# Incorporated - how it can help my retirement



## vimmm (Feb 27, 2011)

I am 41 years old (wife the same) and looking into all ways I can save more for retirement. My and wifes RRSP are maxed out, TFSAs maxed out. I have no debt. I also have small consulting business and my company is incorporated. But every year I take all money out of my business and pay myself and family as salary. We are in high tax bracket. I am good with accounting - I do myself Profit Loss and balance sheet, accountant just submits my corporation taxes. I cannot really grow my business - it is single man consulting and I am not good at managing other people and probably I don't have interest in that.

My goal - retirement around 55, so I have about 14 years left. So my question is - how can my corporation help me with retirement? Should I just start leaving some money in corporation account and then I'll pay that myself as dividends/salary when I hit 55? Is there anything else I can do? Any suggestions would be very welcome. 


Thank you in advance!


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## sprocket1200 (Aug 21, 2009)

i am by no means an expert, but our accountant has advised us to use a holding company to hold the shares of the 'active' company. we own the shares of the holding company. we do intercorporate dividends (not tax), then take dividends out of holdco (taxed at low rate) and no salary.

we can leave the cash in the holdco and even write off more expenses against it. and can take it out any time.

each family member would be set up with a different class of shares so that dividends can be paid out in varying amounts if you choose.

try the calculators at taxtips.ca to show how much tax you would have saved this year alone by using dividends.


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## vimmm (Feb 27, 2011)

Sprocket1200,

Thank you for your reply. It is interesting strategy, but I would like to confirm some things.
My understanding is that you need to have holding company just to protect your savings and there is no tax advantages. That is if somebody sues your active company, they cannot access your savings in the holding company. Is that right?
If you pay everything through dividends, then you do not pay any CPP (and you will not get any pension when retired) and you do not get any RRSP contribution room. Is that correct? If so, then there are some disadvantages here too.

Are you planning to retire earlier and then pay yourself out of holding company? 





sprocket1200 said:


> i am by no means an expert, but our accountant has advised us to use a holding company to hold the shares of the 'active' company. we own the shares of the holding company. we do intercorporate dividends (not tax), then take dividends out of holdco (taxed at low rate) and no salary.
> 
> we can leave the cash in the holdco and even write off more expenses against it. and can take it out any time.
> 
> ...


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## kid5022 (Nov 14, 2010)

i am no tax expert but isn't the point of incorporation to protect your savings?
if someone does sue you they cant go for your personal assets, unless you choose to give it up/collateral etc

if the bizco wasnt set up properly, using a holdco should help in spreading wealth to other family member

i think if you as a person do not get pay a salary in bizco, then most likely no rrsp room no cpp etc

however you can paid yourself a divd instead or taking out a loan(income) from holdco

Note again i am no tax expert(still a student dont quote me)

create holdco own the shares
use bizco as collateral and borrow from bank
use the money borrow and loan to holdco
holdco use the money to purchase bizco from yourself
use the money to repay the bank/do whatever you want with it
with interest rates so low these days it might be worth it to invest after you repay the interest

-hopefully bizco shares are inside rrsp/tfsa so the cg is not tax
-the first loan from bank is use for business purposes and can deduct tax since you are in high tax bracket it might be worth it
-if ur bizco is not in rrsp/tfsa holdco better be...

again i might be wrong, if i am plz let me know 
lots of thanks


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## marina628 (Dec 14, 2010)

We are incorporated , my husband and i take a salary and pay CPP rather than take dividends.We have to take high salaries to support our real estate investments.We were taking a dividend only for first two years but had issues with bank accepting it as income for our mortgages.

kid5022 suggested use bizco as collateral and borrow from bank ,TD Bank values our business at 2.3 million Dollars and only liability is about $200,000 but they always want us to be a personal guarantee for any business loans.
It is because they look at everything such as how many employees the business has etc.My brother in laws have a business for 30 years ,40 employees and own a office building in Toronto and until 5 years ago they always asked one brother to be a personal guarantee of the business .
The situation of OP being a small business/one man show probably needs CPP so I would opt for the paycheck and invest in RSP to get yourself in lower tax bracket.


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## Cal (Jun 17, 2009)

You may want to consult with your accountant about setting up an IPP. Individual Pension Plan....not sure if it would be applicable in your situation, however it may be worth discussing.


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## marina628 (Dec 14, 2010)

Cal said:


> You may want to consult with your accountant about setting up an IPP. Individual Pension Plan....not sure if it would be applicable in your situation, however it may be worth discussing.


We did that and was not worthwhile for us .


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## sprocket1200 (Aug 21, 2009)

vimmm said:


> Sprocket1200,
> 
> Thank you for your reply. It is interesting strategy, but I would like to confirm some things.
> My understanding is that you need to have holding company just to protect your savings and there is no tax advantages. That is if somebody sues your active company, they cannot access your savings in the holding company. Is that right?
> ...


hi Vimm, i can tell you my understanding,
yes, holdco can protect you from various legal actions.

tax advantages as a total may be minimal, it all depends on timing which the holdco is very good at. (holdco is not required to pay any set amount for dividends, you decide.)

no CPP (which is awesome). i have heard that the rate of return on your cpp contributions is around 4%. obviously, it is better if you live past 100, but then when you die there is no nest egg either.

my wife and I looked at her provincial buy out when she quit there and immediately and without hesitation, took the buy out. the payments when she would be retirement age were pennies on the dollar!!

no rrsp contribution room (so no tax liability later!!) use the TFSA or tax efficient investing.

yes we will retire early and pay out of holdco, but when we sell the 'active' business it is my understanding that to get the best tax advantage we will have to pay many of the dividends that same year. (as we will have a capital gain from the sale of the active co shares).

check out taxtips.ca for their tax calculators. i think around $60,000 dividends can be paid out tax free.


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## sprocket1200 (Aug 21, 2009)

marina628 said:


> We are incorporated , my husband and i take a salary and pay CPP rather than take dividends.We have to take high salaries to support our real estate investments.We were taking a dividend only for first two years but had issues with bank accepting it as income for our mortgages.
> 
> kid5022 suggested use bizco as collateral and borrow from bank ,TD Bank values our business at 2.3 million Dollars and only liability is about $200,000 but they always want us to be a personal guarantee for any business loans.
> It is because they look at everything such as how many employees the business has etc.My brother in laws have a business for 30 years ,40 employees and own a office building in Toronto and until 5 years ago they always asked one brother to be a personal guarantee of the business .
> The situation of OP being a small business/one man show probably needs CPP so I would opt for the paycheck and invest in RSP to get yourself in lower tax bracket.


the business is worth millions and they won't accept dividends? something is wrong...


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## vimmm (Feb 27, 2011)

Thanks everybody for replys. It is interesting to exchange ideas with people who are in similar situation.

I choose to go with CPP, because I look at it as:
- In case of my disability, I'll get some money. This is like insurance for me. Could be up to 850$/month - that is better than nothing.
- It is diversified income for my total retirement portfolio. It is not the best investment, but in case something happens to my other money, I'll have at least something.
- My understanding is that even if I'll die, some amount will still go to my wife and dependants (if there will be at that time) through survivor pension.

Just this month I started to look at my retirement very seriously, I even requested and got my CPP statement of contribution. After reviewing it I am OK that I decided to go with CPP, but I understand that some of you have different approach to this.

I'll have to consider creating holding company - but it will depend how my business will go.

I looked at IPP, but that looks like very much "exotic product" - not very popular and not cheap to setup/maintain. I think my RRSP contribution are already enough money in tax shelter - I don't want to have to pay myself too much money when I retired, so I could still get some Old Age Security payments.

By the way, we looked into investing into Real Estate - last summer even went to Florida. At the end we decided to keep everything in stocks/indexes. It is not up to us to be landlords and income did not look that good too. Investing in dividend stocks with average 4% looked easier way to go (for part of our portfolio).

One more question - I understand that there might be big benefit (capital gain break?) if you sell your corporation as small business. Anybody knows more details about this, or I am talking here nonsense? Any info, links, ideas about that?


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## Plugging Along (Jan 3, 2011)

vimmm said:


> Thanks everybody for replys. It is interesting to exchange ideas with people who are in similar situation.
> 
> I choose to go with CPP, because I look at it as:
> - In case of my disability, I'll get some money. This is like insurance for me. Could be up to 850$/month - that is better than nothing.
> ...


One other thing about not taking a salary, is that you cannot claim the childcare deduction if this applies to you. We had our accountant help us calculate our opitmal salary and dividend (you can do both). We made sure we would get the max CPP, plus the max in our childcare, plus our RRSP contributions. Since I work full time already else where, I don't take a salary, just dividends. My spouse will do a combo this year. 

ALso, there is a small business lifetime capital gains. It used to be $500K /per /lifetime. We used ours up years ago, and you will definately want an accountant for this one. I think it's gone up to $750K/per person/lifetime, not sure though. I'm hoping this is true for when we sell our next company. Sorry I don't have the link, the last time we were involved with this, it was through a family company (not mine), I was young, and had the account do the whole thing.


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## vimmm (Feb 27, 2011)

Thanks Plugging Along,

As you used correct term "small business lifetime capital gains", I am now able to find much more info about that. 

And you are very right about childcare deduction - it still applies to me. Just another plus for paying myself salary and not dividends.


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## sprocket1200 (Aug 21, 2009)

vimmm said:


> Thanks Plugging Along,
> 
> As you used correct term "small business lifetime capital gains", I am now able to find much more info about that.
> 
> And you are very right about childcare deduction - it still applies to me. Just another plus for paying myself salary and not dividends.


hey guys, i just had the cap gain discussion with my accountant on Friday. the tax is about 7% of total gain (15% on half the gain, net). the reason is that he says if you take the dividends out of holdco in the same year you can claim back the taxes that were 'prepaid' (i think called RTOH, return on something).

as for cpp, yes you do want to take a small salary. $3,500 is the current limit before you have to start paying the CPP. paying CPP rates is even worse for owners as you must pay both the employee and employer portions!

as for childcare deduction, it comes off of net income on line 214 of tax return. dividends have already been added in, so far as I know, it can come off those too. dividends are also used in the calculation of CCTB and other benefits. even EI payments are included.

be aware that dividends are grossed up, so you need to keep them lower than you would think to be fully eligible for the cash...


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