Entrepreneurship & Small Business

Putting corporation on hold - investing inside corporation for now

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  • Jul 21st, 2016 6:06 pm
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[OP]
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Sep 15, 2008
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Putting corporation on hold - investing inside corporation for now

Currently I am an IT consultant, and I've built up some small savings of retained earnings in my corporation. I've only been doing this for about a year, but due to changes in my personal situation, I am considering going full-time at my current placement.

Going full time leaves me with the question of what to do with the current retained earnings sitting in the corporation. I could leave them at my Tangerine business account yielding a low rate of return on interest, but I'd like to know if I can purchase some stocks instead (e.g. take 25% of the retained earnings and buy a fixed income ETF, another 25% and put it into a broad market ETF, and leave the remaining 50% in case I go back to being an independent, and I need some start-up capital before regular invoicing kicks in again).

Does anybody have any insights into this?
  1. Does the corporation become "inactive"?
  2. If I am purchasing stocks, I see that as an Asset-to-Asset transaction (i.e. using a cash asset to purchase a stock asset), not an Asset-to-Expense (i.e. purchasing stock is not an "expense", so I would not list it as an (non-)operating expense) transaction. So how am I taxed on this? It is not an "expense" but I have "spent" the money.
For #2, example:

Say I have revenue of $100,000
Salary of $50,000
Business expenses of $10,000

That leaves me with $40,000 of net income at the end of the year.. If I purchase $15,000 in stocks, am I taxed on $40,000 (the "real value" of my assets for that fiscal year), or on $25,000 (i.e. remaining net income after taking out the $15,000 non-operating expense)?

Thanks,
-10d
Photographer, Traveler, Small Time Investor, Project Manager, Grease Monkey, Trance Addict. 'nuff said. :D
10 replies
Deal Addict
Dec 31, 2006
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Purchasing investments in a company isn't a taxable event - but income earned and future capital gains would be.

Taxed at high rate in income earned by the investments. Portion refundable if taxable dividend is paid to yourself in future.

Low rate tax on business income earned in corporation (if any).
I am a friendly Koodo customer and AMEX customer.
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Jun 12, 2015
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Ontario
Stocks are not expenses. All you're doing is exchanging cash for investments which are capitalized and therefore not expensed.

You're taxed on dividends and capital gains. The tax on dividends isn't really a tax since you'll get it back if you pay yourself taxable dividend. Bit technical but it's called part 4 tax and you pay yourself dividends from rdtoh at which you get back the tax on the dividends.

Anyways investment income is taxed at highest rate which is why it's generally not recommended to invest with corporations.
[OP]
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Sep 15, 2008
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Dynasty12345 wrote:
Jul 19th, 2016 5:51 pm
Stocks are not expenses. All you're doing is exchanging cash for investments which are capitalized and therefore not expensed.
Thanks; that is the asset-to-asset example I cited above.
Dynasty12345 wrote:
Jul 19th, 2016 5:51 pm
You're taxed on dividends and capital gains. The tax on dividends isn't really a tax since you'll get it back if you pay yourself taxable dividend. Bit technical but it's called part 4 tax and you pay yourself dividends from rdtoh at which you get back the tax on the dividends.

Anyways investment income is taxed at highest rate which is why it's generally not recommended to invest with corporations.
Understand this too, but I am not concerned about the dividends at this point -- that is a "future me" issue. But what is "rdtoh"?

What I want to know is, for the year in which the investments are purchased, what would be the taxable net income for that year? Assuming that my tax rate is 16% for the year, looking at my original example, would I be taxed 16% on $40,000, or on $25,000?

I believe where I am getting tripped up is on the capitalization...In my mind when you "capitalize" something there is a depreciation component. However, stocks should not have a depreciation component, unless I am missing something?
Photographer, Traveler, Small Time Investor, Project Manager, Grease Monkey, Trance Addict. 'nuff said. :D
Deal Addict
Dec 31, 2006
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Dynasty12345 wrote:
Jul 19th, 2016 5:51 pm
Stocks are not expenses. All you're doing is exchanging cash for investments which are capitalized and therefore not expensed.

You're taxed on dividends and capital gains. The tax on dividends isn't really a tax since you'll get it back if you pay yourself taxable dividend. Bit technical but it's called part 4 tax and you pay yourself dividends from rdtoh at which you get back the tax on the dividends.

Anyways investment income is taxed at highest rate which is why it's generally not recommended to invest with corporations.
It's not bad to invest in a corporation - he earned income at a low rate tax, and left the money in the corporation to invest which gives him more $ to invest.

Example:
Earned 100 in corp, after tax has 86 to invest to invest.
Earn 100 personally, after tax has 65 dollars to invest.

Transferring after tax dollars earned personally into a corporation to invest in stocks is not recommended however.
I am a friendly Koodo customer and AMEX customer.
Deal Addict
Dec 31, 2006
1301 posts
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tendim wrote:
Jul 19th, 2016 7:51 pm
Thanks; that is the asset-to-asset example I cited above.



Understand this too, but I am not concerned about the dividends at this point -- that is a "future me" issue. But what is "rdtoh"?

What I want to know is, for the year in which the investments are purchased, what would be the taxable net income for that year? Assuming that my tax rate is 16% for the year, looking at my original example, would I be taxed 16% on $40,000, or on $25,000?

I believe where I am getting tripped up is on the capitalization...In my mind when you "capitalize" something there is a depreciation component. However, stocks should not have a depreciation component, unless I am missing something?
Taxed on the 40K.
I am a friendly Koodo customer and AMEX customer.
Deal Addict
Jun 12, 2015
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Ontario
tendim wrote:
Jul 19th, 2016 7:51 pm
Thanks; that is the asset-to-asset example I cited above.



Understand this too, but I am not concerned about the dividends at this point -- that is a "future me" issue. But what is "rdtoh"?

What I want to know is, for the year in which the investments are purchased, what would be the taxable net income for that year? Assuming that my tax rate is 16% for the year, looking at my original example, would I be taxed 16% on $40,000, or on $25,000?

I believe where I am getting tripped up is on the capitalization...In my mind when you "capitalize" something there is a depreciation component. However, stocks should not have a depreciation component, unless I am missing something?
Yes capitalize is usually w/ depreciation. I just meant it in a way that you put the stocks as investment under assets but there is no depreciation component.

The year you purchase investments, your income would be as if you didnt purchase the investments. Ie stocks have no income affect. The ONLY tax you get on stocks are 1) dividends 2) capital gains if you sold for more than you purchased.

rdtoh is Refundable dividend tax on hand. Its a fancy way of saying when a corporation gets dividends from another corp, it actually does not pay any tax on it. Ie, dividend of $100 income is also dividend $100 deduction, so $0 tax. What CRA does to close a loophole is they apply what is called part 4 tax, which is 33.33% tax on the dividends. This means the corp pay $33 tax when it gets the dividends. The $33 tax is put in an imaginary balance called rdtoh. When the corporation pays YOU taxable income of $100 (ie the original divdiend the corp gets), the corporation gets back 1/3 of the dividend paid out, ie the $33. TDLR, part 4 is a temporary tax for corporations and rdtoh is where the balance is kept track.
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Jun 12, 2015
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Ontario
T3NSION wrote:
Jul 19th, 2016 7:59 pm
It's not bad to invest in a corporation - he earned income at a low rate tax, and left the money in the corporation to invest which gives him more $ to invest.

Example:
Earned 100 in corp, after tax has 86 to invest to invest.
Earn 100 personally, after tax has 65 dollars to invest.

Transferring after tax dollars earned personally into a corporation to invest in stocks is not recommended however.
Every tax course/scenario ive seen is 99% recommend against incorporating investments.

The income earned other than dividend is considered aggregate investment income, which does not get the low tax rate you are assuming. They actually get the highest rate for corporations. Also it usually results in the same personal tax eventually. The only benefit, is deferral of tax typically when you work it out.
Deal Addict
Dec 31, 2006
1301 posts
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Dynasty12345 wrote:
Jul 19th, 2016 8:15 pm
Every tax course/scenario ive seen is 99% recommend against incorporating investments.

The income earned other than dividend is considered aggregate investment income, which does not get the low tax rate you are assuming. They actually get the highest rate for corporations. Also it usually results in the same personal tax eventually. The only benefit, is deferral of tax typically when you work it out.
I'm not assuming a low rate tax - I'm saying he earned revenue as an IT consultant at a low rate of tax.

You defintely don't want to withdraw all the retained earnings and invest personally in his case.

The deferral of tax is a huge benefit.
I am a friendly Koodo customer and AMEX customer.
Member
Aug 17, 2011
448 posts
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CALGARY
This. Any time you have a chance to earn active business income in the corporation, and then turn around and invest the RE through the corp, you're way ahead in that you're working with $0.86 on every dollar earned, instead of working with ~$0.65 on the dollar if you were to pull out all the RE out and invest it personally.
T3NSION wrote:
Jul 19th, 2016 8:25 pm
I'm not assuming a low rate tax - I'm saying he earned revenue as an IT consultant at a low rate of tax.

You defintely don't want to withdraw all the retained earnings and invest personally in his case.

The deferral of tax is a huge benefit.
[OP]
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Sep 15, 2008
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Thanks everyone for the info. Kind of sucks that I'll be taxed on the full value of my net income for the year (I.e. $40,000 in my example), but my main objective aligns with comments by Hansol and T3NSION. The only other option would be to pay myself directly into an RRSP (assuming the room exists), but then that locks away the funds if I ever decide to go independent again.

Cheers.
Photographer, Traveler, Small Time Investor, Project Manager, Grease Monkey, Trance Addict. 'nuff said. :D

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