Withdrawing funds from your corporation to maximize TFSA
generally results in more after-tax cash
TORONTO, Oct. 13, 2015 /CNW/ - Business owners who invest
in a Tax-Free Savings Account (TFSA) rather than leaving surplus
funds in their corporation generally end up with more after-tax
cash, especially when the time horizon is significant, says
Jamie Golombek, Managing Director,
Tax & Estate Planning, Wealth Advisory Services at CIBC
(TSX: CM) (NYSE: CM).
"Many small business owners still don't appreciate the
significant benefit that TFSAs provide," says Mr. Golombek. "A TFSA
is a great opportunity to earn tax-free investment income,
especially now that the annual TFSA dollar limit stands at
$10,000 for 2015. Leaving investments
in the corporation means there will be taxation on any investment
income earned, which may leave less after-tax cash in business
owners' pockets at the end of the day."
Mr. Golombek discusses different investment scenarios for
business owners in his new report TFSAs for Business Owners… A
Smart Choice.
Tax deferral advantage on corporate investment income eroded
by taxes
With corporate business income, a significant amount of tax is
deferred until after-tax income is distributed in a future year,
leaving business owners with more money to invest in their
corporation than in their TFSA. This may yield a higher amount of
pre-tax investment income in the corporation; however, investment
income in a corporation is taxable, and taxes can significantly
erode the benefit of investing the tax deferred amount over
time.
"Taxes reduce the amount available for reinvestment as well as
the total amount of investment income that may be accumulated
throughout the years," says Mr. Golombek.
TFSA investment income completely tax-free, helping business
owners build retirement savings
While the TFSA may have less investment capital since it is
funded with after-tax dollars, most TFSA investors will still be
left with more investment income because all TFSA income is
permanently tax-free.
"The TFSA will outperform corporate investments in most cases
over the long term, simply because no taxes are payable on the
earnings in the TFSA," says Mr. Golombek. "The bottom line is you
may come out further ahead by investing your hard-earned cash in a
TFSA rather than leaving the surplus funds in a corporate
account."
Mr. Golombek also recommends using the TFSA to help build
retirement savings.
"Many business owners are so focused on building their business,
they can neglect planning for their retirement," he says. "Business
owners can set up a regular contribution plan to their TFSA to
build their investment portfolio, and maximize the benefits of tax
savings."
Since corporate and personal taxes vary for each type of income
and from province to province, Mr. Golombek encourages business
owners to seek professional tax and investment advice prior to
making an investment decision.
About CIBC
CIBC is a leading Canadian-based global financial institution
with 11 million personal banking and business clients. Through our
three major business units - Retail and Business Banking, Wealth
Management and Wholesale Banking - CIBC offers a full range of
products and services through its comprehensive electronic banking
network, branches and offices across Canada with offices in the United States and around the world. You
can find other news releases and information about CIBC on our
corporate website at www.cibc.com/ca/media-centre/.
SOURCE Canadian Imperial Bank of Commerce