Protection for your business and the people who make it a success.
If you’ve been stressing yourself out over whether to put money into your RRSP or the new(er) TFSA, here’s a video with Jamie Golombek (Managing Director of Tax and Estate Planning at CIBC Private Wealth management) where he discusses the results of his analysis of the relative tax benefits of the two options.
Spoiler Alert: There is no wrong choice.
March 1, 2011, is the deadline for contributing to an RRSP for the 2010 tax year.
Just by virtue of your being here and reading this, I can make a fairly safe guess that you know what an RRSP is, and why you would want to contribute to one. If not, that’s ok too; just trust me for now that it’s probably a good idea for you.
There is still time for you to make a contribution to your RRSP (or start a new one) and have it count for your 2010 taxes. If you have already contributed the maximum amount for that year, then it’s a good time to start putting money away for 2011. Earlier is better, which is one of five basic investing strategies listed in the Globe and Mail’s “A tale of two RRSPs”
- Increase your annual contribution
- Contribute early in the year
- Start contributing early in life
- Contribute longer by retiring later
- Earn a higher rate of return
The article then offers a very nice, simple, calculator that allows you to compare two different RRSP scenarios; for example, different retirement ages or contribution amounts. I highly recommend taking a look, playing with some numbers, and seeing just how important it is for you to make contributions to your RRSP, no matter how young you are.
Business owners tend to pay themselves enough each year to ensure they can maximize their RRSP contributions. Yet given the tax deferral opportunities available to small businesses, Jamie Golombek concludes that leaving funds in the company may make more sense than taking a salary.
If you’re an incorporated small business owner, chances are you’ve probably been advised at one time or another to pay yourself at least enough salary from your corporation to allow you to contribute the maximum amount to an RRSP. This is because the ability to contribute to an RRSP is dependent on receiving “earned income” in the prior year. Earned income includes salary and bonuses but does not include dividends. Subject to an annual cap, the annual RRSP contribution limit is calculated as 18 per cent of the prior year’s earned income. For example, in 2010, you would have to receive a salary of at least $124,722 to be able to contribute the maximum amount to an RRSP ($22,450) for 2011.
There are potentially two flaws with this reasoning, at least for Canadian-controlled private corporations (CCPC) with taxable income subject to the preferred corporate small business tax rate. First, if you need the cash, depending on your province of residence, you may actually pay more tax on the funds withdrawn as a salary than if the same funds were taxed to the corporation and then withdrawn as dividends. Second, if you don’t need the cash, you give up a significant tax deferral by withdrawing the funds as a salary to be taxed immediately rather than leaving the cash in the corporation to be taxed at a much lower small business corporate tax rate.
These two points are based on what is commonly known as the “theory of integration.”
You can read the rest of Jamie’s article here.