Entrepreneurship & Small Business

Retained Earnings and Passive Investment Strategies

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Member
Jun 7, 2010
317 posts
97 upvotes

Retained Earnings and Passive Investment Strategies

Hello All:

I have built up a significant cash in my corporate account with original plans of expanding my consulting firm. However, I have now given up on that idea and looking to invest the RE via my corporate brokerage account and objective is to defer personal taxes at the moment while putting the RE to work. Also not looking to the IPP or an insurance policy route at the moment (personal reasons). I am in my mid thirties with no mortgage and all tax sheltered accounts are maxed out.

I am thinking of building a couch potato portfolio via Horizon's swap based ETF's (i.e. HXT and HXS) with a 15-20 year investment horizon. My objective is to use the returns to fund supplemental income if I chose to retire early via small withdrawals.

Any thoughts or feedback on this approach?

Thanks.
6 replies
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Aug 2, 2010
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Great idea. The swap is a drag (literally) on performance though and that's why I don't like it. Fee is also double what Vanguard charges for an S&P500 fund.

FYI, you'll need 10-15 yrs invested in the co at positive gain to make doing it in the corp worth it vs outside the corp.
Member
Jun 7, 2010
317 posts
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eonibm wrote: Great idea. The swap is a drag (literally) on performance though and that's why I don't like it. Fee is also double what Vanguard charges for an S&P500 fund.

FYI, you'll need 10-15 yrs invested in the co at positive gain to make doing it in the corp worth it vs outside the corp.
Thanks! Love Vanguard, however, distributions will trigger taxes, hence I am thinking of going with Horizon product(s). I am also looking into corporate class funds from Purpose Investments, however, it appears that a tax "drag" will occur when switching from one fund to another, say for rebalancing.

Looks like HXT/HXS is the only option. But the liquidity of HXS is still a big question and I need to look into it a bit more. On the flip side HXT seems much more liquid!
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Aug 2, 2010
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deadsea wrote: Thanks! Love Vanguard, however, distributions will trigger taxes, hence I am thinking of going with Horizon product(s). I am also looking into corporate class funds from Purpose Investments, however, it appears that a tax "drag" will occur when switching from one fund to another, say for rebalancing.

Looks like HXT/HXS is the only option. But the liquidity of HXS is still a big question and I need to look into it a bit more. On the flip side HXT seems much more liquid!
I think the lower MER and lack of swap cost drag trumps saving a miniscule tax drag on the tax paid on dividend distributions which currently, on the S&P 500 for example, are about 1.7%. On top of that don't discount there is a counterparty risk on the swaps. That aside, no one tracks the S&P500 better than Vanguard and the ability to do that is another issue.

My view is your are not seeing the forest for the trees and are getting all caught up in granularity that is quite irrelevant.
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Jul 3, 2006
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Can you not open a HOLDCO and actively mange securities in that account? You can loose the small business tax credit in HOLDCO but you can make smart investment decisions then use swaps
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J_u_n_i_o_r_3 wrote: Can you not open a HOLDCO and actively mange securities in that account? You can loose the small business tax credit in HOLDCO but you can make smart investment decisions then use swaps
Establishing a HOLDCO in addition provides zero additional benefit in terms of investing nor does it facilitate swaps (something the OP doesn't want to do themselves actively anyway!) any more than the OP's existing corp. Also, you do not lose any small business tax credit as it does not apply in the first place to investment income.
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Jun 7, 2010
317 posts
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@eonibm : You are 100% correct. And thank you everyone for your replies.

At this point I am thinking of doing either swap based etf (Horizon) or doing the plain old vanilla VFV and VCAN (90-10 split) and dealing with the distributions in my T2.

Thanks!

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