With no immediate end in sight to record-low interest rates, it’s time to think seriously about how to put your excess cash to work and build wealth effectively. For example, if you are an entrepreneur or professional and have incorporated your business, did you know you can invest inside your corporation? Among the key benefits: you are investing with pre-tax rather than after-tax dollars and the money grows inside the corporation until you are ready to take it out, ideally at a point in time when your personal marginal tax rate is lower.
Another benefit: corporations are considered their own entities, separate and apart from the individuals that own them. This means any money inside the corporation belongs to the corporation and is protected from any legal proceedings that may be brought against the business owner.
Here are a few key best practices to get started investing inside your corporation:
- Assess your situation. Changes to the small business deduction in the recent federal budget should be taken into account. Be sure to speak with your tax advisor before moving forward. Once you’ve determined you have the discretionary funds to do so and the strategy works for you, investing inside your corporation is really no different than investing personally. As with personal investing, knowing your risk tolerance and time horizon are critical. This is even more important when the money is coming from the business because you have to be able to ensure you meet all your cash flow and debt obligations to keep operating.
- Consider investments that are in line with your risk tolerance and that can be readily liquidated if necessary, such as low-risk bonds, preferred shares or higher risk dividend paying stocks and real estate trusts, for example. You don’t want to tie up your corporation’s money in a five-year GIC. It’s not practical with interest rates this low currently.
- Be clear on what you want the money to do. Are you looking for the investment to grow? To provide another source of income for yourself, or an employee or even the business itself, should you run into a challenging period? This will help you determine the type of investments you should consider.
- Minimize tax. Work with your tax advisor to create a tax-efficient plan for withdrawing the funds. You’ve already gained an advantage by using pre-tax dollars to invest and having those investments grow inside the corporation, which benefits from preferential tax rates, but you also want to make sure when the funds are released to you either in the form of dividends, capital gains or a salary, for example, you are minimizing your personal income tax charges.
Call me or email me. My approach to investing is straightforward. I help my clients find good quality investments, follow trends and adjust as needed. I do this both for individuals and corporations. I welcome you to call me at 416-332-3863 or email me at allan@allansmall.com.