Receiving a salary creates RRSP room for the business owner, and most business owners will have more after-tax income in retirement if they contribute to their RRSP compared to forgoing RRSP contributions and only saving in their corporation. However, RRSP contributions may not be advantageous for a business owner who is in a lower tax bracket during their working years than in retirement.
TFSA contributions also generally make sense. This is particularly true for business owners whose income is below the top tax bracket or who are more conservative investors. Building cash in a TFSA can also come in handy for a business owner who expects to need a large withdrawal from their corporation in the future (for a renovation, car purchase, etc.); they might be able to pay less tax by spreading the income over multiple tax years.
So, I am generally on board with the RRSP and TFSA contributions you are making, Varinder. On real estate, I might take a different approach.
Using a corporation to invest in real estate
Unlike an individual, a corporation cannot have an RRSP or TFSA. A corporation can buy real estate, though.
If a corporation buys a rental property, it will generally need a 20% down payment, just as an individual would. A corporation may pay a slightly higher mortgage rate than an individual because a corporation tends not to have the same credit history. A corporation also has limited liability, so it may be less adversely impacted by not making mortgage payments. An individual’s credit rating is more valuable, giving non-corporate borrowers more reason to say on top of their payments.
The real benefit of investing in real estate using your corporation, Varinder, is to avoid the tax hit on taking a withdrawal. Depending on your income and province or territory of residence, the tax payable to withdraw money from your corporation for a personal down payment could be 40% or more. That only leaves you with $0.60 out of $1 to invest, compared to having the full dollar to use if you buy real estate corporately.
When you buy investments in your corporation, you may be exposing those investments to corporate creditors. So, if you get sued, your corporate investments may be exposed. This may not be a big deal for someone running a business with few liabilities, such as a company that designs websites. But for a trucking business, I suspect you have lots of potential liability.
When should you create a holding company?
Should you decide to buy real estate corporately, you may want to consider setting up a second corporation, Varinder. The purpose would be to transfer cash to invest, on a tax deferred basis, from your operating company to the new corporation. This new corporation would be referred to as a “holding company,” because its purpose would be to hold investments.
