Which investments to hold in corporation?

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Jan 15th, 2021 12:45 pm

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Dec 6th, 2020 5:03 pm

Lyftstuff [OP]: Newbie; Apr 16, 2019; 9 posts; 3 upvotes

Dec 6th, 2020 5:03 pm

Which investments to hold in corporation?

I own a small Canadian corporation (ccpc) with my wife. We had a few great years, but my industry is being phased out so we expect profits to decrease significantly in the future (though not completely). These will be the top earning years of our careers.

On the advice of our accountant, we maxed out our RRSP’s, and TFSA. Our accountant advised to hold the remainder in our corporation, rather than paying it out to ourselves now. We currently hold around $1.2M that won’t be needed for business purposes or income. I’d like to invest this for retirement. So I have a long time horizon (20+ years) for investing this money in the corporation without needing it.

I am aware that any passive income over $50,000 each year will reduce the Small Business Deduction rate. Am I correct then that the best investment would be something that pays little to no dividends and capital gains increases only? If so, what would be best? I believe that the Horizon swap ETFs are no longer an option. I was thinking something like XEQT.

30 replies

Dec 6th, 2020 5:41 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 6th, 2020 5:41 pm

With the swap ETFs gone, I would just go with VGRO, VEQT, or VBAL (or equivalents from iShares etc), depending on risk tolerance.

+2

Dec 6th, 2020 5:51 pm

freilona: Deal Addict; Aug 4, 2014; 3369 posts; 3524 upvotes; Toronto, ON

Dec 6th, 2020 5:51 pm

llpresident wrote: ↑ With the swap ETFs gone,

Where?? I just bought HXS and was considering HBAL.

+4

Dec 6th, 2020 6:29 pm

Lyftstuff [OP]: Newbie; Apr 16, 2019; 9 posts; 3 upvotes

Dec 6th, 2020 6:29 pm

My apologies, I thought that the Liberal government changes did away with swap-based ETFs.

Dec 6th, 2020 6:34 pm

Sanyo: Deal Guru; Feb 9, 2009; 11038 posts; 9520 upvotes

Dec 6th, 2020 6:34 pm

Horizons still have their corp class etf's...they did some new engineering at the beginning of the year, but no distributions:

https://www.horizonsetfs.com/ETF/HXS

+2

Dec 6th, 2020 7:20 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 6th, 2020 7:20 pm

freilona wrote: ↑ Where?? I just bought HXS and was considering HBAL.

I seem to recall reading that the Horizon swap based ETFs were no longer able to provide the previous advantage in a Cdn Corp. if I am mistaken, then that is great as I intend to start investing in my Corp in 2021.

Dec 6th, 2020 7:24 pm

freilona: Deal Addict; Aug 4, 2014; 3369 posts; 3524 upvotes; Toronto, ON

Dec 6th, 2020 7:24 pm

llpresident wrote: ↑ I seem to recall reading that the Horizon swap based ETFs were no longer able to provide the previous advantage in a Cdn Corp. if I am mistaken, then that is great as I intend to start investing in my Corp in 2021.

Yeah I sold HXT last fall “just in case”, but then they restructured and introduced many more interesting ones! Low AUMs and volumes on most, unfortunately.. sigh

Dec 6th, 2020 7:26 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 6th, 2020 7:26 pm

freilona wrote: ↑ Yeah I sold HXT last fall “just in case”, but then they restructured and introduced many more interesting ones! Low AUMs and volumes on most, unfortunately.. sigh

That’s great. Is there a swap based all in one or do I need to patch together a series of ETFs to achieve a swap based all in one corporate portfolio?

Dec 6th, 2020 7:37 pm

freilona: Deal Addict; Aug 4, 2014; 3369 posts; 3524 upvotes; Toronto, ON

Dec 6th, 2020 7:37 pm

llpresident wrote: ↑ That’s great. Is there a swap based all in one or do I need to patch together a series of ETFs to achieve a swap based all in one corporate portfolio?

Look at HBAL: https://www.horizonsetfs.com/etf/hbal

It’s 70/30 equities/bonds, with 10% in US treasuries, 20% Canadian bonds, 10% TSX 60, 20% developed countries, 40% US equities (S&P 500 and Nasdaq) Performed great this year, obviously

It paid a small distribution last year post-restructuring, but should pay none going forward.

Good article about it: https://www.theglobeandmail.com/investi ... folio-mix/

There’s also total return emerging markets etf that can be added separately: https://www.horizonsetfs.com/etf/hxem

+4

Dec 6th, 2020 7:47 pm

freilona: Deal Addict; Aug 4, 2014; 3369 posts; 3524 upvotes; Toronto, ON

Dec 6th, 2020 7:47 pm

Lyftstuff wrote: ↑ My apologies, I thought that the Liberal government changes did away with swap-based ETFs.

If you were considering XEQT, look at HGRO (total returns equities only, no bonds): https://www.horizonsetfs.com/etf/hgro

The volumes are low, so might be better purchased in batches. So a broker with no commissions for etf purchases would be best.

+1

Dec 6th, 2020 11:44 pm

Lyftstuff [OP]: Newbie; Apr 16, 2019; 9 posts; 3 upvotes

Dec 6th, 2020 11:44 pm

In just looking further at XEQT, it appears the total distribution for 2020 was only $0.27/share. Even if I bought all $1.2m of XEQT, that would be around $14k of distributions for the year, so well under the $50k yearly threshold before it affects the small business deduction. Though I guess that $14k would be taxed at the higher corporate rate.

Just trying to figure out if there is a big tax savings over HGRO if I prefer something like XEQT.

Dec 7th, 2020 10:08 am

ShuttleBoy: Member; Apr 8, 2017; 269 posts; 114 upvotes

Dec 7th, 2020 10:08 am

I have a related question, what will the taxes be on the first 50k in income and what will the cap gains be if you own non-income generating stocks for 10+ years?

Also if you have a professional corporation (accountant, lawyer, physician, dentist) are you restricted by your college to hold passive investments > certain threshold?

Dec 7th, 2020 10:21 am

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 7th, 2020 10:21 am

ShuttleBoy wrote: ↑ I have a related question, what will the taxes be on the first 50k in income and what will the cap gains be if you own non-income generating stocks for 10+ years?

Also if you have a professional corporation (accountant, lawyer, physician, dentist) are you restricted by your college to hold passive investments > certain threshold?

Dividends are taxed as income in the year received. Capital gains tax will only be triggered on a sale of shares. The strategy should be to avoid triggering a taxable event by pursuing a buy and hold strategy with in the Corp, ideally in a vehicle that does not pay a dividend (a taxable event). This is why the swap based ETF is a valuable corporate investment tool.

The capital gains tax will not be impacted by the length of time you hold an investment. The only relevant input is the amount of the capital gain.

The ideal strategy would be to hold the investments until the Corp is no longer earning active business income. At that point, you start selling investments and letting money out (dividend) to the shareholder(s) gradually year over year.

The main risk would be if you have built up a decent capital gain in a corporate investment vehicle and have to sell for some reason, such as an ETF shutting down. This could then trigger a sufficiently high amount of capital gains that exceed the annual $50,000 passive income threshold. I would like think an unexpected need to prematurely trigger a capital gain would be rare.

Professional regulatory bodies do not get involved with investments or taxes because it is outside of their mandate.

+2

Dec 7th, 2020 11:58 am

ShuttleBoy: Member; Apr 8, 2017; 269 posts; 114 upvotes

Dec 7th, 2020 11:58 am

llpresident wrote: ↑ Dividends are taxed as income in the year received. Capital gains tax will only be triggered on a sale of shares. The strategy should be to avoid triggering a taxable event by pursuing a buy and hold strategy with in the Corp, ideally in a vehicle that does not pay a dividend (a taxable event). This is why the swap based ETF is a valuable corporate investment tool.

The capital gains tax will not be impacted by the length of time you hold an investment. The only relevant input is the amount of the capital gain.

The ideal strategy would be to hold the investments until the Corp is no longer earning active business income. At that point, you start selling investments and letting money out (dividend) to the shareholder(s) gradually year over year.

The main risk would be if you have built up a decent capital gain in a corporate investment vehicle and have to sell for some reason, such as an ETF shutting down. This could then trigger a sufficiently high amount of capital gains that exceed the annual $50,000 passive income threshold. I would like think an unexpected need to prematurely trigger a capital gain would be rare.

Professional regulatory bodies do not get involved with investments or taxes because it is outside of their mandate.

Great explanation, when you say dividends are taxed as income, do you mean corp income at 11.5% or is it taxed differently?

I heard some regulatory bodies prohibit owning Real estate unless it includes your office. For example you can buy a medical building if you are a physician and you can rent out few units and operate your practice from one unit. I thought holding non real estate investments can be capped.

Anyways I did not mean to derail the thread.

Dec 7th, 2020 12:06 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 7th, 2020 12:06 pm

ShuttleBoy wrote: ↑ Great explanation, when you say dividends are taxed as income, do you mean corp income at 11.5% or is it taxed differently?

I heard some regulatory bodies prohibit owning Real estate unless it includes your office. For example you can buy a medical building if you are a physician and you can rent out few units and operate your practice from one unit. I thought holding non real estate investments can be capped.

Anyways I did not mean to derail the thread.

The issue with real estate may be related to the professional corporation itself. Look at your articles of incorporation as to any such restrictions. It is important that the pro Corp is not engaging in any non-professional activities. If you are a dentist you need to be working on teeth or growing your income from dentistry. Once you become a landlord you are now engaged in another profession that is not dentistry so you can’t do that.

Dividends will be taxed normally up to $50,000 annually. After that it’ll cut into your SBE and your Corp tax rate will go up for everything including active business income (11.5% up to high 20s). This is worth a read to understand the SBE: https://www.taxtips.ca/glossary/smallbu ... uction.htm

+2

Dec 7th, 2020 12:39 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 7th, 2020 12:39 pm

llpresident wrote: ↑ The issue with real estate may be related to the professional corporation itself. Look at your articles of incorporation as to any such restrictions. It is important that the pro Corp is not engaging in any non-professional activities. If you are a dentist you need to be working on teeth or growing your income from dentistry. Once you become a landlord you are now engaged in another profession that is not dentistry so you can’t do that.

Dividends will be taxed normally up to $50,000 annually. After that it’ll cut into your SBE and your Corp tax rate will go up for everything including active business income (11.5% up to high 20s). This is worth a read to understand the SBE: https://www.taxtips.ca/glossary/smallbu ... uction.htm

I haven’t looked into this but if you really want real estate, speak to an accountant about whether you can create a new holdco, and then make a loan from the pro Corp to holdco.

Dec 7th, 2020 2:30 pm

Lyftstuff [OP]: Newbie; Apr 16, 2019; 9 posts; 3 upvotes

Dec 7th, 2020 2:30 pm

LLP what are you looking at buying for your corp?

Dec 7th, 2020 4:20 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 7th, 2020 4:20 pm

Lyftstuff wrote: ↑ LLP what are you looking at buying for your corp?

In all likelihood I will go with Horizons corporate class ETFs, as wisely suggested by @freilona earlier in this thread. I like her suggestion of HBAL, and possibly also an emerging markets ETF to supplement since that seems to be missing in HBAL. That supplementary ETF is HXEM I believe.

+3

Dec 20th, 2020 3:10 pm

Lyftstuff [OP]: Newbie; Apr 16, 2019; 9 posts; 3 upvotes

Dec 20th, 2020 3:10 pm

Just to add further to this topic:

The other consideration of course is a long term hold of companies that pay no dividends. This would also allow more US exposure as some of the biggest companies pay no dividends: Google, Amazon, Facebook, Netflix, Tesla, and PayPal, along with the Berkshire Hathaway stock. Even the ARKK ETFs have a very small dividend yield. Someone could hold a mixture of the above, along with the Horizon ETFs and not surpass $50k yearly passive investment income within their small business. Thoughts?

Dec 22nd, 2020 5:29 pm

llpresident: Deal Addict; Dec 3, 2014; 2348 posts; 1820 upvotes; Ontario

Dec 22nd, 2020 5:29 pm

freilona wrote: ↑ Look at HBAL: https://www.horizonsetfs.com/etf/hbal

It’s 70/30 equities/bonds, with 10% in US treasuries, 20% Canadian bonds, 10% TSX 60, 20% developed countries, 40% US equities (S&P 500 and Nasdaq) Performed great this year, obviously It paid a small distribution last year post-restructuring, but should pay none going forward.

Good article about it: https://www.theglobeandmail.com/investi ... folio-mix/

There’s also total return emerging markets etf that can be added separately: https://www.horizonsetfs.com/etf/hxem

So I've been looking into this further as I am now opening the corporate investment account. The following link to the Horizon's ETF page sets out a list of their "Corporate Class" ETFs. I do not see HBAL on this list. I suppose worst case I can review what is in HBAL (or similar like VGRO, etc.) and then create my own "all-in" portfolio using a combination of Horizon's Corporate Class ETFs.

https://www.horizonsetfs.com/library/Ge ... tal-Return

Last edited by llpresident on Dec 22nd, 2020 5:45 pm, edited 2 times in total.

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