Knowing when to keep funds in your corporation can mean greater wealth accumulation
TORONTO, Oct. 23, 2014 /CNW/ - CIBC (TSX: CM) (NYSE: CM) If you don't need funds personally from your business, after-tax investment income should generally be retained in your corporation, finds a new report by Jamie Golombek, CIBC's Managing Director of Tax and Estate Planning.
"Now is the time for small business owners to look at the taxes that arise when corporate funds are invested, and whether to reinvest the after-tax income or pay it out," says Mr. Golombek. "If you don't need funds for personal use, there are often clear benefits to keeping after-tax investment income in your business."
When it comes to earning investment income inside your corporation, the amount of taxes paid depends on the type of income earned, such as interest income, Canadian dividends or capital gains. Similarly, the amount you get to keep depends on how well the corporate tax system is integrated with the personal tax rates in your province, he says.
In his latest report, In Good Company, Mr. Golombek examines the tax impact on various types of investment income in a corporation by province, and shows that it may be best to retain after-tax investment income in your corporation due to an investment advantage.
"There is an investment advantage for most types of investment income in the majority of provinces in Canada," says Mr. Golombek. "The larger the investment advantage, the bigger the benefit from leaving after-tax investment income in your corporation for re-investment."
When there is an investment disadvantage -- less after-tax investment income is available in your corporation -- you are better off distributing the after-tax investment income as dividends to yourself and/or other shareholders in the year it is earned and re-investing the remaining funds personally, he says.
Mr. Golombek adds that the non-taxable portion of capital gains should be distributed as capital dividends as soon as possible in all provinces. Paying capital dividends will prevent future capital losses from reducing your tax-free capital dividends, he says.
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SOURCE: Canadian Imperial Bank of Commerce
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