25
FEATURE ARTICLE
Impact of changing certain variables
The first two scenarios differ only in terms of the
type of investment. By changing other variables,
we change the scale of the results, but the advice is
still the same in most cases. Here are a few further
observations:
• As we said, it is always beneficial to
contribute to an RESP, even if the
analysis stretches over 20 years. A
shorter period (especially the last
contributions before the disbursement)
increases this benefit.
• When the money is invested in growth
shares with annual taxation, we concluded
that over 20 years, with a rate of return
of 6.6%, leaving the money in the
corporation or contributing to an RRSP or
TFSA are equivalent. For a shorter period,
however, it is better to leave the money in
the corporation and, naturally, for a longer
period, it is best to withdraw it.
• At a higher income tax rate, it is best to
leave the money in the corporation if the
investment is in growth shares.
• And, it is no surprise that if the borrowing
rate is high, it is better to withdraw the
money from the corporation and pay
down the debt.
Conclusion
The three situations we presented here are extreme.
Few clients have a profile of 100% fixed income or
100% growth. And, of course, a 20-year buy and
hold is somewhat theoretical. The real answers can
be found somewhere between these two extremes.
This next table provides a succinct summary of our
recommendations.
Fixed income
Growth
(annual taxation)
Growth
(buy and hold)
RESP with grants Pay dividends
TFSA
Pay dividends
Neutral, but leave in
corporation if income tax
rate is high and person is
older
Leave in corporation
RRSP
DEBT (non-deductible
interest)
Pay dividends if borrowing
rate is about 75% higher
than expected rate of return
(especially for a long-term
loan)
Pay dividends if borrowing
rate is higher than expected
rate of return
Leave in corporation
Personal non-registered Leave in corporation
