How to Save Taxes with Corporate Investment Strategies

Are you leaving money on the table through missed tax opportunities? As an entrepreneur, every dollar saved in taxes directly impacts your company’s growth potential. While basic tax planning is common practice, it has been proven that targeted corporate investment strategies can create significant tax advantages for Canadian businesses. By implementing sophisticated tax optimization techniques, companies can achieve both immediate savings and long-term financial growth.

Let’s take a look at some corporate tax-saving strategies that we hope will help you keep more money for your business and personal goals.

When your business is generating profits, it can be tempting to withdraw funds from it to invest in personal accounts such as RRSPs or TFSAs. This strategy is valuable in itself, but since every situation is unique, it may not be the best option for you. One of the most effective tax optimization techniques is to keep as much money as possible within the company.

By investing within your corporation, you can take advantage of lower corporate tax rates. This means your investments grow faster, as there’s more capital to work with from the start. We can help you set up a tax-efficient corporate structure that maximizes your investment potential.

When it comes to corporate investment strategies, not all types of income are created equal. Interest income is taxed at the highest rate, while capital gains receive preferential tax treatment. By focusing your corporate investments on assets that generate capital gains, you can significantly reduce your overall tax burden.

Some examples of investments that can generate capital gains include:

• Stocks and equity ETFs
• Corporate-class mutual funds

These investments can help lower your tax payable and create Capital Dividend Account (CDA) credits, allowing for tax-free withdrawals from your corporation.

Learn more about Capital Gains Tax Rules

The Capital Dividend Account (CDA) is a powerful tool for tax minimization in Canadian-Controlled Private Corporations (CCPCs). This account allows you to withdraw certain types of income from your corporation tax-free. The most common sources of CDA credits are:

• The non-taxable portion of capital gains
• Life insurance proceeds received by the corporation

For example, if your corporation earns a $100,000 capital gain, 66.67% ($66,670) is taxable, while the other 33.33% ($33,330) can be withdrawn tax-free using the CDA. This strategy can lead to substantial tax savings over time.**

**Note: This example reflects the Lifetime Capital Gains Exemption (LCGE) changes proposed in June 2024. However, recent political developments, including Prime Minister Justin Trudeau’s resignation and the prorogation of Parliament until March 24, 2025, have introduced uncertainty regarding these tax changes. Given this situation, it is advisable to consult a tax professional to stay informed of potential legislative changes that could impact your tax planning strategies.

Despite changes in recent years, corporate-class mutual funds remain an effective investment strategy that offers unique tax advantages for businesses.

• Corporate-class funds can offset income and capital gains from one fund with expenses and capital losses from another, potentially reducing taxable distribution.
• These funds only distribute Canadian dividends, capital gains, or return of capital, avoiding less tax-efficient interest income and foreign dividends.
• Corporate-class funds can effectively convert interest income into tax-deferred capital gains.

Using corporate-class mutual funds helps retain more investment earnings, enabling faster capital growth. This strategy is particularly useful for business owners who have maximized their RRSP and TFSA contributions and seek tax-efficient options for non-registered accounts.

Life insurance isn’t just about protecting your family; it can also be a valuable corporate investment strategy. When your corporation owns a life insurance policy, several tax advantages come into play:

• Premiums are paid with corporate dollars taxed at a lower rate compared to personal tax rates, which can be as high as 50%.
• Death benefits can be paid out tax-free to your beneficiaries through the CDA.
• Certain policies can be used as tax-efficient investment vehicles to supplement your retirement income.

By ensuring that your corporation is both the owner and beneficiary of any life insurance policy, you can maximize these benefits and ensure that proceeds can be distributed tax-free to your beneficiaries through the corporation, avoiding personal taxes on death.

We can help you determine if corporate-owned life insurance fits into your overall wealth management strategy and how it can contribute to your tax efficiency goals.

Read more on Corporate-Owned Life Insurance

Effective business investment requires strategic vision. With the right tax-efficient investment structures, business owners can turn what they save today into substantial long-term wealth that will benefit both their business and their personal goals. It’s about making every dollar work smarter, not harder.

– Darren St-Georges, Senior Wealth Management Advisor at The St-Georges Group – Assante Capital Management Ltd.

Finding the right balance between salary and dividends is a crucial aspect of corporate tax efficiency. While salaries are deductible for the corporation, they’re fully taxable for the recipient. Dividends, on the other hand, are paid from after-tax corporate profits but receive preferential tax treatment at the personal level.

The optimal mix depends on various factors, including:

• Your personal income needs
• The corporation’s income level and profitability
• Your retirement plan and desire to contribute to CPP and build RRSP room

Generally speaking, opting for dividends is a good option from a personal tax point of view, as it allows you to keep more of your income, which can then be used for personal investments. But there’s more to it than that. As your business and personal situation evolve, your compensation strategy will also need to evolve to better match your personal financial goals and the profitability of your business. By working with a tax expert, you’ll be able to find the perfect balance between salary and dividends that will minimize your overall tax burden while meeting your financial needs.

An Individual Pension Plan (IPP) is another effective strategy for business owners looking to save on taxes while building retirement savings. An IPP is a defined benefit pension plan designed specifically for incorporated business owners and key employees. Here are some key benefits:

• Tax Deductibility: Contributions made by corporations to fund an IPP are fully deductible from corporate income, reducing taxable income.
• Higher Contribution Limits: Compared to RRSPs, IPPs allow for higher contribution limits based on age and service years, enabling significant retirement savings.
• Past Service Contributions: An IPP can also provide funding for past service years, allowing business owners to catch up on retirement savings.
• Tax Deferral: Like RRSPs, funds within an IPP grow on a tax-deferred basis until withdrawal.

Setting up an IPP requires careful planning and compliance with regulatory requirements, but it can be an excellent addition to your corporate investment strategies.

The Canadian, Quebec, and Ontario governments offer various tax incentives and credits to encourage business growth and innovation. Some of these include the Scientific Research and Experimental Development (SR&ED) tax credit, the Small Business Deduction (SBD), and the Manufacturing and Processing tax credit (Ontario only).

By taking advantage of these programs, you can reduce your corporate income tax and free up more capital for investment and growth.

Strategic corporate investments and tax planning are essential to maximize your company’s financial potential. As a business owner, implementing these key tax-saving strategies can significantly reduce your tax burden while creating long-term wealth. So it’s essential that you work with qualified investment, tax, and wealth management advisors who can help you tailor these strategies to your specific situation, ensuring that you take full advantage of the available tax benefits while maintaining compliance with Canadian and Quebec tax regulations. Remember, every dollar saved in taxes is another dollar that can be reinvested in the growth and success of your business.

At The St-Georges Groupe, our team of experienced Assante Capital Management professionals is here to support you as your business grows and evolves and to adapt your tax and investment strategies accordingly. Contact us to schedule a free consultation and see how we can help.