Investing within a corporation

Investing your money is like planting a financial seed, and choosing where to plant it can have a signicant impact on your financial growth. One option worth considering is investing within a corporation, but there are some tax-related pros and cons you should know about. Let's dive in!

Pros and Cons of investing within a corporation

The decision to invest within a corporation is tricky, but could save you taxes if it applies to your business and personal goals.

1. Availability of larger capital base

Due to lower small business corporate tax rates (12.2% in Ontario) for active business income, you are very likely to have a larger pool of capital available within your corporation to invest. If you take the money out personally and invest from there, you would normally pay a higher tax rate (based on your marginal tax rates, which will depend on your income). This is usually a great incentive to invest within a corporation.

2. High passive income rate for Corporations

The tax rate for passive income in Ontario is close to 50.2%. Passive income rates apply to rent, interest, dividends, and royalty income. If you are looking to purchase a property from your corporation and rent it out and are hoping for the low 12.2% rate... that is bad news, unless you are in the business of renting properties and have more than 5 full-time employees.
And if you had the fabulous idea to buy a home through your corporation and then live in it... you must personally pay the corporation the fair market rent each year for the property you bought. Not fun!
This makes investment within a corporation tricky and makes sense only in some situations.

3. Layer of legal protection

Although this is not 100% proof, investing assets through a corporation or better yet, a holding corporation provides a layer of legal protection if you were sued. This is a non-tax incentive to invest through the corporation as the corporation is a separate legal entity.

4. Limitation of passive income earned inside the corporation

If you earn more than $50,000 in investment income through the corporation, CRA starts to claw back your small business deduction and will pay a higher corporate tax rate on your active income i.e. in Ontario you will move from 12.2% to 26.5%. For every $1 you earn over $50,000 of passive income, $5 is clawed back from your active income

5. Mortgage Rates

Usually, it is more difficult to secure the same terms of mortgage financing for a corporation compared to applying in the personal name as some corporations may not have sufficient credit history or income to justify the mortgage loan. Moreover, interest rates tend to be higher for corporate mortgages than personal mortgages which could make the investment less profitable.

Conclusion

‍Unfortunately there is no straight yes or no answer (pretty much like most tax or finance questions) on whether to invest within or outside a corporation as it would depend on your particular case. But we are here to help you navigate this choice and make the best decision for your business growth and for yo, personally.

If you are a business owner and looking for an accounting firm that saves you time and $$$ and proactively supports your growth, please reach out!

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