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.
About CIBC
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11 million personal banking and business clients. Through our three
major business units - Retail and Business Banking, Wealth
Management and Capital Markets - CIBC offers a full range of
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SOURCE CIBC - Consumer Research and Advice