It may be difficult to decide whether, as a business owner, you should pay yourself a salary or draw dividends. However, research has shown that it is a far better investment in your future to draw a dividend to fund your lifestyle. Not only does it give you better tax benefits, but it will also save you money because you won't have to pay CPP premiums. But if you don't take a salary, you will reach retirement without a cent in RRSP's. What then? As a business owner, that can be an advantage.
Because of government policy, should you have an RRSP's, you have to start making withdrawals (which are fully taxable) at age 71, whether you need the money or not. However, if you leave the money in the company, you only need to draw it out when you actually need it.
RRSP's also can create a huge tax liability for your estate. When one spouse dies, for example, his or her RRSP passes to the surviving spouse tax-free. But when the second spouse dies, the combined RRSP becomes taxable in the year of death. That might mean losing half of it to tax. But if you keep that money invested in your company, should you die, the tax rate is significantly lower when compared with a RRSP's.
So, as an incorporated business owner, taking money out of your corporation and putting it into RRSPs may not be your best strategy. There are better ways to save for retirement.
One option is a life insurance policy. While your RRSP annual contribution is capped at 18% of your earned income, some life insurance policies can be 'over-funded' and cash value can build up tax-free within the policy.
Another possibility is an inheritance policy. Whilst RRSPs are taxed according to your income level, any death benefit from the inheritance policy will be tax-free.
Contact us today for more information on how we can help you make the best investment to fund your retirement.