The RRSP vs. Corporation Dilemma

Hello All,

The RRSP vs. Corporation Dilemma

A common question from incorporated business owners who have money in their corporation is "Should I contribute to my RRSP, or should I leave the money inside my corporation and invest it there?"

The challenge is that there are several different "buckets" available, each with its own pros and cons. As with most of these questions, the answer depends on your situation.

But, understanding the options can help you make a better decision.

Don't Overlook the TFSA

Before comparing RRSPs and corporate investing, it's worth mentioning the Tax-Free Savings Account.

Unlike an RRSP, TFSA contributions are not tax deductible. But investment growth and withdrawals are generally tax-free, which over time can result in significant tax savings. For all Canadians, the TFSA is one of the simplest and most flexible ways to build wealth. If you do have unused contribution room, it's often worth maxing out your contributions before moving on to more complex strategies.

The Case for RRSPs

RRSPs are one of the best ways to save for retirement and reduce your tax bill.

The biggest advantage is that you get tax deduction right away. Contributions reduce your taxable income, which can create significant savings especially if you're in a higher tax bracket. Your investments then grow on a tax-deferred basis until you withdraw.

One important consideration for incorporated business owners specifically is that RRSP contribution room is generated through earned income, which generally means salary. If you pay yourself exclusively through dividends, you won't be creating new RRSP room. This is one of the reasons the salary versus dividends decision isn't purely a tax calculation.

The Case for Corporate Investing

Investing through your corporation also happens on a tax deferred basis, but is a bit different from investing in RRSPs.

Because corporate tax rates on active business income are usually lower than personal tax rates, you will often have significantly more cash to invest if you leave funds inside the corporation rather than withdrawing them personally. Instead of taking profits out, paying personal tax, and investing what remains, you keep the amount before paying personal taxes and let it compound within the corporation.

That said, corporate investing comes with its own complexity. Investment income earned inside a corporation is subject to specific tax rules that are quite different from personal investing. And eventually you'll need to have a plan about how and when those funds come out personally because they will be taxed at personal tax rates at some point.

I put together a video and podcast episode on this topic if you want a straightforward overview of how corporate investing actually works.

Watch the video: https://youtu.be/eivpJOGpP5s

Listen to the podcast episode: https://podcasts.apple.com/ca/podcast/the-incorporated-canadian/id1896885965

So Which Is Better?

The honest answer is that it varies but in most cases is some combination of the three.

The key factors that will help shape your decision include your current personal tax bracket, how much TFSA and RRSP room you have available, how much income you need personally right now, your investment time horizon, your retirement plans, and your corporation's current financial position.

In most cases, the answer isn't RRSP or corporate investing. It's a combination of TFSA, RRSP, and corporate investments working together.

In practice most incorporated business owners are underutilizing at least one of these buckets, because it is not always clear how they interact. Getting that clarity is often the difference between a reactive investing strategy and an intentional one.

I'd love to hear where you're at in terms of your investing and what you find challenging. Simply reply to this email and let me know.

Ronika