Pitfalls with Surplus Investments Held in Corporate Accounts

Did you know that the accumulation of investment assets in a corporation may adversely affect the shareholder's ability to claim the Capital Gains Deduction when the shares are sold? That's important news for anyone working with a corporate owner-manager. 

Bookkeepers and accountants may know that there is typically a substantial tax deferral in retaining income up to the annual small business limit in a Canadian controlled private corporation, but income over that amount would normally be paid out as a bonus.

A salary or bonus which takes corporate income below the annual small business limit may be advisable, however, only where the personal tax situation of a family member results in the salary attracting little tax.

Furthermore, in some circumstances it may make sense to leave business income in the corporation to be taxed at a high rate. The after-tax amount of such income can later be distributed as an "eligible dividend", which generates a higher dividend tax credit than income which was taxed at the low corporate rate and may, indeed, result in a negative tax rate for a lower income shareholder.

Both these issues must be considered in owner-manager compensation and retirement income planning.