have nearly 100k surplus in the business and am not investing a dime of it at this time. Stay away from corporate class investments, the mer negates any theoretical benefit. My conclusions are:

- the personal vs ccpc debate is mostly hair splitting
- use the ccpc to minimize taxable salary, maximize dividend payouts, and keep yourself in a low tax bracket
- forget rrsps, max the tfsa and any personal nonreg needs you have
- income split with a spouse to share dividends
- treat your ccpc like a gold mine and slowly siphon out income over decades to yourself as you need it

If you live modestly, the tax deferral advantage lets you eventually use most of what you earn, you just have to be patient.


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## Oilers82 (Jan 17, 2011)

Mike59 said:


> As the owner of a ccpc, i've spent a ton of time researching investment options. I have nearly 100k surplus in the business and am not investing a dime of it at this time. Stay away from corporate class investments, the mer negates any theoretical benefit. My conclusions are:
> 
> - the personal vs ccpc debate is mostly hair splitting
> - use the ccpc to minimize taxable salary, maximize dividend payouts, and keep yourself in a low tax bracket
> ...


Thanks so much for your input, it always helps to hear from people with experience!

And thank you to everyone else for their input, lots of things to consider here. While its all interesting and pretty exciting to be starting up this corporation, I think I'm gonna miss my current formula of "get paid into personal account, save 50%, pay monthly fixed expenses, then spend or save the rest however i please".


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## doc987 (Nov 23, 2011)

If you are using your retained earnings for a retirement vehicle, it may be wise to consider setting up a DRIP within your PC with some solid Canadian dividend paying companies and let the compound interest grow over time while at the same time delaying taxes until you decide to start to withdraw from your PC.


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## treva84 (Dec 9, 2014)

Rather than starting a new thread, I figured I'd ask a few questions to follow up on the helpful information contained here -

Given the new CCPC tax rules by the federal Liberal government, does the majority of the advice here from 2011 still apply?

Thinking about taxes, does one pay less taxes on dividends received (i.e. the quarterly dividend from RY) or capital gains made with retained earnings (i.e. the 12% gain realized by the sale of RY)?


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## james4beach (Nov 15, 2012)

andrewf said:


> There are ways around this, at any rate. Claymore has their 'advantaged' fixed income products that distribute return of capital/capital gains rather than 'other income'. They seem like a good option in corporations where you do not want to immediately distribute interest income.


An update: this Claymore fund doesn't exists any more. As of 2016 there are a couple ETFs that are tax efficient for bonds and distribute minimal interest income (the most highly taxed stuff), meaning that more of the return comes in the form of capital gains.

*HBB*: uses swap derivatives to provide a total return for bonds and doesn't pay any interest. Some people have concerns about synthetic, swap-based funds like this because it's very different than traditional mutual funds and ETFs.

*ZDB*: a traditional bond fund, but invests in discount bonds that have minimal coupons. This results in less interest income than a normal bond fund and is tax efficient. I've purchased this one for the family in non-reg.


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## Jaberwock (Aug 22, 2012)

Pay yourself a decent salary, so that you can buildup your RRSP contribution room, and max out your RRSPs and TFSA.

Don't do what a friend of mine did. Following the advice of his accountant, he took a very low salary for several years. Now his business is booming, he has cash to spare in the business and he is faced with the choice of taking it out and paying the top tax rate, or investing it and paying the top tax rate.

During the years when he was paying himself a pittance, he could have withdrawn money and paid low and middle income rates. Now the money sits in his company, and he can't get it out without paying top rates.


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## darthvader (Mar 11, 2015)

I'm kind of confused in regards to which direction to take. I have set up a professional corporation last year and have taken out very minimal personal income from it. My main goal was to invest within the corporation itself, allowing for compound growth for the years to come. 

I know that there may not be many options available, but what does everyone here think of Purpose investments? It appears that they have quite a number of investment vehicles that are corporate class and having low MER's.

Cheers


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## treva84 (Dec 9, 2014)

darthvader said:


> I'm kind of confused in regards to which direction to take. I have set up a professional corporation last year and have taken out very minimal personal income from it. My main goal was to invest within the corporation itself, allowing for compound growth for the years to come.
> 
> I know that there may not be many options available, but what does everyone here think of Purpose investments? It appears that they have quite a number of investment vehicles that are corporate class and having low MER's.
> 
> Cheers


I looked at the Purpose investment funds as well, they charge low fees, but they aren't really indexing as it's more active stock selection with a low cost and tax efficient structure. The Horizon's funds are similar as well but you could do a pure indexing strategy with those funds.

Personally I am comfortable researching my own investments and thus if I want to be active (rather than passive (i.e. indexing)) I'm going to take a buy and hold strategy, deferring cap gains for as long as possible. Thus, my goal will be to buy high quality companies at attractive prices with the intention to never sell them. Initially, many of these will be low yielding DGI type stocks, with the eventual idea that by the time I'm ready to retire, through dividend growth they will be yielding 3+%. 

An example of such a company today is ATD.B.

At present however I'm largely pooling cash, waiting for the next crash / correction to allow me a favourable entry point. 

If this all seems too hard, involved or complicated, then yes Horizon or Purpose products are a viable alternative.


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