You might have heard the term –passive income. In fact, building a steady, sustainable passive income is one of the main goals retirees and early retirement cultists FIRE subscribe to ( Financial Independence, Retire Early ).
But for active Canadian business owners, should you start building an investment portfolio that generates a passive income with the profits in your corporation?
The simple answer is, NO!
That’s because you pay high tax on any investment income earned inside your corporation. The main benefit of a business owner is incorporating, and being incorporated allows you to defer taxes if you do invest properly.
As a business owner, if you start building passive income from dividends and interest inside your corporation while your business is active, you’re going to do 2 things:
1. Pay a ton of tax upfront, significantly reducing the rate at which your investments grow and compound.
2. Potentially sabotage your small business tax rate. That’s your preferred rate as a small business owner on your company’s active business income.
As a business owner, you should avoid anyone preaching FIRE investment strategies and ignore the advice from the columnists at the Globe and Mail suggesting you invest in a global dividend stock portfolio.
Instead, focus exclusively on investments that generate capital gains when sold