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23 FEATURE ARTICLE Sylvain Chartier M. Fisc., F.Pl. Advisor National Bank Private Banking 1859 to contribute to an RESP, TFSA or RRSP, repay a debt or invest in a non-registered investment. Based on the IQPF's 2016 Projection Assumption Guidelines, we used a rate of return of 4% before fees for fixed-income securities and 6.6% for capital gains, and a borrowing rate of 5%. We did not take fees into account. We used a corporate tax rate of 50.17%, the known future rate for corporate investment income. We assumed that the corporation did not have a capital dividend account (CDA), general rate income pool (GRIP) or refundable dividend tax on hand (RDTOH). 1. Fixed income only Table 1 shows that if the money accumulates for 20 years in the corporation, the net after-tax value will be $5,613. On the other hand, if a $5,000 dividend were paid, the net personal value of $3,150 (considering income tax at 37%) could be invested in a non- registered account or a TFSA or be used to pay down a debt. Investing this amount in an RESP would give an opening balance of $4,095, given the 30% grant. In an RRSP, reinvesting the tax savings would give an opening balance of $5,995. We are assuming, of course, that our business owner has the contribution room required in these various registered plans. The results show that it is better to withdraw the money from the corporation in every case other than making a non-registered personal investment. Withdrawing the money from the corporation to pay into an RESP is a very attractive option. The combination of the grants and the reduced tax rate on the educational assistance payment (10% in our simulation) explains this result. SHOULD BUSINESS OWNERS KEEP THEIR SAVINGS IN THEIR CORPORATION? When business owners are planning their finances, they often wonder whether it would be a good idea to increase their compensation to contribute to an RRSP, TFSA or RESP, to acquire non-registered personal investments or even pay down personal debts with non-deductible interest. We looked at two extreme scenarios: one with an investor who has a 100% fixed-income profile and another comprised solely of growth shares that only generate capital gains. In this second scenario, we will examine the impact of annual sales of securities and a single sale at the end of the period (buy and hold). We chose the tax bracket beginning at a taxable income of $103,915 (for 2017), because few taxpayers have an income above $202,800. That means we used a tax rate of 37% for non-eligible dividends and 47.46% for interest income and taxable capital gains. Imagine a business owner who has the option to keep $5,000 in the corporation or take a dividend Corporation RESP TFSA Debt RRSP Personal Opening balance $5,000 $4,095 $3,150 $3,150 $5,995 $3,150 Duration 20 30.00% 47.46% Rate of return 4.00% Tax rate 50.17% 47.46% Net rate 1.99% 4.00% 4.00% 5.00% 4.00% 2.10% Balance $7,420 RDTOH $1,489 Total $8,909 CDA $- Dividend rate 37.00% 10.00% 47.46% Dividend tax ($3,296) Projected net Projected net Projected net Projected net Projected net Net $5,613 $8,390 $6,902 $8,358 $6,902 $4,775 Table 1 – Fixed income only

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