Cash Just Sitting | Small business accounts | Discussion forum

First of all, I think it is a travesty to consider any insurance product (segregated funds) and the like to supposedly shelter an estate from taxes. One is either going to give up return performance or pay exorbitant fees for these products. Sharks play on retiree fears about estate taxes when they may be almost nothing at all. It almost* never makes any economic sense.

P.S. I cannot comment on business account practices, but shouldn't the intent be to wind down those business accounts in an organized way once retired?

* Some retirees consider life insurance to pay the cap gains taxes on recreational/cottage property due on last surviving death IF the intent is to keep the property in the family. They will pay dearly for those life insurance premiums when they may be better off just ensuring the estate has sufficient residual value to pay those taxes. All other estate assets should be monetized/crystallized upon death.

Hi corona72. Welcome to the forum. This forum is a good place with lots of information available.

My brother and I closed our business in 2018. We had a lot of cash when we finished.

We agree with AltaRed: "shouldn't the intent be to wind down those business accounts in an organized way once retired?"

To that end, since CIBC was our bank, we opened a self directed CIBC Investor's Edge account. Likely your bank has something similar. We let CIBC give us a sales pitch about someone at CIBC managing the cash, but we knew we were not too interested in paying the fees, and quickly started investing the money ourselves. We were already experienced investors. We put the money to work ourselves.

You say you have no experience, but you do not have to buy stocks. There are GICs and Investment Savings Accounts (ISA) available which are well discussed in this forum. For our corporate account we use the ISA - DYN6002 issued by Scotia Bank. It is similar to DYN6000 often discussed in this forum as it often is the best rate. There are many others. A corporation has to use the appropriate ISA, not one used by individual investors. If we had more idle cash we would diversify with other appropriate ISA.

We pay ourselves dividends each year. The goal is to pay out the assets and wind up the corporation. We will likely finish that next year. We want wind up the company as we have no children. Somebody has to look after it and we feel it is appropriate that we do that.

You likely have an accountant for your corporate taxes. We still use ours. We try to moderate the tax hit some, but we are certainly not minimizing the taxes by stretching the wind up out for a long time. We want to get it done in the near future.

If the corporation banks with RBC Royal Bank, there is the RBC Prime-Linked Cashable GIC.

Cashable any time. Cashable without penalty after 30 days. Variable rate locked to the Royal Bank Prime. For under $250,000, the current rate is P - 2.45% = 4.25%. For $1 million or more, the current rate is P - 2.00% = 4.70%.

There isn't lower corporate taxes on passive income earned by a corporation. This is from Scotia Wealth (Nov 2022): Passive income taxation for Canadian-controlled private corporations:

Corporate taxation

Passive income earned in a CCPC is taxed around 50% across Canada, and business income earned by a CCPC is taxed as such: (a) the first $500,000 is subject to a small business tax rate, and (b) amounts over $500,000 are subject to a general tax rate (see chart 1 in Appendix). Since 2019, when the CCPC and its associated corporation(s) make over $50,000 in passive income, this will reduce the amount of business income that is eligible for the lower small business deduction rate. Note that investment income earned in an associated holding company will be included for passive income rule calculation and may trigger a reduction in income qualified for the small business deduction. …

That's deliberate so that taxpayers don't have a tax incentive to incorporate; move their portfolio of passive investments, without any contribution limits, into the corporation; and only pay the small business tax rate on the income and gains.

Thanks, Norman1. I remember the feds trying to stop the practise, but not them actually doing anything about it because of the howls of protest from small businesses.

I don't see anything wrong with spinning it out over time if it's only going to take 12 years. Odds are that at least one of you will still be alive by then.

However, some people have found that they're better off to do this sort of thing all in one year. It's a huge tax bill, of course, but then you are done with it and can invest what you net out of it for better returns over the coming years and there is nothing for your kids to have to clean up.

I can't say whether this is a good idea for you or not; it would require some careful calculations.

Tax factors to consider in this regard would be: loss of Age Amount for only one year (but you might already be losing all or most of it, depending on current income); total tax payable by doing it this way as opposed to dribbling it out over 12 years; OAS clawback is not infinite - it ends it has been entirely clawed back - around 140K (don't quote me as I can't remember it well; and it will depend on how much OAS you are actually receiving, which in turn depends on when you ben receiving it and whether you are 75 or older). If the amount you still have to take out from the business is significantly more than that amount, then it could cost you less to take it all out at once than having the clawback on the withdrawal every year. Add in the additional income you could earn on it outside the business minus any tax implications from that. It's a complicated calculation but could be worthwhile. It might be helpful to consult an accountant or CFP, especially if you already have one.

re: that clawback maximum: if, for example, cashing out all the business money would bring you to income of 200K, the clawback would end at 140K (if that's the right amount for you), and the other 60K would not create a further clawback because your OAS will have been entirely clawed back at 140k or so. But if you took it out bit by bit annually, it would all be subject to clawback up to 140k or so. I hope that makes sense considering my vagueness about numbers. You also have to consider the marginal rate for amount up to 200K, i.e. whether it increases.

I don't know anyone at all in Victoria, but you could ask someone in another province if you get a solid referral. The tax issue is mostly federal. You can meet on Zoom if needed.
I have no one to recommend though. We've never actually met our accountant, whom we acquired during covid, and we haven't asked her to do anything complicated.

I would advise though that what you need is someone who specializes in "retirement INCOME planning". There are tons who know all about retirement planning from the savings point of view but fewer who understand the income side well.
I would think though that in a city full of retirees there must be someone!

I first ran into this concept in a book by Daryl Diamond, who was talking about it with reference to RSP or RIF withdrawals, but I think the same principle applies. He is or was in Winnipeg. I think he has or had a company focusing on retirement income planning but don't know the name of it.

My advice would be that if it is difficult to explain this idea to the accountant, then that's not the person for you. You want someone who "gets it" or wants to learn, not someone who just plays one old tune.

While a portion of passive income within CCPC is recoverable when dispensed, the net resulting tax rate is higher than in a non-registered account. That’s true for interest, canadian and foreign dividends, and especially for capital gains.

You need a good CCPC accountant.