Some business owners are firm believers in RRSPs. They religiously take a salary from their business in order to maximize their RRSP contributions. This has proven to be an effective way of saving for retirement for many business owners.
However, some are realizing that the greatest tax benefits may lie in paying themselves through dividends rather than salary, and leaving the money that would normally go into an RRSP, in the corporation, where it can be reinvested in a tax advantageous way. Here, the corporation becomes the retirement savings vehicle.
This is especially effective for professionals who have incorporated their businesses, including lawyers, accountants and consultants, but applies to all business owners.
Business owners may find that they end up with more money after-tax if they fund their living requirements with dividends and leave excess cash in their corporations. This excess is then invested. As with salary, the owner would pay personal income tax on dividends received, but at an effectively lower rate than salary (say 32% rather than 46% at the top marginal rate for 2011), while the income left in the business would, in most cases, be taxed at the small business tax rate (approximately 15.5% at today’s rates).
At retirement, the business owner would then sell corporately-owned investments and extract the after-tax proceeds as dividends, rather than the traditional withdrawal of funds from an RRSP or RRIF to live on.
Speak to your accountant and your investment advisor to see if this plan can work for you.