Business owners who invest in a TFSA rather than leaving surplus funds in their corporations generally end up with more after-tax cash, especially when the time horizon is significant, says Jamie Golombek, managing director, Tax & Estate Planning, Wealth Advisory Services at CIBC.
“Leaving investments in the corporation means there will be taxation on any investment income earned, which may leave less after-tax cash in business owners’ pockets at the end of the day,” says Golombek.
He discusses different investment scenarios for business owners.
Corporate investment income eroded by taxes
With corporate business income, a significant amount of tax is deferred until after-tax income is distributed in a future year, leaving business owners with more money to invest in their corporation than in their TFSA.
This may yield a higher amount of pre-tax investment income in the corporation; however, investment income in a corporation is taxable, and taxes can significantly erode the benefit of investing the tax deferred amount over time.
While the TFSA may have less investment capital since it is funded with after-tax dollars, most TFSA investors will still be left with more investment income because all income is permanently tax-free.
“The TFSA will outperform corporate investments in most cases over the long term, simply because no taxes are payable on the earnings in the TFSA,” says Golombek.
He also recommends using the TFSA to help build retirement savings. “Many business owners are so focused on building their business, they can neglect planning for their retirement. Business owners can set up a regular contribution plan to their TFSA to build their investment portfolio, and maximize the benefits of tax savings.”