For incorporated professionals, determining the best way to grow their savings is not a given!
Some of the questions that always come up are: “Where should I accumulate my annual surpluses? Is it preferable to withdraw an additional amount from my corporation to maximize my TFSA? Or should I simply let all the surpluses grow in my corporation?”
Unfortunately there’s no universal answer, since the decision depends on a number of factors, the most important being your asset allocation.
A factor to consider: taxation
The major difference between saving in your TFSA and leaving the surpluses in your corporation is the fact that the returns generated in the TFSA are not taxable, whereas they are taxable in the corporation. However, you should know that the amounts you want to contribute to your TFSA will first have to be withdrawn from your corporation and that this income will then be taxed immediately.
Bond portfolio versus stock portfolio
If your risk tolerance is such that it is preferable for you to hold investments that generate interest income, you will be better off investing these amounts in your TFSA rather than in your corporation. Conversely, if the investments in your corporation are concentrated in stocks, it is not tax advantageous to contribute to your TFSA.
Example
The tables below show the results you can expect if you contribute to your TFSA (scenario 1) or leave the surpluses in your corporation (scenario 2).
| SCENARIO 1 BOND PORTFOLIO |
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|---|---|---|---|---|
| INTEREST INCOME 3.9% | ||||
| Years | COMPANY INVESTMENTS |
RTDOH1 | NET TO THE SHAREHOLDER |
TFSA |
| 0 | $11,163 | – | $6,000 | $6,000 |
| 5 | $12,288 | $694 | $6,978 | $7,265 |
| 10 | $13,527 | $1,458 | $8,054 | $8,796 |
| 15 | $14,890 | $2,299 | $9,239 | $10,651 |
| 20 | $16,392 | $3,224 | $10,544 | $12,896 |
| 25 | $18,044 | $4,243 | $11,979 | $15,615 |
|
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| SCENARIO 2 STOCK PORTFOLIO |
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|---|---|---|---|---|
| CAPITAL GAIN RETURN 6.4% | ||||
| Years | COMPANY INVESTMENTS |
RTDOH1 | NET TO THE SHAREHOLDER |
TFSA |
| 0 | $11,163 | – | $6,000 | $6,000 |
| 5 | $14,106 | $603 | $8,815 | $8,182 |
| 10 | $17,825 | $1,364 | $12,372 | $11,158 |
| 15 | $22,524 | $2,327 | $16,867 | $15,215 |
| 20 | $28,463 | $3,543 | $22,547 | $20,748 |
| 25 | $35,967 | $5,080 | $29,725 | $28,294 |
|
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1 RTDOH stands for refundable tax dividend on hand. It is an account for overpayment of tax on a corporation’s investment income. This tax paid in advance is, however, recovered by the corporation when it pays dividends to the shareholder.
A theory on the subject states, however, that regardless of your investor profile, it is preferable to maximize your TFSA each year, because no one knows what the tax rules will be in 20 or 30 years. The best strategy is undoubtedly to allocate your investments among different vehicles and to diversify them to protect against the tax changes that will inevitably occur.
Our experts at your service
To help you make the best financial decisions, don’t hesitate to call upon your Wealth Management Advisor. Together, you can discuss your situation and, with the help of our tax specialists, he can recommend the best action plan to protect your wealth. You can count on his expertise!
