Can my corporation fund my retirement instead of an RRSP?
Option 1: invest inside the corporation
Pay yourself what you need to live on, leave the surplus in the company. Because corporate active income is taxed at the small business rate, roughly 40 cents more of every surplus dollar is left to invest compared with paying it out and investing personally at a top rate. Over 20 years that difference compounds into a great deal of money.
The trap: once passive investment income inside the corporation exceeds $50,000 in a year, your small business deduction limit shrinks by $5 for every $1 over, disappearing at $150,000. Then your practice or business income is taxed at the general rate (roughly 23 to 30%) instead. Managing investments to stay clear of that line is a core part of the plan. The passive income rule explained →
Option 2: an Individual Pension Plan
An IPP is a defined-benefit pension your corporation sets up for you. Contributions are made and deducted by the corporation, and because the allowed contribution rises with age, a 50-year-old can put in substantially more than the RRSP limit. Past service can often be funded as well. It suits owners over about 40 with stable corporate income who intend to keep the corporation running for years.
Option 3: corporately owned insurance
Certain permanent policies owned by the corporation grow on a tax-sheltered basis and, at death, can pay out through the capital dividend account tax-free to the estate. It's an estate and tax tool rather than a retirement income tool, but it often sits alongside the other two in a complete plan.
What about the RRSP?
If you pay yourself salary, you still build RRSP room and should usually use it. Dividends don't create room. The salary/dividend decision and the retirement plan are the same conversation. Salary or dividends? →
Who needs to be in the room
Your accountant, for the tax filings and the salary/dividend mix. A lawyer, if the structure changes. And us, to build and run the plan. We talk to each other so you don't have to translate.
Want this worked out for your numbers? We'll look at your corporation with your accountant and show you what to do with the money inside it.
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