Corporate Investments For Retirees

Corporate Investments for Retirees

Retiring does not mean you need to close your corporation or withdraw all its money at once. Many incorporated business owners reach retirement with cash or investments in an operating company or holding company, and the corporation may continue to own those investments for years after the business itself has stopped operating.

For many incorporated business owners, retiring with a corporation raises an important question. Should you leave the money invested, withdraw it personally, or gradually wind down the corporation?

The corporation should not be treated as a separate pot of money sitting outside your retirement plan. The decision should be based on your spending, other income, taxes, investment risk, and estate goals.

Should you keep the corporation in retirement?

A corporation does not have to close simply because its owner has retired, and there is no required withdrawal schedule like there is for a registered retirement income fund (RRIF).

Keeping it may make sense when it holds a substantial portfolio that you expect to draw down gradually. It gives you some control over the timing of personal withdrawals, but the corporation will still have annual tax returns, accounting fees, and corporate maintenance requirements.

Some retirees reach a point where the cost and hassle outweigh the benefit, or there is not enough money remaining in the corporation to justify keeping it. At that stage, winding it down may make sense.

This does not need to be an all-or-nothing decision. You might keep the corporation during the early years of retirement, draw it down over time, and close it once the remaining balance is relatively modest. Coupling this with Canada Pension Plan (CPP) and Old Age Security (OAS) deferral can be a powerful strategy.

A corporate wind-down can create tax at two levels. Selling investments may trigger capital gains tax inside the corporation, and distributing the remaining money or investments may then trigger personal tax for the shareholder.

Is a corporation the best place for your investments?

Leaving money in a corporation can defer the personal tax that would apply if you withdrew it. That can leave more money invested today, but a tax deferral is not the same as a permanent tax saving.

Interest, dividends, and taxable capital gains earned by a private corporation are subject to corporate tax. Some of this tax may eventually be recovered when money is paid to shareholders, and part of a capital gain may sometimes be distributed without personal tax through the corporation’s capital dividend account (CDA). Your accountant should track these balances and confirm what options are available.

The alternatives matter as well. Withdrawing money to make a registered retirement savings plan (RRSP) or tax-free savings account (TFSA) contribution when you have available room, pay down a mortgage, or in a low income year to invest personally may produce a better long-term result despite the immediate personal tax cost.

Comparing a corporate tax rate with a personal tax rate for one year tells only part of the story. You need to consider how long the money will remain invested, the tax on the investment income this year, and the eventual tax cost of withdrawing it.

If the business is still operating, corporate investments can also reduce access to the small business deduction and increase the tax paid on active business income. Holding investments in an operating company may also leave them exposed to business risks or jeopardize access to the lifetime capital gains exemption (LCGE) on a future sale of the business. Moving money to a holding company can sometimes help, but the way in which funds are transferred should be reviewed with tax and legal advisers.

Can you transfer corporate investments to yourself?

You generally cannot move investments from a corporate account to a personal account without tax consequences. The investments belong to the corporation, even when you are its only shareholder.

Selling an investment may trigger a capital gain or loss inside the corporation. Transferring an investment may trigger a deemed disposition, just as if you sold it. Taking the resulting cash out personally is a second transaction and may result in a taxable dividend or another form of shareholder distribution subject to personal tax.

How should corporate investments change in retirement?

A corporate investment portfolio should reflect how and when you expect to use the money. Someone who will need regular corporate withdrawals has a different investment need from someone who expects to leave most of the corporation to their beneficiaries upon their death.

The portfolio should be considered alongside your RRSPs, registered retirement income funds (RRIFs), TFSAs, pensions, and personal investments. Looking at each account separately can leave you with too much cash in one place, unnecessary tax in another, or more overall investment risk than you intended.

Three questions are especially important:

• How much will you need from the corporation over the next few years?
• Which investments can be sold without taking more investment risk or realizing more taxable income than necessary?
• Which account should fund your spending first?

Retirement planning can help answer these questions rather than relying on guesswork or a rule of thumb.

Some retirees become reluctant to withdraw money from their corporations because they do not want to pay the personal tax. They may end up spending less than they can afford and leaving a much larger tax bill upon their death, diminishing their estate value.

Minimizing tax this year should not be your goal. The goal is to fund your retirement and estate as efficiently as possible after tax.

Should you withdraw from your corporation or RRSP/RRIF first?

There is no standard withdrawal order that works for everyone. Drawing corporate assets first may be sensible in one situation, while taking extra RRSP or RRIF withdrawals may be better in another.

Today’s tax rate versus next year’s tax rate is only the starting point. The comparison should also include future RRIF minimums, CPP and OAS start dates, possible OAS recovery tax (clawback), the shareholder’s life expectancy, and the tax that could arise if a large corporate account remains at death.

For example, taking dividends before CPP and OAS begin may allow a retiree to use lower tax brackets, while deferring guaranteed, indexed pension income. On the other hand, early RRSP withdrawals can reduce future RRIF minimums and may make sense in some cases.

Dividends are a common way to withdraw corporate funds in retirement. The appropriate mix may include taxable dividends or tax-free capital dividends, repayment of a shareholder loan, or transactions completed as part of a formal wind-down.

The corporation’s accountant should confirm what is available and how it should be reported. Where family members own shares, the tax on split income and legal rights attached to each class of shares may also affect what can be paid and to whom.

What happens to the corporation when you die?

On the death of a shareholder, the shares of the corporation are generally deemed to have been sold at fair market value unless an exception such as a spousal rollover applies. The corporation’s investments are not automatically sold merely because the shareholder has died. The corporation does not die with the shareholder.

Tax may arise later when the investments are sold or corporate assets are distributed. This creates the potential for tax at both the shareholder and corporate levels, although post-mortem planning may reduce the duplication.

These strategies are technical, time-sensitive, and dependent on what happens after death. The executor, accountant, and estate lawyer should work together before the corporation’s assets are distributed.

The will should also deal with ownership of the shares, and having a secondary “corporate” will may reduce costs on death in some provinces. A power of attorney does not automatically appoint someone as a corporate director, so legal advice may be needed to make sure the corporation can continue to operate if a director becomes incapacitated.

Include the corporation in your retirement plan

The goal should not be minimizing one year’s tax bill. It is coordinating corporate assets, RRSP or RRIF withdrawals, CPP, OAS, and spending over decades of retirement.

We can model different withdrawal strategies and estimate how they may affect your after-tax income, estate value, and lifetime tax. This can help determine when to draw from the corporation, when to use registered savings, and whether gradually winding down the corporation makes sense.

The projections will not predict the future. They rely on assumptions about investment returns, inflation, longevity, and tax rates, but they can show which decisions matter and whether one strategy appears more resilient than another.

Objective Financial Partners provides advice-only financial planning and does not sell investments or insurance. When detailed corporate tax work is required, we can coordinate with Objective Tax & Accounting or your existing accountant.

Book an introductory call if you would like to discuss your situation.