Many successful shareholders of Private corporations have or have started to accumulate excess cash within their corporation and do not need this surplus cash for everyday operations. This surplus cash if not needed for operations is typically invested in savings accounts, GIC’s, real estate, or stocks/bonds. While the accumulation of surplus cash and passive assets are positive it starts to create a potential problem such as:
Exposure to creditors: You have worked hard building your business or Private practice and it should be a high priority to protect this surplus. In the event your corporation is ever sued the cash inside the corporation is exposed to creditors.
Loss of Qualifying small business shares: One of the most tax effective planning strategies available for shareholders of qualifying small business corporations “QSBC” is to utilize the lifetime capitalize gains exemption. The CRA sets out strict rules for your shares to qualify one of these rules is that most of your assets must be active in the business.
Passive assets such as an investment portfolio or real estate holdings within your corporation could set your shares off side.
Grind down of small business limit: As you invest this surplus cash in income generating assets such as GIC’s, stock/bonds this produces “Passive income” in the way of interest, dividends, and realized capital gains. Once this passive income reaches $50,000 your small business limit starts to be grinded down. At $150,000 of passive income you may lose your entire small business limit.
Creditor Proofing Solutions: A common strategy to protect your investments from creditors is to establish a holding corporation. Excess profit can then be transferred to the holding corporation via dividend on a tax free basis. This new holding corporation can then hold passive assets such as your investment portfolio. This allows shareholders to protect their hard earned wealth from potential creditors. Reorganizing your shares and creating this holding corporation is also a good structure to have when it comes to succession or estate planning.
Reduction of Passive Income Solutions: To help reduce your passive income consider investing in assets that don’t generate as much or any income such as non dividend paying equities instead of fixed income assets. Corporate owned life insurance can also be utilized to allocate excess cash as these policies accumulate cash values on a tax exempt basis. Lastly Individual Pension Plans or IPP’s can be utilized to reduce passive income, provide creditor protection, and create corporate tax deductions, all while creating a significant savings vehicle also known as a “Supercharged RRSP.”
The above content is for discussion purposes only and is to not be taken as tax or legal advice. When considering any planning strategies you should consult a tax professional or Lawyer.
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