I have about $300,000 invested through my Holdco as retirement savings. The investment is growing, but I haven’t maxed out my TFSA yet. Should I take the money out of my Holdco, pay the tax on it, and let it grow tax free in the TFSA?
A personal holding company is often referred to as a “Holdco.” It is basically a corporation that primarily exists to hold investments, or shares of a company that carries on an operating business, rather than owning the investments or shares in your personal name.
TFSA contributions can only be made by an individual and not by a corporation. As a result, to make a TFSA contribution using income from your Holdco, you must first withdraw the funds from the Holdco as a corporation.
Assuming you are located in Ontario, the withdrawal of funds from your Holdco will be taxed at 47.74% (the highest personal rate in Ontario for 2021). As an example, for you to make the maximum TFSA contribution of $6,000 in 2021, you would need to withdraw an ineligible dividend of $11,481 ($6,000/ (1-0.4774%)) from your Holdco. Further, to free up the $11,481 in the Holdco to create the cash to pay the dividend, you may need to sell a holding—which would trigger corporate taxes in the Holdco at roughly 25% tax.
We recommend that you let the investments in your Holdco “ride.” With more investment capital in the Holdco, a higher rate of return over a longer time period increases the benefits from reinvesting corporate investment income. For deferred capital gains, corporate investments would always yield a greater amount than a TFSA. Think of these assets as a retirement bucket from which you can draw an income or cash flow in the future. The longer you can postpone the personal income tax hit, the better. There is also a good chance that in retirement your personal tax rate will also fall below the current rate of 47.74%. Buying good quality blue chip shares in your Holdco and holding them long-term creates $nil corporate tax, and the dividends collected and reinvested pay you to be patient.
Here is a challenge for you to consider: Set a savings goal for your Holdco – new money invested that is higher than the TFSA limit of $6k but something you can aim for each year.
S+C Partners is committed to helping you.
The taxation of a Holdco, like any private corporation, can be complex. Corporate and personal tax rates will vary by province or territory and with the type of investment income earned by the Holdco. We strongly recommend you speak to a professional advisor about your specific situation prior to accessing or distributing funds from your Holdco for personal use.
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