This week, we are interested in the question of our reader, Simone, who writes: “Over the years I have accumulated investments (approximately $350,000) in the incorporated company through which I billed my consulting services . I am now 67 years old and I hesitate between “emptying” the company over two years or paying myself a dividend of approximately $35,000 over 10 years. I don’t want to keep the company going all my life. What is the best option, knowing that I may still be billing clients for services of around $30,000 for a few more years of pre-retirement? »
The real question
In the case of our reader, the real data to be considered to determine the optimal disbursement method will be circumscribed by her liquidity needs. In short: how much money will she need, each year, to meet her personal cost of living?
On the one hand, it is necessary to determine what his current income is. Has she already applied for her pension from the Régie des rentes du Québec (RRQ)? Does she receive the Old Age Security (OAS) benefit? Does she have other income to consider (spousal support, for example)?
In an integrated financial and tax planning approach, the first piece of advice I could give him is rather to determine the amount of annual dividend required to meet his needs, in order to limit taxation to a minimum, annually.
According to this strategy, it would theoretically be more advantageous to limit the cash flow of the disbursement of dividends to the true need for cash, by using in priority TFSA and non-registered investments held personally.
Visualize to better understand
We confirm with Madame her personal cost of living, which is $45,000 per year. Considering these relatively low personal needs, considering the annuity income she already receives, the simulations in a financial planning software make it possible to effectively visualize that it is more interesting for her to disburse the dividends over 10 years rather than having to add to his 2022 and 2023 tax return a dividend of $175,000!
Indeed, in this scenario, Ms. exposes herself to a significant recovery of the OAS since she does not have unused RRSP rights (approximately $15,000 for 2022) to reduce her taxable income. In addition, since her TFSA portfolio is already maximized, she must, in this scenario, invest the amount available after taxes in a portfolio of non-registered investments, which generates taxable income. On the other hand, the scenario with the dividends for 10 years makes it possible to maintain taxation at a lower rate, while avoiding the recovery of the PSV.
A pragmatic approach
Considering that our reader is still billing and that deposits are expected in the coming years, combined with the fact that her lifestyle is low and that at age 71 there will be added disbursement income from the Registered Retirement Income Fund (RRIF) , I would be tempted to want to optimize Madame’s situation as much as possible by making scenarios based on a dividend minimizing taxes each year.
However, in the case submitted by Madam, it is necessary to distinguish the theoretical approach from a pragmatic approach taking into account its goals and priorities. Indeed, it seems important for our reader to dissolve her company in the coming years. She wants easier management for “her old age” and, moreover, it must be taken into account that she pays accounting fees for the management of her business.
In addition, she presents a very conservative investor profile, with a portfolio of guaranteed investments (GICs) whose returns are very limited, which eliminates the question of the best time to sell her investments in the context of the current markets.
In the light of the information I have in hand, I would rather advise him to determine the amount of dividend that allows not to generate recovery of the PSV. We arrive at a scenario where she disburses over seven years instead of ten, while earning three years of retirement funded at 100% of her lifestyle.
In conclusion, this case study demonstrates that, very often, you can hesitate between two scenarios and that in fact, the best solution is elsewhere! Note that this is a relatively simple situation since the company’s only assets are investments.
In the case of a company with permanent life insurance, shares in other companies and/or real estate, you will most likely have to be the shareholder until your last breath!