6 business investing considerations

As a savvy business owner, you understand the importance of maximizing your company's resources. So, what are the key factors to consider when investing within your organization? Let’s guide you through the process of making informed decisions that can drive your business to new heights.

1. Optimize liquidity: Assess your cash needs

Determine the amount of liquid assets necessary to meet your income requirements as a shareholder. By maintaining adequate cash reserves, you can effectively manage seasonal fluctuations and be prepared for unforeseen opportunities or challenges. Strike the right balance between liquidity and growth potential.

2. Set goals for invested money – and define your investment objectives

Still have something left over? Now it’s time to think about investing. Just as you would in a personal investing account, the key is to decide why you’re investing. Are you aiming to secure your retirement? Are you looking to create a legacy for future generations? Defining your objectives, time horizon and risk tolerance will help shape your investment strategy.

3. Tax efficiency: Plan smartly

Minimize your tax burden by employing tax-efficient investment strategies. Passive income within a company, such as interest and rental income, is subject to higher tax rates. That makes tax efficiency especially important. It’s often a good idea to focus on investments that generate capital gains and/or Canadian dividends, because these are generally taxed at lower rates than interest income.

It's worth noting that the tax rules related to corporations can be complex, and it's recommended to consult with a tax professional or accountant to ensure compliance with the specific tax regulations applicable to your situation.

4. Avoid too much passive income

Small business owners often qualify for the small business tax rate on the first $500,000 of active business income. However, earning more than $50,000 in passive income within your company may trigger higher corporate tax rates on a portion of your income. Careful planning can help you optimize tax savings while maintaining compliance.

5. Maximize the capital dividend account

When you realize capital gains from investments, leverage the capital dividend account to your advantage. When a corporation receives certain non-taxable amounts, such as tax-free capital gains or life insurance proceeds, it can credit those amounts to the Capital Dividend Account (CDA). Dividends paid from the CDA are not taxable to the recipient shareholders since the funds originated from non-taxable amounts. This means that shareholders can receive the dividends without incurring personal income tax on them.

Given the complexities surrounding the CDA, it's recommended to seek guidance from a tax professional or accountant who can provide tailored advice based on your specific circumstances.

6. Create a legacy with life insurance

Consider using life insurance as a tax-efficient way to extract funds from your company. The corporation can pay for and own life insurance, with the business owner as the insured life. When the insured individual passes away, and the life insurance policy pays out the death benefit, the proceeds are generally received tax free by the corporation. The death benefit received by the corporation from a corporately owned life insurance policy can often be credited to the CDA. These amounts can be distributed to your shareholders as tax-free dividends, providing a tax-efficient way to extract funds from the corporation.

Bonus: Build a plan with your Prospera advisor

Investing within your company is more complex than investing in a personal account. That’s why it’s so important to develop a customized plan with your Local Business Relationship Manager, who can refer you to an investment advisor for specialized advice.

Contact a Local Business Relationship Manager at Prospera