CIBC - Consumer Research and Advice-RRSPs are a smart choice for
A new poll, however, finds that corporate investing is still as popular as investing in an RRSP
TORONTO, Feb. 9, 2017 /CNW/ - CIBC (TSX: CM) (NYSE: CM) – While business owners in Canada often choose to invest excess funds in an investment account held by their corporation, a new report by CIBC Wealth Strategies Group finds that the better choice in the long run is generally investing in an Registered Retirement Savings Plan (RRSP).
"When it comes to their retirement savings, incorporated professionals and entrepreneurs with incorporated businesses have two main options of deferring taxes on business profits: either leave excess funds in the corporation for investing, or withdraw the funds and invest in an individual RRSP," says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Wealth Strategies Group.
"For years, they've always had this dilemma: Which is the better choice?"
Due to various changes in recent years to the taxation of corporations and their shareholders, the answer today is investing in RRSPs, he says.
In his report RRSPs: A Smart Choice for Business Owners, Mr. Golombek compares corporate investing to investing in an RRSP. Using various scenarios, he illustrates that business owners and practicing members of most professions -- law, medicine, engineering, architecture or accounting – who have incorporated would be better off paying themselves a salary and investing in an RRSP than leaving excess funds in the corporation for investment.
According to a new CIBC poll, the vast majority (87 per cent) of Canadian business owners are holding excess profits in their corporation. When asked what they plan to do with the profits or excess funds, they indicated they are more apt to invest in a corporate investment account than an RRSP. They cited the following as their top plans:
- Reinvesting (39 per cent) extra funds back into the business for day-to-day operations
- Withdrawing (33 per cent) the funds for personal or family use
- Investing funds (27 per cent) in an investment account within their corporation
- Contributing to a Tax-Free Savings Account (TFSA) (24 per cent)
- Contributing to an RRSP (21 per cent) or spousal RRSP (11 per cent)
Unlike investing in a non-registered account, as outlined in his previous reports, Bye-bye Bonus and The Compensation Conundrum, Mr. Golombek says that business owners who pay themselves with salary, rather than dividends, may benefit from tax-deferred savings with an RRSP.
"Business owners who want to get the most from their investments over the longer term should probably consider taking sufficient salary to maximize RRSP contributions," he says.
There are exceptions to the rule, he adds. For example, over short time horizons, corporate investing can beat RRSP investing. Also, depending on your portfolio construction, if you are able defer 100 per cent of any capital gains and realize no annual income, corporate investments will always yield a greater amount than an RRSP. But, realistically, few investors are likely to be able to defer 100 per cent of their capital gains over a long period of time, the report notes.
RRSPs aren't the only smart choice for business owners. Investing in TFSAs may also yield better results than investing in your corporation, as described in the report TFSAs for Business Owners.
"Many variables may affect your decision to invest excess funds through your corporation or withdraw them and contribute to an RRSP or TFSA, but the bottom line is that over time, an RRSP or TFSA will likely leave you with more in your pocket than corporate investing," says Mr. Golombek.
March 1, 2017 is the deadline for making a 2016 RRSP contribution.
To find out about your RRSP and TFSA contribution limits, you can now log in to the Canada Revenue Agency website with your CIBC client card number and password via the SecureKey® Sign-In Partner option.
2017 CIBC Small Business Poll Disclaimer
From January 20 to 23, 2017, an online survey was conducted among 526 randomly selected small, medium and large business owners and senior professionals (vice president level and above) from across Canada who are Angus Reid Forum panellsts. For comparison purposes, a probability sample of this size has a margin of error of +/- 4.2%, 19 times out of 20.
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