If you want to make tax-deferred investments in an RRSP, you would draw a salary from your corporation to gain earned income that creates RRSP contribution room. Or you can save for retirement, also on a tax-deferred basis, by leaving excess funds in an investment portfolio within the corporation – eventually to be withdrawn as dividends. Each option has its advocates and advantages, so it’s a decision to make with your advisor, tax expert or accountant.
You could try to base your decision on which method delivers the greatest after-tax amount. Depending on your time horizon, investment holdings and provincial tax rates, one method may stand out as a clear choice.
Investing within the business can be the simpler method, as taking a salary puts you on the payroll. So there’s additional paperwork, and you must make Canada Pension Plan (CPP) contributions.
A reason to favour an RRSP involves the passive income rules, effective for the 2019 tax year. Leaving more than $50,000 of passive income within the corporation in any year could result in a higher tax rate on active business income. When you remove funds as salary to make RRSP contributions, you reduce passive income.
