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By Steve Lowrie, CFA

Special to the Financial Independence Hub

There are plenty of perks to being your own boss, including the ability to build up tangible assets to invest in your personal portfolio, your corporate accounts, or both. But if you are a small- to mid-sized Canada-controlled private corporation (CCPC) owner, how do you know if you’re managing your personal and corporation investments as tax-efficiently as possible? Let’s take a look at that today.

Your Accountant and your Financial Advisor: A powerful pairing

In my experience, successful business owners usually have their corporate tax planning practices well in hand. Any number of reputable accounting firms can help you tax-efficiently structure your CCPC, manage its revenue and expenses, and accurately report its activities to the proper authorities. Your accountant also should be able to help you plug a lot of the taxable leaks that can otherwise siphon away excessive individual or corporate wealth.

However, I have noticed a business owner’s best, most tax-efficient corporation investment strategies often slip through unattended.

That’s no knock against accounting firms. It’s not typically in their purview to optimize tax-efficient investing across your (and potentially your spouse’s) taxable personal and corporation investment accounts, tax-favoured RRSPs and TFSAs, etc. That’s where an independent financial advisor, like Lowrie Financial, comes in. Your CA or tax attorney has the specialized expertise needed to tend to your corporate assets. We focus on the intersection between your corporation tax planning and your greater wealth planning … including how to manage all your investments as tax-efficiently as possible.

Tax-Efficient Investing: Tax Planning vs. Predicting

Before we dive into the details, I’d like to emphasize that none of us has a magic wand to make your tax bill disappear entirely. Nor do I possess a Ouija board to divine future tax code changes. Instead, I believe it’s best to avoid overly clever or predictive tax-cutting ploys that seem too good to be true — because they probably are — and focus on what we can manage here and now.

So, what are the solid tax-efficient strategies within our control? Most are the same whether you’re investing as a business entity or an individual. I’ve already covered many of them in “Tax Strategies to Boost Your Financial Savings.” Still, common-sense advice has a way of getting buried under all the financial nonsense, so let’s revisit the following four tax-planning strategies for a business owner’s personal and corporate investments alike:

1.) Don’t let Short-Lived adventures distract you from your Long-Term Financial Goals

Who isn’t attracted to the idea of scoring big on an action-packed investment? When things are going up, it’s fun, like finding extra money you’d forgotten about in your sock drawer. Managing your investments for gradual growth is more like watching paint drying on the wall.

Unfortunately, as I described in “Investment Fads and Other Destructive Behaviours,” corporate and individual investors who chase after short-term returns aren’t likely to serve their long-term financial goals. Instead, they end up with what I call a “dog’s breakfast portfolio” of whatever investments have been randomly hot or not over the past several years.

In the long run, this approach not only leaves you anxious and uncertain about how your investments are holding up, but it’s also usually not as tax-efficient. Instead of giving you the confidence to minimize your trading and adhere to some of the other best practices I’ll cover next, you end up jumping in and out of markets and positions, disregarding the tax ramifications, and assuming your accountant will dig you out of whatever mess you’ve created.

How do you avoid this trap? Financial planning for business owners (or anyone else) means having an investment plan to guide the way, shaped by an evidence-based strategy; and sticking with your plan over time, adjusting it only as your business or personal goals evolve.

2.) Keep your Friends close and your Taxable Capital Gains closer

Understandably, you may think of your taxable investments’ capital gains as a burden. But as I covered in “Tax Strategies to Boost Your Financial Savings”, they can actually be one of your best tax-planning friends.

Some recent good news was that there were no changes in the recent 2022 Federal Budget on the capital gain inclusion rates. So capital gains are still taxed at half of your personal or corporate tax rate. For example, if your personal or general corporate rate is 50%, then you will pay 25% on capital gains. Yes, you read that correctly, 50% less tax! I have yet to find anyone who wouldn’t opt to pay 50% less tax on anything when they’re able.

This concept applies to realized capital gains, and even more so to unrealized gains you can defer for now. Like the snowball effect of compounding interest (earning interest on interest earned), you or your business can build up a compounding tax arbitrage by putting off paying taxes on unrealized gains, which can then stay invested to accumulate even more tax-friendly gains.

You don’t want to be penny wise and pound foolish by chasing after tax savings that don’t serve your greater wealth interests. So, it remains wise to first ground all your investment decisions in your financial goals, with a portfolio built and managed accordingly. Then, the more effectively you can leave your corporate assets untouched to create gains, the more tax-efficient your results are likely to be when you do sell taxable positions according to your disciplined investment plan.

3.) Marginal Tax Rates matter

Supplementing our first two points, it’s also worth keeping an eye on the marginal tax rates you land in, based on your individual and corporate income.

For your personal income, this is especially important if it’s hovering right around the perimeters of those marginal rate points. In Ontario, if you make over $221,709 in 2022, you’ll be in the top bracket. It’s worth being aware of when you may be getting close to that threshold, so you can sharpen your income tax planning pencil, typically in concert with your financial advisor and accountant team.

Tax rates on income from corporation investments become more complicated. You’ve got the small business exemption, active business income (ABI), and passive income rules, and other planning considerations such as tax integration to factor in. Once again, capital gains and deferred capital gains reign supreme.

4.) Corporation Investments add Tax-Saving flexibility

As a CCPC owner seeking to solve the equation for paying minimal taxes on income earned from corporation investments, you have additional tax-planning tools available. Specifically, where an ordinary investor has only their own net worth to manage, you have another whole entity, with its own set of investment accounts and opportunities to earn, save, invest, transfer, and spend income.

This essentially offers business owners more flexibility, as well as additional complications to consider, which makes it even more vital to connect your accounting team with your wealth planning professional. This applies to your ongoing business income activities, as well as when you eventually prepare your business for sale. Each of us has our areas of expertise which, combined, can generate outcomes that are greater than the parts.

Financial Planning for Business Owners: Investing on Autopilot

While I live and breathe this tax-efficient investing stuff in my practice, you’re probably more interested in the intricacies of your own business. I wouldn’t blame you if you’d prefer your corporate and taxable assets just took care of themselves, including growing nicely on their own.

Thinking big picture is one way to shift your financial interests closer to being on autopilot. Once your “big rocks” are in place, it’s easier to hire a financial professional to fuss with the pebbles, with minimal wasted effort (time and money) from either of you.

For that, here’s a handy checklist of key components to consider:

Financial Planning

  • Goals: Have you established strategic goals for yourself and your business, for which your investment assets will be earmarked?
  • Budget: How near or far are you from being able to fund those goals?
  • Risk Tolerance: To pursue your goals, how much risk are you willing to take—personally and on behalf of your business?
  • Risk Capacity: Even if you’re relatively risk tolerant, how much risk can you afford to take, without endangering yourself, your business, and those who depend on both?

Investment Management

  • Does your investment portfolio reflect your willingness and capacity to take on investment risks in pursuit of your financial goals?
  • Is your portfolio properly diversified to minimize unnecessary risks?
  • Is your portfolio built and being managed with cost- and tax-efficiencies in mind?

Tax-Efficient Integration

  • Have you familiarized yourself with the array of tax-wise opportunities available to you and your business, given your corporate goals, size, and structure?
  • Have you done what you can to make best use of the opportunities available, individually and in alignment with one another?

Your Personal Resolve

  • Are you resolved to manage what you can control, and let go of what you cannot?
  • Are you aware of the behavioural biases we all share, and how they can derail otherwise solid plans?
  • If markets head south, are you prepared to stay invested as planned? If they surge upward, will you also stay invested as planned (so you don’t unwittingly take on excess investment risk)?
  • If your investments disappoint, do you have a “Plan B” in place, so you can make judicious rather than hurried adjustments?

Even if you can’t affix a dollar figure to it, your personal resolve may be your biggest investment rock of all. In my experience, sticking with the investing plans you’ve crafted is an essential, if often underappreciated influence on all things financial. Fortunately, most thriving business owners have already practiced these same disciplines within their daily operations and strategic plans. This should make it easier to also apply them to your tax-efficient investing. Either way, note that I speak your language too. Let me know how I can help.

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared on his site on May 12, 2022 and is republished here with permission.

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