The Dirty Truth About RRSP Contributions For Business Owners
I generally don’t recommend RRSP contributions for business owners because of the restrictions in the investments that can be made within an RRSP and that the minimum amounts that have to be withdrawn in retirement are out of your control. What I recommend for business owners is to have a holding company for their investments and they can hold the exact same investments that they hold in their RRSPs, if that’s what they want to invest in.
The business owners do not have to withdraw cash from their operating business as wages, then invest the after tax amount. Tax free dividends can be paid from the operating company to the holding company, under the right structure, and those higher amounts can be invested.
The big difference is you are not restricted through a trust company and the rules of the Tax Act as you are with an RRSP. You maintain control going in and out.
A recent article in the Vancouver Sun quotes David Sung, president of Nicola Wealth Management, arguing “small business owners and incorporated professionals should not make RRSP contributions if they are making under $500,000 in after-expense corporate profits.”
Furthermore, Sung goes on to say that it’s probably best not to take a salary at all. Alternatively, you should pay your small business corporate taxes and take just enough dividends to live on, ultimately paying less tax today and having more cash to invest. (See full article for more details)
This philosophy is in line with the views expressed in my recent article, Wages Vs Dividends Income For Business Owners, but goes deep into the specifics of a no-RRSP strategy whereas I avoided going in that direction for the sake of keeping on topic.
- No salary means no CPP contributions (more money in your pocket)
- RRSP contributions for business owners or incorporated professional is not ideal but are great for employees
- CPP is more of a tax than a savings vehicle for business owners (you pay both sides)
- Better savings can be achieved with a no-RRSP strategy but it requires more management and planning (hard work pays off)
- A holding company that handles all investments is your best option, if investments similar to those allowed in an RRSP are what you want to invest in
Have a business-related question that you want answered by Kelowna accountant, Ken Davidson? Tweet it @KenDavidsonCA or leave a message in the comments below!
About the Author
Ken Davidson is a Chartered Accountant with BDO Canada LLP, with their Kelowna accounting firm. Ken specializes in helping Kelowna businesses that are in start-up mode, companies in Kelowna that are in their growth phase and are ready to take their revenues to the next level, and professionals to secure their financial future with solid investment advice. Ken is best known for his strategic planning advice that positions him as a trusted advisor above and beyond being a Kelowna accountant that gives typical tax planning advice. To contact Ken for a Strategic Business Review to learn how he may be able to help your Kelowna business, email him at firstname.lastname@example.org.
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