To RRSP or not to RRSP?

That is the question… for Incorporated Professionals.

Firstly, to answer that question, we must take a step backwards and decide whether you are going to take your income in the form of salary or dividends, or a combination of both. Historically, for income in the current year, there was an advantage to taking income in the form of dividends. However, with recent tax integration measures, that is only true in Newfoundland, Nunavut, and Saskatchewan. In all other provinces, there is a slight tax cost in the current year when opting for dividend income (e.g., in Ontario a 0.59% disadvantage). If you are receiving income in the form of dividends, keep in mind that dividend income does not qualify as “earned income” and, therefore, does not create RRSP contribution room.

It is important to remember that one of the most significant advantages of both the RRSP and the Professional Corporation (“PC”) is tax deferral. It is for this reason, despite the slightly higher tax rate, that leaving money in the PC to be drawn later in the form of dividends makes corporate investing very attractive. If there is corporately generated income that you do not need presently for lifestyle maintenance, leaving that money in the PC in Ontario defers 41.33% tax!

This tax deferred money can be invested in the PC to be drawn in retirement just like the RRSP, but without all the restrictions imposed on RRSP/RRIF conversions. It is difficult to put a price on the greater flexibility afforded to corporate savings versus RRSPs, but it is well worth considering and integrating into your overall retirement investment strategy.

Every situation is unique, but a rule of thumb would be to limit your withdrawals from your PC to an amount that would allow you to maximize your RRSP (currently that would be a salary of $154,611) and take the balance of what is needed in the form of dividends. Leave whatever is not needed in the current year in the corporation.

Invest this money in the corporation wisely. Your corporate investments should not mirror your RRSP investments as the corporation is taxed excessively on both interest income and foreign income. Take advantage of products such as corporate class mutual funds and ETFs, and consider insured savings strategies to shelter the corporate investments from tax.

Get in touch with us for more information on the salary versus dividend debate. If you are incorporated, you have options, and you should understand the benefits and pitfalls associated with your PC and investing therein.

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