Mrs. and Mr. Smith, both aged 50, own a successful CCPC. They expect to be able to set aside another $100,000 per year for the next 10 years to supplement their retirement income.

Assume that they fully use their small business deduction and already have a corporate reserve that generates $50,000 per year (the threshold limit).

They have three main options to save that $100,000:
1. In an investment account
2. Taking a dividend of $100,000 per year and saving it personally
3. Using corporate-owned exempt life insurance

Here’s how each would work.

1. In an investment account
Assuming the investment account earns 5% per year, the company will earn $5,000 in investment income.

Under the new passive investment rules, the business will be liable for $2,508 in corporate income taxes, and face a reduction in their small business deduction of $25,000 (five times the investment income of $5,000).

Let’s assume the tax savings offered by the small business deduction are worth about 12% by subtracting the 14% small business rate from the 26% general rate. This means the Smiths would lose about $3,000 (12% of $25,000) in tax benefits because their corporation earned $5,000 in investment income above the $50,000 threshold.

That leaves the Smiths with $99,492: $100,000 capital plus $5,000 investment income, less $2,508 corporate taxes and the $3,000 lost tax benefit.

2. Taking a dividend
The Smiths could draw the $100,000 out of the company in the form of a dividend and have that amount taxed as such. That would leave them with $56,370, assuming a 45% effective tax rate on the dividend and a 53.5% tax rate on the investment earnings.

3. Using exempt life insurance
Depending on the design of the life insurance policy, the account value (before surrender charges) could be about $99,001 at the end of year one and the death benefit would be about $2,254,000.

Options 1 and 3 would allow for tax deferral within the corporation, while Option 2 would permit the Smiths to withdraw capital from the investment portfolio tax-free