Corporate tax savings: Smart strategies to keep more money in your business

And if you’re a business owner or incorporated professional, things can get even more complicated.  But with significant changes to the federal budget in 2018 and again in 2024, implementing tax-efficient strategies has become more crucial than ever.

The good news? You have lots of options that can help lower your corporate tax expenses. Let's explore some powerful strategies to help minimize your corporate taxes while optimizing your business structure. 

Corporate insurance 

1. Corporate-owned life insurance: Your "no-limit corporate TFSA" 

Corporations can’t have tax-free savings accounts (TFSAs), which are registered accounts designed for individuals. But corporate-owned life insurance has some features similar to a TFSA. Namely, that you can use it to grow and withdraw your money, tax-free. Here are some of the advantages of corporate-owned life insurance:  

• Money that grows within the policy is tax-exempt. 
• Investment income in certain policies is exempt from the federal $50,000 passive income limit that could reduce your company’s access to the small business deduction.  
• You can access the cash value of the policy through withdrawals or tax-free loans. 
• When you (or the key person insured by the policy) die, a tax-free death benefit goes to your Capital Dividend Account (CDA). From there, your company can pay a tax-free distribution to shareholders. 
   

2. Split dollar critical illness insurance: A shared-ownership approach 

Spilt dollar critical illness insurance involves your corporation as the policyholder and beneficiary, and you (or another key person) are the insured. If you’re diagnosed with a critical illness covered by the policy, your corporation receives a tax-free payment. This innovative strategy offers: 

• Coverage for a variety of major conditions, such as heart attack, stroke and cancer. 
• An optional Return of Premium rider (ROP). When taking a split dollar approach, the policy owner (your corporation) pays the critical illness insurance premiums, while you, as the insured, personally pay for the ROP rider. Since you pay for the ROP, it provides you with a full refund of all premiums paid when certain conditions are met.  
  • For example, if the policy has been in place for 15 years and there hasn’t been a claim (you haven’t been diagnosed with a critical illness) in that time, you’ll receive a return of premium cheque. 
  • On the other hand, if you are diagnosed with a covered critical illness, your corporation will receive the critical illness benefit, tax-free.  It can then be paid out as a taxable dividend to shareholders, or as a salary or bonus. Or the funds can stay within the corporation to help with business operations or funding shortfalls as the result of your illness.  

It’s important to realize that with split dollar critical illness insurance, you and your company jointly purchase the policy. However, the benefit isn’t shared. Either your company will receive the benefit (a payout if you’re diagnosed with a critical illness), or you’ll receive the benefit (the ROP cheque, if you haven’t been diagnosed with a critical illness within the amount of time specified). 

Individual pension plans: Beyond the traditional RRSP 

An individual pension plan (IPP) is a powerful retirement savings option, especially if you’re an incorporated business owner older than 40 with a T4 income of more than $100,000. Think of an IPP as a supercharged RRSP. It’s designed for business owners like you, with extra perks and benefits, including:  

• Higher contribution limits (up to 65% more than RRSPs), to help you maximize your retirement savings. 
• Tax-deductible deposits. Contributions to an IPP are tax-deductible for your corporation, which can enhance the tax-efficiency of your business. 
• Defined benefits. Unlike RRSPs, IPPs offer a defined benefit once you retire, providing you with a predicable stream of income. 
• IPPs don’t count towards the $50,000 federal passive income limit.   

Although IPPs come with lots of perks and benefits, they also come with some key considerations. IPPs need actuarial calculations and have higher administrative costs, so it’s important check and see if the benefits will outweigh the set-up and maintenance costs. We can help you run the numbers and see if an IPP is right for you. 

Maximizing business expense deductions 

Corporate insurance and retirement savings vehicles aren’t the only ways to lower your corporate taxes! Maximizing business expense deductions can go a long way to minimizing your tax bill. 

Eligible expenses that can reduce your corporate taxable income include: 

• Salaries and wages 
• Travel expenses 
• Management and administrative fees 
• Bank and interest charges 
• Overhead expenses 
• Office supplies and equipment 

It can be tempting to deduct anything and everything. But it’s important to do your homework, and make sure your deductions are for true business expenses. Follow these best practices for managing your expenses and deductions: 

1. Maintain detailed records! Keep your receipts and track your expenses in a spreadsheet for a smoother experience at tax time. 
2. Understand qualification criteria. What counts as a legitimate business expense? What doesn’t? 
3. Take time to review your finances throughout the year, and consult your financial, tax and legal professionals as needed – we're here to help.  
4. Stay current with changes to tax laws, to make sure you’re up-to-date on what you can (or can’t) deduct as a business expense. 
    

Smart investment strategies within your corporation 

Investing can provide long-term growth for your business, but be aware of the special considerations that come with corporate investing.

The first consideration is the types of income you can make with your business: active income and passive income. Active income is money you earn through your core business activities, such as your professional service fees or profits from your retail store. Passive income is money you earn outside of core business activities, and usually includes earnings from investments, dividend income, and rental or real estate income.

Managing your corporate passive income is crucial. That’s because corporate passive income faces higher tax rates – up to 50%, compared to 9% to 12% for active income. While your corporation can’t use TFSAs or RRSPs, corporate-owned insurance and IPPs can help lower your tax burden. Strategic portfolio construction also plays an important role – and we can help.

The second consideration is tax-efficient investing. There are lots of tax-efficient investment options and strategies we can use, including:  

• Leveraging corporate class funds for tax deferral 
• Focusing on capital growth over dividend income 
• Strategically using pooled fund structures 
• Minimizing annual passive income through distribution management 
   

While these options and strategies are complex, we can de-mystify them and work together to determine which ones are right for you and your business. 

Creating a comprehensive tax strategy 

While there are lots of great insurance, investment, deduction and savings options available to help you reduce your tax burden, it’s important to have the right mix of strategies working together. To maximize tax efficiency, consider:   

1. Using multiple strategies 

• Combine different approaches for optimal results. 
• Balance your immediate business needs with long-term planning. 
• Regularly review your strategies and adjust as needed.   
   

2. Collaborating with professionals 

• Work with tax specialists. 
• Consult financial planners and insurance professionals (that’s us!). 
• Meet regularly with your accountant to ensure your business financials are on track. 
   

3. Documentation and compliance 

• Maintain detailed records. 
• Stay current with tax laws. 
• Be prepared for audits.  
• Clearly document your financial policies.
   

4. Regularly reviewing and adjusting your tax strategies  

• Do an annual strategy assessment – do the strategies you’re using still make sense for your business?  
• Monitor market conditions – with the help of your tax and financial professionals.  
• Make sure your tax strategies accommodate your business growth.   
   

The bottom line 

Effective corporate tax planning isn't about using a single strategy – it's about implementing a comprehensive approach that aligns with your business goals while maximizing tax efficiency. The key is finding the right mix of strategies that work for your specific situation. 

Ready to optimize your corporate tax strategy? 

Don't leave money on the table through inefficient tax planning. Our team can help you: 

• Assess your current tax situation. 
• Identify optimization opportunities. 
• Implement appropriate strategies. 
• Monitor and adjust your plan as needed.
   

Contact us today to develop a tailored corporate tax strategy that helps your business retain more of its hard-earned profits while maintaining full compliance with Canadian tax laws.

Remember: The most effective tax planning is proactive, not reactive. The sooner you implement these strategies, the more potential benefits your corporation can realize. 

The information provided is based on current laws, regulations and other rules applicable to Canadian residents. It is accurate to the best of our knowledge as of the date of publication. Rules and their interpretation may change, affecting the accuracy of the information. The information provided is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax or other professional advisors.