Maximizing the Use of Your Retained Earnings to Grow Net Worth, Create Cash Flow and Preserve Estate Value
Most Canadian business owners I meet aren’t trying to “beat the tax system.”
They’re simply trying to stop being punished for doing everything right — building a successful company, creating jobs, and keeping as much capital they can working inside our Canadian economy.
Yet the moment those same Canadian incorporated business owners try to take their retained earnings out of the corporation by increasing their personal salary or dividends, they get hit with a large tax bill.
If they let those retained earnings sit idle in the corporate bank account, the value of those dollars immediately begin to lose value to inflation.
Allow those same retained earnings to instead drift into traditional passive investments in the corporation, then the Canadian tax system hits them with a 50%+ passive income tax.
But here’s the good news:
You can compliantly grow your retained earnings inside your corporate structure without triggering any additional taxes — and it doesn’t require any complicated structures.
This article serves as a guide for Canadian incorporated business owners to break down exactly how these strategies work based on a recent in-person presentation that Canadian Wealth Secrets delivered in collaboration with the teams at PE Gate and Gauvreau CPA.
The HoldCo Advantage: Where True Flexibility Begins
As you earn active income in your operating company and begin to consistently retain earnings from year to year, it can often be helpful to consider opening a holding company that can house your retained earnings and any assets you begin to acquire inside of your corporate structure.
The creation of a holding company or “HoldCo” becomes the engine room for your corporate wealth accumulation.
A holding company gives you:
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Asset protection
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Investment freedom
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A place to accumulate retained earnings
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A tax-efficient “vault” for long-term wealth
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It also unlocks the most powerful wealth advantage Canadian entrepreneurs rarely hear about:
Investing retained earnings with 0% tax on passively earned dividend income
Here’s the principle:
Passive investments inside a corporation are taxed at essentially the highest personal income tax bracket (~50% in most provinces).
Active business investments owned by a connected corporation (i.e.: a holding company) can distribute dividends at 0% tax.
The key phrase is connected corporation.
To qualify, your HoldCo must own:
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>10% of voting shares, AND
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>10% of equity value
Get that right, and your Canadian corporate passive investment income flips from 50% tax… to 0%.
That’s the financial equivalent of going from sprinting uphill to coasting downhill.
