A plan for the cash building up in your company.

Before you invest company cash, give it a job. Some of it covers next month's payroll. Some belongs to tax instalments or an equipment purchase. Only the amount beyond those commitments can support a longer plan.

A larger bank balance can make an owner feel ready to invest while a late customer payment still leaves the company short. Start with current records and a cash forecast.

Separate operating cash from long-term capital

1. List payroll, tax, loan payments, supplier bills and committed purchases, including their due dates.
2. Choose an operating reserve that reflects collection delays, seasonality and the cost of a slower month.
3. Set aside money you'll need personally, including the tax on taking it out of the company.
4. Compare uses for the amount that remains: business investment, debt repayment, owner pay or longer-term investing.

Use the same date and the same cash requirement for each option. A long-term investment isn't a working-capital reserve if selling it at the wrong time would leave you unable to pay the bills.

The tax deferral has a second step

Retaining profit may leave more money available inside a corporation initially. The final comparison also needs the corporate tax on investment returns and the personal tax when money reaches you. Different income types can have different treatment.

Some corporate investment tax may become refundable when the company pays taxable dividends. A comparison that ignores those refunds can misstate the result just as much as one that ignores the personal tax on withdrawal.

Source: CRA: corporate investment income and dividend refunds.

Investment income can affect business tax

For a Canadian-controlled private corporation with the full $500,000 federal business limit, the passive-income reduction removes $5 of that limit for each $1 of adjusted aggregate investment income above $50,000. It reaches the full limit at $150,000. Associated companies' amounts are combined, generally using taxation years ending in the preceding calendar year.

This illustration assumes a full-year limit with no allocation, assignment or taxable-capital reduction. An allocated limit changes the calculation. The income measure has specific inclusions and exclusions; portfolio value and total cash received aren't substitutes for it.

Source: CRA: passive-income reduction formula.

The actual tax consequence also depends on eligible active business income and the applicable federal and provincial rules. A reduction in an unused limit may have no current tax cost.

Source: CRA: current T2 guide, small business deduction.

A holding company needs a reason

Moving investments into an associated holding company doesn't give the group a fresh $50,000 passive-income threshold. An extra company also brings setup, legal, filing and administration costs.

Compare the intended benefit with those costs and the tax treatment of the proposed transfer. Asset protection depends on the legal structure and facts; a holding company doesn't automatically protect every asset or qualify a future share sale for an exemption.

When keeping the cash available comes first

A long-term investment plan may be premature if taxes are unfunded, customer receipts are uncertain, debt terms restrict distributions or a near-term purchase will use the money. Paying cash out now may also be inefficient if it forces a later loan back to the business.

Bring the current balance sheet, investment statements, corporate tax schedules and your household cash requirement into the review. Add any planned sale or restructuring. The decision should show the cash you'll have available, when you'll have it and which assumptions could change the outcome.