Dividends may be more attractive than RRSPs
As we enter a new year, it is time to review your annual cash flow needs. This will help determine the amount of funds that need to be withdrawn from your business. In past years, a salary would be paid to maximize RRSP contributions and any additional amounts were withdrawn as dividends. A salary allows for maximum Canada Pension Plan contributions. A salary of $124,722 will allow for a maximum RRSP contribution of $22,450 for 2011.
We must rethink this strategy to determine if it still is the best fit for your needs. Firstly, if you do not need the cash, you are foregoing some tax deferral savings by not leaving the excess in the corporation. Secondly, if you withdraw the funds as a salary, you will pay more income tax than if you were to pay dividends to yourself. There is a tax savings of 3.1% on paying dividends versus salary. Using an example of $127,000 of annual income, there would be an annual savings of $6,610 if a dividend were paid instead of a salary. There is also a tax deferal of 30.4% by keeping the funds in the corporation. If your corporation has other employees and the total remuneration exceeds $400,000 there is an additional 1.95% Ontario Employer Health Tax that can be avoided on your salary if a dividend is paid.
The strategy entails investing the excess funds in the corporation rather than making RRSP contributions. Another benefit is that when the corporate portfolio generates dividends and/or capital gains they are taxed at favourable rates. As well there are corporate class mutual funds that the corporation can invest in that would not trigger any tax on gains until the investments are sold. RRSP’s have the advantage of deferring tax until withdrawn, however, there are no advantages on the type of income earned. The RRSP’s have annual minimum amounts that must be withdrawn beginning in the year you are 72 years old. The wealth that has grown over the years in your corporation can be withdrawn in any amount in any year and can be income split with individuals who are shareholders.
The rate of return that your Canada Pension Plan contributions earn if invested over 40 years and collecting $11,120 CPP pension for 15 years is less than 3%.
Keep in mind that the RRSP’s are protected from creditors under a bankruptcy, other than any contributions made within the final 12 months prior to bankruptcy. For certain individuals and their professions this maybe an important feature to keep.
If you invest $26,776 per year in your corporation, and pay dividends for your cash flow needs, you will accumulate more wealth with more flexibility in the future. Please contact us if you would like to further discuss this option.
Golf Membership Fees
In determining ways to remove funds from a corporation, there have been numerous questions on the topic of golf membership fees and initiation fees and there deductibility. Any expense incurred for the use of a golf course, including membership fees, initiation fees and green fees, cannot be deducted for tax purposes. This rule has been in the Canadian Income Tax Act for many years. The meal and beverage expenses consumed at a golf club are 50% tax deductible similar to a meal and entertainment expense incurred at any restaurant. It must be clearly separated from the golf club fee to be tax deductible.