How Can a Small Business Owner Structure Their Investments to Minimize Personal and Corporate Taxes in Ontario?
Structuring investments is one of the most impactful financial decisions a small business owner in Ontario can make. Done properly, it can reduce both personal and corporate taxes, protect your assets, and help your business grow more efficiently. In this guide, we walk you through the most common strategies Ontario business owners use, and how to think about investment planning as both an entrepreneur and an investor.
Why Structuring Matters for Ontario Small Business Owners
Business owners face a unique tax environment where:
- Corporate income is taxed separately from personal income
- Passive income inside a corporation is taxed differently than active income
- Taking money out of the corporation (salary or dividends) affects RRSP room and tax brackets
- A holding company can provide flexibility, protection, and tax deferral
Because of this, structuring your investments properly can dramatically improve long-term wealth building.
Corporate vs Personal Investing: Understanding the Difference
Corporate Investments
Corporate dollars can be invested before personal tax is paid, allowing for tax deferral — but passive income inside a corporation is taxed differently and can impact small business rates.
Personal Investments
Personal investing through RRSPs, TFSAs, and non-registered accounts often offers better long-term tax treatment than leaving all investments inside the corporation.
Opco & Holdco — The Most Popular Structure in Canada
Most established business owners eventually adopt a two-company structure:
- Opco — Your active operating company where business income is earned
- Holdco — A separate holding company used to store retained earnings and investments
Why this structure is so common:
- Protection: Move surplus cash and investments out of the operating company to reduce exposure to business risks and creditors.
- Tax deferral: Keep profits inside Holdco instead of withdrawing everything personally in high-tax years.
- Flexibility: Use Holdco to buy real estate, invest in other companies, or prepare for succession planning.
- Small business rate planning: Keep passive income out of Opco so it doesn’t erode your small business deduction.
RRSPs & TFSAs — Powerful Tools for Personal Tax Reduction
RRSP
Contributions are tax-deductible and investment growth is tax-deferred until withdrawal. Paying yourself enough salary to build RRSP room can be a powerful long-term strategy.
TFSA
All growth and withdrawals are tax-free. For many owners, moving after-tax dollars out of the corporation and into a TFSA can be more efficient than holding passive investments corporately.
For many Ontario business owners, withdrawing some surplus funds as dividends, then using RRSPs and TFSAs personally, creates better after-tax outcomes over time than leaving all surplus capital inside the corporation.
Salary vs Dividends — Which Is Better for Tax Planning?
Business owners can usually pay themselves in two main ways, each with its own tax impact:
| Method | Benefits | Considerations |
|---|---|---|
| Salary |
|
|
| Dividends |
|
|
Many Ontario owners end up using a blend of salary and dividends to balance immediate tax, retirement savings, and cash-flow needs.
Passive Corporate Investments — When Do They Make Sense?
There are situations where it can still make sense to hold investments inside a corporation or holding company, including when:
- You want to defer personal tax and keep funds growing corporately.
- You plan to reinvest corporate funds into business acquisitions or real estate.
- You are building a pool of capital for future succession, buyouts, or retirement planning.
However, passive income inside a corporation can attract higher effective tax rates and may reduce your access to the small business deduction once it crosses certain thresholds. This is a key reason to review your structure with a tax professional regularly.
Key Questions to Ask Before Making a Move
- How much surplus cash do I truly have beyond operating needs and reserves?
- Should I move surplus cash to a holding company for protection and flexibility?
- Is it more efficient to invest extra funds corporately or personally (RRSP/TFSA)?
- Am I at risk of generating too much passive income in my corporation?
- Does a salary/dividend mix make more sense than using just one method?
Final Thoughts
Structuring your investments wisely can help you:
- Minimize personal and corporate taxes
- Protect assets from business risk
- Build long-term wealth in a tax-efficient way
- Align business profits with your personal financial goals
Most Ontario entrepreneurs benefit from some combination of:
- A holding company for surplus profits and investments
- A thoughtful salary/dividend strategy each year
- Consistent RRSP and TFSA contributions
- Regular check-ins with a CPA or tax advisor as rules and circumstances change
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Apply for a Business LoanThis article is for informational purposes only and is not tax, legal, or investment advice. Always consult a qualified accountant or tax professional about your specific situation.
Written by:
An entrepreneur at heart, Rafael co-founded Smarter Loans in 2016. He spent over a decade helping financial brands with their digital marketing. Passionate about helping Canadian consumers and businesses access capital in a fast, safe and convenient way he continues driving Smarter Loans towards growth as the CEO. Rafael is an author at Smarter Loans and he writes about entrepreneurship, business, finance and more.
