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Receiving a salary makes RRSP room for the business owner, and most business owners will have more after-tax income in retirement if they contribute to their RRSP than their RRSP contributions and save only with their corporation. Huh. However, RRSP contributions may not be beneficial for a business owner who is in a lower tax bracket during his working years than in retirement.
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TFSA contributions also generally make sense. This is especially true for business owners whose income is below the top tax bracket or who are more conservative investors. The build-up of cash in a TFSA can also be useful for a business owner who expects to require large withdrawals from his corporation in the future (for renovations, car purchases, etc.); They may be able to pay less tax by spreading the income over several tax years.
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So, I am in general with the RRSP and TFSA contributions you are making, Varinder. On real estate, I might take a different approach.
Using a corporation to invest in real estate
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Unlike an individual, a corporation cannot have an RRSP or TFSA. A corporation can buy real estate, however.
If a corporation purchases rental property, it will typically require a 20% down payment, just like an individual. A corporation may pay a slightly higher mortgage rate than an individual because a corporation does not have the same credit history. A corporation also has limited liability, so non-payment of the mortgage may have less adverse impact on it. A person’s credit rating is worth more, which gives non-corporate borrowers more reason to have a say on top of their payments.
The real benefit of investing in real estate using your corporation, Varinder is to avoid the tax hit on taking withdrawals. Depending on your income and the province or area of residence, the tax payable for withdrawing money from your corporation for an individual down payment can be 40% or more. You are left with only $0.60 out of $1 to invest, compared to having full dollars to use if you buy real estate corporately.
When you buy investments in your corporation, you may be exposing those investments to corporate creditors. Therefore, if you are prosecuted, your corporate investments could be exposed. This may not be a big deal for someone running a business with few liabilities, such as a website designing company. But for a trucking business, I suspect you have too many potential liabilities.
When Should You Form a Holding Company?
If you decide to buy real estate corporately, you may consider setting up a second corporation, Varinder. Its purpose will be to transfer cash from your operating company to the new corporation to invest on a tax-deferred basis. This new corporation will be referred to as the “holding company”, as it will be intended to make investments.
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