Author Topic: Canadian Investing in Professional Corporation Holding Company  (Read 2064 times)

HerryTairyCannery

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Hi and thanks for any advice in advance,

My wife is a healthcare professional with a corporation and a family trust. Her income is generated in the corporation and she gets paid from the corporation in the form of dividends through a family trust. She is building up money in the corporation and we have been advised to create a holding company for retirement investing.

Investing in a holding company will be non-registered, so I expect tax implications will be an issue. I think Vanguard (or other) index funds will be fine for the equity portion of our investments (due to capital gains and dividend credits) but I'm not so sure about how to arrange our asset allocation such that interest from bonds doesn't result in an overly high tax bill while still having the benefits of bonds.

She doesn't generate RRSP contribution space being paid this way. Investing all of our TFSA contributions and my RRSP contributions (I'm a salaried employee elsewhere) into bonds where the interest payments won't be taxed will help, but won't balance our portfolio sufficiently, especially as we approach retirement.

A financial advisor approached my wife about managing our investments. His company's approach was to use corporate class mutual funds to reduce income tax costs. The financial advisor charges 2% and corporate class funds seem to charge higher MERs or management fees than regular Canadian mutual funds. This seems excessive to me and I'd like to avoid this route.

So, as we approach the time to set up a holding company I'd appreciate any advice on the tax implications of non-registered investing in Canada. If you have any advice on any other pitfalls, challenges, or opportunities associated with investing in a holding company in Canada I'd greatly appreciate it. Thanks!

Self-employed-swami

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Re: Canadian Investing in Professional Corporation Holding Company
« Reply #1 on: March 30, 2014, 01:32:40 PM »
I am contemplating a similar move, with the corporate class mutual funds in my corporation.

The reason behind it, for me at least, is because I want to finish working professionally in a few years, but I would like to continue to draw down the assets of the company, over ~5 years, to decrease the taxes paid, and to fund my SAHM lifestyle (basically be a back-up to my husband's income, should something happen to his employment in that time, I am the 'breadwinner' right now).

The reason corporate class mutual funds are a thing, is because they generate only capital gains income in the corporation, and not other professional activity income, which makes things simpler and cheaper on the tax end of things (or at least that is how my accountant explained it to me).  Please excuse me, I know the ins and outs of personal income tax, but not the business stuff (hence the accountant).

drfrugal

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Re: Canadian Investing in Professional Corporation Holding Company
« Reply #2 on: March 30, 2014, 07:22:20 PM »
Hi,

I am a canadian health care professional and so is my wife, we have two professional corporations that we set up about 10 years ago.
So you are well aware of the benefits from a tax perspective of a prof corp saving over 30% in taxes compared to claiming this personally.
I think first and foremost that is what you must focus on that you automatically have had a return on your investment of 30% before investing a dime.

So keeping that in mind you still want that money to grow in the most tax advantageous manner possible. Firstly, I would have to understand your situation a
bit more to determine if a holding company is necessary. We have (and are allowed to ) invest in all sorts of equity and bond investments as well as real estate
that is part of your practice through your professional corporation, so I really never felt the need to have a holding company. From a liability perspective, our malpractice and clinic insurance is more than adequate to cover any claims that may be brought against us in the future. So my suggestion is not to have a holding company unless your personal situation is unique, it will just complicate your finances and you will end up paying more to accountants and lawyers.

Lastly the investments, more specifically fixed income. Firstly, I have quite a long time horizon and therefore invest a large percentage of my portfolio in stock index ETF's which are very tax efficient. From the fixed income side of things I ensure my RRSP's and TFSA's are all in Bond ETF's, but we are in the same situation as you now and no longer take salaries so have no more RRSP room. Also I do a GIC ladder personally that is slightly better tax wise that holding bonds in my corp. As well for the fixed income component I do some MICs (mortgage investment corporations) where it is not really a fixed income product but pretty close and pretty safe, and make higher returns that help balance out the tax hit.

About the financial advisor. Avoid these people at all costs, you seem smart enough to do it yourself, read books like "The Four Pillars of Investing" and you will add that 2% and more into your pocket not theirs. As well, I have been around long enough to see a lot of these loopholes and investment products closed by the government and you end up losing way more than you save on taxes. Flow through shares and REITs to name a couple.

Hope this helps, happy to answer any other questions and remember my first point you are already saving over 30% in tax!!