Hi everyone, I was just catching up on some reading and updates when I came accross this information on the last Federal Budget. I found it written very well by a respected individual and thought you might find it informative. I hope you enjoy the read. Harvey
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.
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 First, if you need the cash, depending on your province of residence, you may actually pay more tax on the funds withdrawn as a salary than if the same funds were taxed to the corporation and then withdrawn as dividends.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.”