Corporate Investing Canada: How to Structure the Portfolio

What Is Corporate Investing in Canada?

Corporate investing in Canada means investing retained earnings inside your Canadian-controlled private corporation (CCPC) rather than withdrawing the money personally. This applies to:

• Excess cash not needed for day-to-day operations
• Profits retained for future business opportunities
• Capital intended for long-term wealth building or legacy strategy

The basic logic: corporate tax rates on active business income are lower than personal rates, so investing inside the corporation should allow faster compounding. This is partly correct, but incomplete without proper structure and tax management.

Step 1: Assess Your Current Situation

Before making changes, document where you are today.

Checklist: Current State Assessment

Corporate Structure:

• [ ] Do you have a separate holding company (HoldCo) for investments?
• [ ] Is your operating company (OpCo) "pure" enough to qualify for the Lifetime Capital Gains Exemption?
• [ ] How much passive investment income did your corporation earn last year?

Current Investments:

• [ ] What types of investments do you hold corporately? (stocks, bonds, ETFs, mutual funds, cash)
• [ ] What types of income did they generate? (interest, dividends, capital gains)
• [ ] How much passive income appeared on your last T2 return?

Tax Position:

• [ ] What is your current small business tax rate?
• [ ] Are you approaching the $50,000 passive income threshold?
• [ ] When did you last review your corporate investment strategy with your CPA?

Purpose:

• [ ] How much capital is needed for business opportunities in the next 3-5 years?
• [ ] How much is earmarked for your retirement?
• [ ] How much is intended for estate transfer?

Document these answers. They form the foundation for your implementation plan.

Step 2: Understand the Tax Rules

The $50,000 Passive Income Threshold

When your corporation earns more than $50,000 in passive investment income in a single year:

• Your Small Business Deduction (SBD) begins to shrink
• For every $1 above $50,000, you lose $5 of small business deduction
• At $150,000 of passive income, the SBD is eliminated entirely

What counts as passive income:

• Interest income
• Foreign dividends
• Rental income (from passive properties)
• Taxable capital gains (realized)
• Certain other passive income types

What does NOT count:

• Unrealized capital gains (until sold)
• Income from an IPP
• Growth inside a permanent life insurance policy
• Return of capital distributions (ROC)

Capital Gains Inclusion Rate (Current Status)

The capital gains inclusion rate for corporations is currently 50%, meaning half of every realized capital gain is taxable. This means:

• One-half of every realized capital gain is taxable
• Capital gains remain more efficient than interest income
• Timing of realization is important

While the inclusion rate remains at 50% for now, there are high expectations for future tax pressure on capital gains. This makes tax-efficient strategies and timing decisions increasingly important for long-term wealth building.

Step 3: Structure Before Strategy

Decision: Do You Need a HoldCo?

Create a HoldCo if:

• You have accumulated significant retained earnings ($500,000+)
• You want to separate operating risk from investment capital
• You want to preserve eligibility for the Lifetime Capital Gains Exemption ($1.25 million)
• You are planning for estate or succession

Keep investments in OpCo if:

• Your retained earnings are minimal
• Your business has low liability risk
• You do not plan to sell the business
• The cost of a HoldCo structure outweighs the benefits

Implementation:

1. Consult with your lawyer and CPA
2. Set up the HoldCo structure if appropriate
3. Transfer investment assets to HoldCo
4. Update your investment accounts and documentation

Decision: How to Divide Your Capital

Divide your corporate capital into three buckets:

Bucket 1: Near-Term Business Capital (3-5 years)

• Purpose: Business opportunities, working capital buffer
• Risk tolerance: Low to moderate
• Liquidity: High
• Tax strategy: Preserve capital, minimize tax events

Bucket 2: Retirement Capital (10+ years)

• Purpose: Your personal retirement
• Risk tolerance: Moderate to high
• Liquidity: Lower priority
• Tax strategy: Tax-efficient growth, deferral

Bucket 3: Legacy Capital (20+ years)

• Purpose: Estate transfer to next generation
• Risk tolerance: Can be higher
• Liquidity: Not required until transfer
• Tax strategy: Long-term tax efficiency, estate strategy structures

Document how much capital goes into each bucket. This determines your investment strategy for each portion.

Step 4: Choose the Right Tools for Each Bucket

Tool 1: Corporate Class Funds

Use for: Bucket 2 (Retirement) and Bucket 3 (Legacy)

How they work:

• Structured as corporations, not trusts
• Minimize annual interest and foreign dividend distributions
• Convert income to capital gains or Canadian dividends
• Help keep passive income below $50,000 threshold

Implementation steps:

1. Identify which investments generate interest/foreign dividends
2. Replace with corporate class equivalents
3. Monitor annual T2 return to confirm passive income reduction
4. Review with CPA annually

When NOT to use:

• If you need immediate liquidity (Bucket 1)
• If your passive income is already well below $50,000
• If the additional costs outweigh the tax benefits

Tool 2: Individual Pension Plans (IPP)

Use for: Bucket 2 (Retirement) if you meet criteria

Qualification criteria:

• Typically age 45 or older
• Higher T4 income (often $150,000+)
• Established business with consistent income

How it works:

1. Set up IPP with actuary and lawyer
2. Make contributions from corporation
3. Assets move out of corporation (reduces passive income)
4. Income inside IPP is tax-deferred and doesn't count toward $50,000 threshold
5. Creates defined benefit pension for retirement

Implementation steps:

1. Assess if you qualify (CPA and actuary can help)
2. Calculate contribution limits
3. Set up the IPP structure
4. Transfer assets from corporation
5. Review annually with actuary

Tool 3: Corporate-Owned Life Insurance

Use for: Bucket 3 (Legacy) or conservative portion of Bucket 2

How it works:

• Permanent life insurance policy owned by corporation
• Cash value grows tax-sheltered
• Does not generate passive income
• On death, creates Capital Dividend Account (CDA) credit
• Allows tax-free distribution to beneficiaries

Implementation steps:

1. Determine if you need insurance coverage
2. Calculate how much to allocate to insurance vs. other investments
3. Work with insurance advisor to structure policy
4. Fund policy from corporate surplus
5. Review policy performance and CDA credits annually

Step 5: Implement Asset Location Strategy

Where to Hold What

In the Corporation (Prioritize Capital Gains):

• Stocks and equity funds (growth assets)
• Real estate investments
• Assets that generate capital gains, not interest

In Personal Registered Accounts (Prioritize Yield):

• RRSP: Interest-bearing investments, bonds, high-dividend stocks
• TFSA: Any investments (tax-free growth)

In Corporate Life Insurance:

• Conservative, fixed-income portion of portfolio
• Legacy capital that needs tax-efficient transfer

Implementation checklist:

• [ ] Audit current holdings: what generates interest vs. capital gains?
• [ ] Move interest-generating assets to personal registered accounts
• [ ] Keep growth assets in corporation
• [ ] Consider life insurance for conservative/legacy portion
• [ ] Document the rationale for each decision

Step 6: Set Up Monitoring and Review Process

Annual Review Checklist

With Your CPA:

• [ ] Review passive income total from last T2 return
• [ ] Project passive income for current year
• [ ] Assess if approaching $50,000 threshold
• [ ] Review capital gains realization strategy
• [ ] Discuss extraction strategy for next year
• [ ] Review any new tax law changes

With Your Investment Advisor:

• [ ] Review portfolio performance (after-tax)
• [ ] Assess if asset location is still optimal
• [ ] Review corporate class fund usage
• [ ] Discuss any changes to buckets (near-term, retirement, legacy)
• [ ] Update investment policy statement if needed

Documentation:

• [ ] Update investment policy statement
• [ ] Document any structural changes
• [ ] Record rationale for major decisions
• [ ] Ensure next generation understands the plan

Step 7: Common Implementation Mistakes to Avoid

Mistake 1: Investing Before Structuring

• Problem: Making investment decisions without proper structure
• Solution: Complete Steps 1-3 before choosing investments

Mistake 2: Ignoring the $50,000 Threshold

• Problem: Passive income creeps up and triggers SBD reduction
• Solution: Monitor annually and use tools to manage threshold

Mistake 3: Not Coordinating with CPA

• Problem: Investment decisions made in isolation from tax strategy
• Solution: Annual strategic review, not just tax filing

Mistake 4: Mixing Buckets

• Problem: Using near-term capital for long-term investments (or vice versa)
• Solution: Clearly document and separate buckets

Mistake 5: No Documentation

• Problem: Family doesn't understand the plan if something happens to you
• Solution: Maintain investment policy statement and decision log

Frequently Asked Questions

How much passive income can my corporation earn before it hurts my tax rate?

The small business deduction begins to be reduced when your corporation earns more than $50,000 in passive investment income in a single year. The deduction is fully eliminated once passive income reaches $150,000.

Should I invest personally (RRSP/TFSA) or in my corporation?

Use both, but for different purposes. Personal accounts (TFSA/RRSP) are best for tax-free compounding or deductions against high personal income. Corporate accounts are best for deferral, investing pre-personal-tax dollars, but you must eventually pay to get the money out.

Can I just invest in ETFs inside my corporation?

You can, but ETFs held directly in a corporation often generate interest income and foreign dividends that are taxed at high corporate rates and count toward the $50,000 passive income threshold. This can trigger the SBD grind. Corporate class funds or other tax-efficient structures may be more appropriate.

How do Corporate Class funds work?

Corporate class funds are structured as corporations rather than trusts. This allows them to combine expenses across fund classes, minimize interest income distributions, generate more tax-efficient capital gains or Canadian dividends, and help keep your passive income below the $50,000 threshold.

What is an IPP, and who qualifies?

An Individual Pension Plan (IPP) is a registered pension plan for business owners, typically over age 45 with higher income. It allows higher contribution limits than RRSPs, moves assets out of the corporation (reducing passive income), provides tax-deferred growth that doesn't count toward the $50,000 threshold, and offers enhanced creditor protection.

How does corporate-owned life insurance fit into corporate investing?

Permanent life insurance held inside a corporation can serve as an alternative asset class: tax-sheltered growth that doesn't trigger passive income, creates credits to the Capital Dividend Account (CDA) on death, provides tax-free distributions to beneficiaries, and offers contractual liquidity for estate tax strategy.

How long does it take to implement these steps?

The assessment and strategy phase (Steps 1-3) typically takes 2-4 weeks working with your CPA and advisor. Implementation (Steps 4-5) can take 1-3 months depending on complexity. The review process (Step 6) is ongoing and should happen annually.

Related Articles

• A Practical Guide to Tax-Efficient Investing : A more philosophical, mentoring approach to tax-efficient investing
• The SBD "Grind" & Your Corporate Portfolio : Deep dive into how the Small Business Deduction reduction affects your investment strategy
• Corporate Class Funds and the Powerful Magic of Tiny Changes : How structural tax efficiency reduces tax drag
• RDTOH & GRIP for Owner-Managed Corporations : How refundable tax mechanisms impact corporate tax strategy
• CDA 101: The Capital Dividend Account Explained : Understanding one of the most powerful tax-sheltering tools for Canadian corporations
• Corporate vs. Personal: When to Invest in Each Account : Understanding when to invest corporately vs. personally
• The Hidden Long-Term Cost of Corporate Investing : Structural costs that add up over decades
• The Fortress Strategy: HoldCo/OpCo Structures : How corporate structure affects asset protection and tax efficiency
• Corporate Investing Services : How we help incorporated owners structure portfolios

Fact Check & Sources

This article is informed by publicly available guidance and commentary from:

• Canada Revenue Agency (CRA)
• Revenu Québec
• Major Canadian financial institutions
• Professional tax and accounting resources

Rules and interpretations change over time. Individual circumstances matter. Always consult with qualified professional advisors before implementing any strategy.