Careers in the Cloud - E36: How to Invest & Save Smarter | Financial Advice for Contractors

Investing Through Your Corporation in Canada? What You Need to Know About Taxes, Risk & Returns

If you're an incorporated IT contractor or small business owner in Canada, you're probably asking: Should I invest through my corporation—or personally? What are the tax implications, and how can you use smart investing to plan for your family's future?

In this value-packed episode of Careers in the Cloud, we’re joined by Michael Marcucci, Certified Financial Planner at Investia Financial Services, and Frank Pizzimenti, CPA at Alex Pizzimenti CPA Professional Corporation, to demystify corporate investing in Canada.

They answer your most pressing questions, including:

• What’s the difference between investing your personal income vs. your corporate revenue?
• What investment options are available to Canadian incorporated contractors?
• How to build a risk profile for your corporation
• Can investing through your corporation help fund major life events (home, wedding, kids, retirement)?
• What are the tax rates and implications for different types of investment income:
    → Interest vs. dividends vs. capital gains
• What about real estate investing through a corporation? 
• Should you go with direct investing or an investment advisor? 
• What if you have U.S. or offshore investments—are you getting double taxed? 
• How does taxation work when you earn investment income in your corporation and take it out as a dividend?

Whether you're planning for the future, growing your wealth, or trying to avoid tax pitfalls, this episode gives you a strong financial foundation to make smarter decisions with your corporate money.

DISCLAIMER: Mutual funds, approved exempt market products, and/or exchange-traded funds are offered through Investia Financial Services Inc. The comments contained herein are a general discussion of certain issues intended for conversational purposes only.

Transcript:

Please note, that this transcript is automated and may have errors

[00:00:00,160] Maurizio:

Mike and Frank, thanks so much for joining us today. Good to see you both again. Michael Marcucci, certified financial planner with Investor Financial Services, and Frank Pizzimenti, CPA, with Alex Pizzimenti, CPA, Professional Corporation. It's great to have you both here for today's topic. To give some context to those who may not have seen a prior episode, we had our accounting friends from Prime Taxes here to talk about when, say, an IT professional wants to start their own business and work as a contractor. What steps do they have to take to actually formally set up that incorporation? So, just like that episode, today we're going to be speaking from the context of Canadian individuals with Canadian corporations. The first question I have for both of you that we can maybe put as a blanket statement for those contractors who have already set up their corporations is: Maybe they got some contracts under their belt, and now they're making money. They have money in that company they set up. What is the main difference between someone investing income personally versus investing their income that's in their business, so corporate investments? 

[00:01:31,710] Michael:

Totally. I can start, and thanks for having us. Obviously, we've been talking about this for a little while, so I'm glad we could make it happen. It's a great question. It's really important for these corporation owners. The first difference for these corporation owners who are likely owner-operators or the actual employees 

[00:01:50,630] Maurizio:

is that it's often one person in the company. Investing 

[00:01:55,430] Michael:

personally obviously uses after-tax dollars, and you're paying yourself a salary dividend, getting that money out of the corporation into your personal hands. You have all of the personal investment accounts available to you, such as TFSA, RRSP, RRSP for the kids, for new homeowners or prospective homeowners, etc. That's using after-tax personal dollars. 

[00:02:17,660] Maurizio:

Should we quickly go over again because there are some people who start a company and they're pretty new to Canada? When we look at TFSA and RRSP, what do those exactly mean, and what are the implications of using those as investment vehicles? 

[00:02:31,540] Michael:

To start, a Tax-Free Savings Account (TFSA) is totally accessible to any Canadian who is 18 years old. You don't have to have the account open to garner contribution room. Money can go in there, you don't get a deduction on the way in, but it can grow tax-free, which is really the selling point. That's the main point of the account. Any withdrawals can be taken out at any point; they're available to you, accessible, and liquid. 

[00:02:56,370] Frank:

A comment for the corporation owner is if you do take that money out, you have to keep in mind that you're going to be paying personal income tax before you can make that contribution to the TFSA. There is an annual cap, and if you exceed it, it's quite punitive. So always make sure that you're talking with your accountant, checking your records before making a contribution. 

[00:03:21,930] Michael:

Then, I guess other investment accounts available so we can go there next because that's the newest one. 

[00:03:30,330] Frank:

Sure. 

[00:03:31,050] Michael:

The rules were not completely clear when the account first launched, but it is the First Home Savings Account (FHSA). It is slightly different from a TFSA in that it combines the tax deferral options and deduction on the way in, or for deposits like an RRSP, but it can be used tax-free for the first home and it doesn't have to be repaid. Again, you have $8,000 of annual room. It's really important that the account has to be opened to garner that room, so you don't just accrue your room each year; it has to be physically opened in your name. Most people don't know that. I'll pass it to Frank for the tax considerations. 

[00:04:10,120] Frank:

This is by far my favourite account. I kind of nerd out on it because you get the benefit where, when you pull the money out of the corporation, you kind of get it tax-free because you get that deduction when you make the contribution. So you don't pay any personal income taxes on it typically, again, speak to your accountant. But also, like Mike was saying, when you finally use that and take it out, you don't have to include that in income as long as you're using it for qualified purposes. So you get the best of the TFSA, where you accrue income tax-free, and the best of the RRSP, where you get the deduction when you actually make the contribution. There are very specific rules, so make sure you're always talking to your accountant about it. I 

[00:05:08,070] Michael:

totally agree. Every situation is unique to that person. Frank and I will say this many times throughout the day, but in general, if someone's saving for a home purchase and they are qualifying use of the FHSA, it is a home run in most cases, and it should be used or be a top priority among the accounts, for sure. 

[00:05:25,990] Maurizio:

The FHSA is similar to an RRSP, as you mentioned, but slightly different, obviously. Can we go over again, for those who don't know, what is an RRSP? 

[00:05:34,870] Michael:

Sure, 100%. It's a Retirement Savings Plan (RSP). Obviously, the RRSP in our world, besides some of the locked-in accounts we won't get into, is the longest-term in nature type of account. It's really designed to be geared towards your long-term savings and retirement savings. You get a deduction for your contributions, it grows tax-deferred, so there are plenty of benefits there. But you would have to take it into income when making withdrawals either at a later point in life or when it's converted to a RIF or Retirement Income Fund. Frank can speak more to that. It's still a great account and a great vehicle for clients and investors saving for the long term, for sure. It can be used for the house as well. 

[00:06:16,070] Frank:

You hit it on the head. The big thing is when you withdraw it, that does go into your income entirely. All of the accruals are tax-deferred, though. You really do get this benefit where, at a minimum, in Ontario, your starting tax rate when you're making above $15,000 a year or $16,000 a year, using rough numbers, is 20%. You have 20% more to invest at a minimum. It's really a good vehicle for that. Then there's also stuff like the Lifelong Learning Plan, then there's also the Home Buyers Plan, where you can access this money temporarily. You do have to repay it. There are some options there. 

[00:07:04,220] Maurizio:

To bring this back in the context of some of our contractors, right? We'll have people who start working as a contractor. I don't want to say as low as because it can be higher, it can be lower, but there are people who start working as a contractor for $50 Canadian an hour, right? Plus HST. There are other people I know personally who are charging $200 an hour in very specialized, very senior positions. If you look at someone like that who's earning that money through their company, right, through their corporation, depending on their situation—it's not a one-size-fits-all for everyone—but ideally, in most people's scenarios, they probably want to consider, or at least have a conversation with their accountant or investment advisor around maximizing what's possible within those personal 

[00:07:48,050] Michael:

accounts generally. We typically, of course, there are obviously exceptions, but we typically would advise clients where they are that corporation owner and employee at the corp to focus on their registered accounts or personal accounts first or not totally push those to the side before opening the corporate investment account. That would be our typical advice. Right, 

[00:08:10,450] Maurizio:

like blanket statement—not looking at anyone individually. On the flip side of that, because we just kind of went through most of the options available for personal, when you look at how you could invest or the differences when it looks at investing from a corporation perspective, can you highlight anything there to bring you back on track? 

[00:08:29,710] Michael:

I can start, and then I'll pass it to Frank. The main difference, so there's two layers. We'll go through the first layer being the account type. On the personal side, you have the registered accounts available to you: TFSA, RRSP, FHSA. There's more, but we won't get into those. You would also then have a non-registered account. This is think of it as extra. There's no contribution room limits. Everything is taxed in terms of interest and income in the year it's earned or received, and capital gains are taxed when they're triggered. There's no tax deferral in that non-registered account. The reason I bring that up is that in the corporate space or corporate investing world, that's the only option you have. In that first layer we'll call it account type, it has to be non-registered. You can't have a corporate TFSA, for example. In the second layer, in terms of investment options, they're essentially the same. You have to consider the risk profiles of the owner being either the individual in the personal space or the corporation with considerations for the individual. You have to know what the risk profile is, risk tolerance, these things. But investment options, what products are available to you, are essentially the same. In terms of 

[00:09:45,590] Frank:

tax implications, generally when you're earning investment income in a corporation, there are some rules that basically make it so that it's taxed at the same rate as if you're an individual owning those. So you don't get any sort of preferred tax treatment by investing in a corporation. 

[00:10:10,710] Maurizio:

There's no direct, if we look at apples to apples, someone investing personally in a non-registered account or someone investing corporate income through a non-registered account, face value, the difference in taxes is there's no difference. 

[00:10:30,830] Frank:

There's nuance, though, right? There is some nuance to it, but by and large, the goal of the system is to make it so that when you earn investment income in a corporation, it's largely the same as if you earned it personally. The terminology is integration. When you take that money out personally, there can be a refund to the corporation depending on the scenario. In terms of tax treatment, there's not much of a difference. 

[00:11:08,740] Maurizio:

Can we talk about risk tolerance as well and the difference in risk tolerance between the person and the company? 

[00:11:15,140] Michael:

That's our world, and Frank knows how important it is. When we speak to a prospective client, either an individual and or a corporation, we spend a lot of time with these people or corporation owners to try to help them understand what their risk tolerance is. We always say to clients, if every client could stomach a ten out of ten, go buy the S&P and never think twice. We use the roller coaster analogy, which I'll share. Behemoth—and I haven't been to Wonderland in a while—some of these rides provide a great thrill. If you throw up, they're not so fun. We have to find the appropriate level of fun to the appropriate level of nausea or inducement of nausea. The same goes for the corporation. We can't have that individual think that the corporation has the exact same capacity for risk, financial tolerance for risk, as they do individually. We help to try to find the nuance between their personal situation and that corporation's goals of the accounts, if that makes sense. When 

[00:12:27,690] Maurizio:

you talk about the goal of the system, that's something I've thought about where, depending on the type of investment vehicle, if someone understands what the goal of the system is for that specific, like TFSA, RRSP, or like you said, a non-registered account in either a corporation or personal, does understanding the goal of the system sometimes open up someone's risk tolerance because they understand a little bit better? Probably, 

[00:13:06,080] Frank:

yeah, for sure. It's always easier to work with and achieve the goals of someone who takes the time to understand the risk involved and the nuances of the system. 

[00:13:20,080] Maurizio:

On 

[00:13:21,880] Michael:

our side, we have to be most careful, and regardless of how comfortable someone is with the investment world or how much experience they have, we still go through the process because in our world, it's all about leveling expectations. We don't want someone to rush the opening of a set of accounts, get six months, 12 months into the process, and then say, "Hey, why aren't we up 10%? " Well, that's not how we operate. Certainly, the more that someone understands how to use these different accounts, what the goals of the accounts are, how they could fit within their world, or how to get the most out of these accounts, we love that. 

[00:13:57,590] Maurizio:

Do you find most people don't understand what the account is actually for or what they feel the account is for is incorrect? 

[00:14:06,750] Michael:

I would say so. We spend a significant amount of time and actually create a separate worksheet for clients because someone's TFSA might vary completely differently from Frank's. We want clients to know, and it's really important that they know, especially for someone owning a corp. I have these accounts open, what are they working towards? Some of them might have split goals, dual goals. It's incredibly important. We've 

[00:14:37,860] Maurizio:

spoken a little bit about the different options that someone has personally and as a corporation. The fundamental piece of advice is that there's a different risk tolerance typically, or you have to be aware of the difference in risk tolerance between the person and the company. Depending on what that looks like, that's a conversation you'd have with your accountant or financial advisor to make sure that you're adhering to the risk tolerance on either side and maximizing what you can do within those constraints. In this case, when you look at someone's meeting with their financial planner and their accountant, and they have plans for a wedding, a family, kids, education, house—an endless amount of things they want to do with this money—how can what we previously mentioned, the different options, help them achieve this? What are some things they should maybe talk about in that meeting so that they can actually use this setup to their advantage and achieve those goals? 

[00:15:43,650] Michael:

I'll start and pass it to Frank. It's really important, and it brings up a good point probably for both of us. You said this when we were chatting. It's much easier for us to help, and both of us to help, when we arrive early to a situation and not late. We will take over a set of accounts or look at a client's accounts, and their goals or what would likely be their goals are all mismatched, crossed. We have to first provide clarity to those accounts, and secondly, know that even though the FHSA has to be for the house, you don't save in the FHSA and intend to roll it into the RRSP, which is an option, but you would never start there. That account is more restrictive. We have clients with a TFSA, multiple non-registered accounts serving completely different goals: house savings with a non-registered for the house, non-registered for long-term. Really, the earlier we are to a situation, and I would say both planner and accountant, the more purposeful or direct the plan can be at working towards those goals. The last thing I'll say before I pass it over is you can't achieve all your life's goals in the next five years. You do have to distill and prioritize between if it's a wedding coming up, which I know we just got married in October, the house, the baby, all these things coming. You do have to start with one thing or start with the highest priority of the goals and kind of start there. 

[00:17:26,120] Frank:

I'm sure you've seen this as well, where a client comes to you and they say, "Oh, I did this," and your jaw hits the floor. "You did what? " Always making sure you're going to your advisors first. If we get in there and we're able to help you set it up to start, it can avoid a lot of legal or tax implications that you don't know about because our system can be convoluted sometimes. It can be a simple mathematical formula. "I need X amount for a wedding in three years. All right, how do we get there? Where are you going to get that money from, and what vehicles are going to be the best to achieve that? " It's a different calculation for each type of life event—a house, a wedding, a child, even just long-term savings. Always make sure you're speaking with your accountant, especially before any major decisions. 

[00:18:42,350] Michael:

Just a point Frank made that's really important is the timing of those goals. Some things are more explicit, like "I'm getting married on this date," and I know the date. Some things, like "I want to buy a house in a tough market," are less explicit, but certainly with the most concrete of goals and milestones, that has a direct and the strongest influence on risk profile. We say to clients, if you know you have a milestone where you need to pull this cash and it's one, two, three years out, you're not jumping into the market and taking a bunch of market risk. This is where that risk profile that we talk about is personal, it's what's happening in your life, it's financial, it's your capacity for risk, it's all these elements that we use to form an informed profile hopefully. 

[00:19:28,980] Maurizio:

One thing that's come up, not so much with me, but I know it does come up with people when they're starting a small business. They think differently about the income that they have personally, obviously, because income comes from a different place. They don't have a steady paycheck necessarily. A lot of our contractors would have a steady source of income, but it can be cut at any time. Some of them do have multiple clients, some of them only rely on one. There's a lot of variability. They start to look at, "I'm making all these investments whether personally in a TFSA, FHS, RRSP and then say in a non-registered corporate investment account. " Let's say they have a little bit of action in both. They'll start to think about, "Well, what if I do need this money, and I have to take it out? Something happens, life happens. " They don't have access to some kind of loan or whatever—that's a separate topic—but what are the implications if you do have to, in those vehicles we mentioned, take the money out for an emergency? Are you in a terrible spot? What does it mean for some of these? 

[00:20:36,970] Frank:

I'll 

[00:20:38,810] Michael:

start then. 

[00:20:39,890] Frank:

Taxes are 

[00:20:41,730] Maurizio:

really what people start to think about when they have to take stuff out of the accounts, right? 

[00:20:45,530] Frank:

That's always the discussion when I'm doing a corporation's year-end with the shareholder and the owner, as to not just paying the corporate tax but also the personal tax implications as well. I'll start off by saying there are 1,000 different permutations to this question, so speaking on a general and high-level basis. There are a lot of different tax plans you could do if you need money personally to get it out of a corporation. Typically, it would be taxable to you, so again at your marginal personal tax rate. 

[00:21:31,560] Maurizio:

Let's isolate that for one second. We're saying you have money in a corporate non-registered account, right? You need that money personally for whatever emergency you may have. You're saying that if there are gains there, you will pay taxes on those gains. At what level? 

[00:21:58,000] Frank:

To isolate the corporation's investment account, start where the money's coming from. If you have a capital gain, there could be taxes on it depending on the attributes of the corporation. But if you do have a taxable capital gain, that constitutes 50% of your capital gain, and that 50% is taxed at a rate of 50% in the corporation, roughly 50%. You can get some refund on it by taking the money out personally. 

[00:22:32,350] Maurizio:

Face value. 

[00:22:33,230] Frank:

There's complexity, 

[00:22:35,290] Maurizio:

yes. 

[00:22:35,830] Frank:

This is super simple, super straightforward, 

[00:22:38,870] Maurizio:

which is hard in our textbook. Textbook, yeah, textbook. It 

[00:22:43,270] Frank:

doesn't happen often, so take this with a grain of salt. 

[00:22:46,550] Maurizio:

That's a good reason why you speak to your accountant about that because everyone's situation is different. At face value, school textbook, that's the kind of scenario they're going to give you. The 

[00:22:55,750] Frank:

other half of the capital gain may be able to be pulled out tax-free. 

[00:23:00,190] Maurizio:

That's 

[00:23:01,710] Frank:

an option through what's called the Capital Dividend Account or CDA. 

[00:23:04,990] Maurizio:

That 

[00:23:07,030] Frank:

is an option, but again, very much dependent on the situation. It might not be available to you. There might be other avenues of getting, like if you've lent the corporation money, you can take that back tax-free. If you have to take a dividend or salary, that's taxed. You have to consider that, especially as a dividend, "I take money out of my corporation. " Now, I don't pay tax on that until April of the next year, if this is the first year I've taken it out, typically, unless you have to make installments otherwise. Sorry, a lot of caveats here. 

[00:23:45,500] Maurizio:

That's why you've got to speak to someone. 

[00:23:51,660] Frank:

Speak with your financial advisor and your accountant. You have to be ready for that tax bill at the end of the day on top of your obligations and what you need money for. It really is quite convoluted, and it can be quite complicated, but if you come to your financial advisor and your accountant first, there can be some good strategies to get that money out. 

[00:24:16,700] Michael:

Like contingency plans? I was going to say the planning side of it to Frank's last comment there is we don't want to call that worst-case scenario, but it's close to meaning. We would always hope you have personal options available to access cash without adding to your income, without inflating your income superficially. In the same way that we would typically not want to pull from an RRSP prior to retirement. 

[00:24:44,650] Maurizio:

On the personal side, we're saying now, on 

[00:24:46,370] Michael:

the personal, but to compare the options because both in both cases we're inflating income 

[00:24:50,530] Maurizio:

to 

[00:24:51,210] Michael:

access cash. We would want to have a buffer or have these personal registered accounts, I don't want to say maxed, but closer to before the corporate investment account typically becomes an option worth considering. 

[00:25:05,090] Maurizio:

That's a very good point that we spoke about before where blanket statement, it's not going to be the same for everyone, but for most people, they do see a little bit more success, rather like the general business person, if they can really maximize what's possible in those personal accounts before they start investing. 

[00:25:25,750] Michael:

Typically, 

[00:25:26,640] Maurizio:

yeah. 

[00:25:26,920] Michael:

On 

[00:25:28,520] Maurizio:

the topic of what you just mentioned, when you talk about liquidating, you brought up corporate corporation here. We've talked about personal. Let's say someone has to liquidate part of their RRSP. They obviously got a tax deduction. By tax deduction, you mean the amount that you put into your RRSP is reduced from your taxable income of the year that you put it in, so you're effectively taxed on less money that you made, likely 

[00:25:54,400] Michael:

resulting in a refund, but that depends on your situation. Hopefully. 

[00:25:58,200] Maurizio:

If not, that would be sad. That's tough. If they have to withdraw that early, hopefully they don't, but if they need that cash for some kind of emergency and they withdraw something like that, the implications are that 

[00:26:13,500] Michael:

it gets added to your taxable income. 

[00:26:15,040] Maurizio:

It gets added back. 

[00:26:16,330] Michael:

Just 

[00:26:17,590] Maurizio:

like you were given a refund, potentially you're now taxed on the money that you take based off of the amount of money. It's almost like you earned extra money that year. 

[00:26:26,110] Frank:

Essentially, 

[00:26:26,950] Michael:

yeah. Some will be withheld, and so there's prescribed withholding rates for withdrawals, but that depends on the amount of the withdrawal. Ignoring the timing of when you pay the taxes, let's say apples to apples come tax time, the government or the CRA is just saying, "We offered you a deduction that was meant to be retirement money. If you're accessing it early or even if you access it in retirement, we're going to take that into income and tax you accordingly. 

[00:26:50,990] Maurizio:

" The only penalty is not necessarily a fee or anything, but you lose the contribution room, or no? 

[00:26:56,590] Michael:

Depends on the account, obviously. The best example is TFSA. When withdrawing from a TFSA, assuming you're not drawing money that's down, you do get that income compounded into your room in the following calendar year. Let's use round numbers. If your TFSA was worth $200,000 and you withdrew $200,000, next year you do get that inflated or expanded room within the TFSA. The RRSP is the linchpin where you lose the benefit of that room that you had already essentially understood. 

[00:27:35,830] Maurizio:

This is all kind of bringing us to some points that you both brought up that are good questions to ask people in both of your positions. As someone who is an IT contractor who started their business, they're getting all this sorted, what are some good questions that they can ask people like yourselves in this regard? 

[00:27:54,250] Michael:

There are plenty. I'll maybe start off more generally. Frank and I both said this many times. We work with a few clients that have corporate accounts. Not to say we won't, but we would strongly prefer not to work with a corporation owner without an involved, active accountant in the picture. For u...