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Why It’s a Mistake for Business Owners to Invest in an RRSP

By Kaylin Fitzsimons

Don’t get us wrong, registered retirement savings plans (RRSPs) are great for employees and business owners who have uncertain annual profits. But for highly successful business owners, many have found that their business is their best investment and their best tax shelter! Therefore, the money retained in your corporation becomes your pension plan, whether it be accounts receivable, property, passive investments, and/or permanent life insurance policies.

With proper financial planning, passive investments in your corporation can help you lower the taxes you pay to fund your lifestyle at each stage of life. Here are 3 reasons why it may be a mistake for business owners to invest in an RRSP.

Saving in Your Corporation vs. Saving in an RRSP

Since business owners pay either 12.2% or 26.5% in tax on income earned and then contributed to an RRSP, keeping funds in the business can often be a better move tax-wise. It will help you accumulate more wealth on an after-tax basis that can be used to fund your lifestyle.

For instance, time in the market with passive investments in your company could potentially generate capital gains that are taxed at as little as 10%. In this case, you have 90% left over to use as you see fit. You can take 50% of the gain as tax-free dividends to spend on your current lifestyle and leave 40% retained in your company for retirement. These capital gains take time to accumulate, but it is a great way to plan for large expenses such as college education for your children or planning for your dream retirement lifestyle.

Do You Really Expect to Receive Retirement Income From the Canadian Pension Plan?

In order to qualify for the annual RRSP contribution, you must take wages as income, which requires a contribution to the Canadian Pension Plan (CPP). As a business owner, you are considered both the employer and employee, which means you mustmake both contributions to the CPP.

Many successful business owners prefer to take dividends annually to fund their lifestyle instead of taking wages so they are able to keep the wealth that would have gone

to CPP in their corporation to fund their own retirement rather than relying on the governments CPP.

High Taxes on RRSP Income in Retirement

When you convert your RRSP to a Registered Retirement Income Fund (RRIF) at retirement, the income received will be subject to tax. Depending on your tax bracket, you could be paying tax at the highest marginal rate.

Alternatively, your retirement assets in your company can be structured to provide you with retirement income in the form of eligible dividends, tax-free dividends, return of capital, and insured retirement plans. In this case, you have the control and flexibility to minimize the tax you pay in retirement.

In short, the earlier you invest in your company rather than an RRSP, the more you are able to enhance your lifestyle, and create more wealth for retirement.

Keeping Your Wealth in Your Business

An RRSP is a useful tool for saving for retirement, but it doesn’t always make the most sense for successful business owners. There are other ways to retain wealth in your business and build a tax-efficient stream of income in retirement. To learn more about how to use your business wealth to fund your future lifestyle, reach out to us today! Call 416-792-2333 or email to get started today.

About Kaylin

Kaylin Fitzsimons is an Insurance Advisor at Lifecycle Wealth, providing tax-efficient insurance solutions to high-net-worth professionals and business owners in Ontario, Canada. She is also an investment advisor at Mandeville Private Client Inc., which allows her to offer a wide range of investment options to her clients, including private and alternative fund solutions. Kaylin is focused on using insurance to add value to her clients’ lives and designing investment portfolios that allow her clients to minimize taxes. Kaylin is dedicated to helping her clients save money, make the most of their hard work, and experience confidence that their businesses and families are protected through tailored strategies.

Kaylin graduated from Western University with a Bachelor of Management and Organizational Studies. In her free time, she enjoys cooking or visiting her favorite restaurants, traveling, spending time with her son, and learning about different cultures. To learn more about Kaylin, connect with her on LinkedIn.

This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice. Many factors unknown to us may affect the applicability of any statement or comment made in this publication to your particular circumstances. Hence, you should not rely on the information in this publication for investment, financial, legal tax or accounting advice. You should consult your financial advisor or other professionals before acting on any information in this communication.


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