Dr. Emily Chen, a 55-year-old sole practitioner, owns a successful dental clinic structured as a Professional Corporation (PC). Her PC generates $400,000 in annual active business income and holds $1.5 million in passive investments. She draws a salary of $150,000 and has maxed out her RRSP. She plans to sell her practice in 10 years and retire. What is the most tax-efficient strategy for managing the passive income within her PC now?

Question: Dr. Emily Chen, a 55-year-old sole practitioner, owns a successful dental clinic structured as a Professional Corporation (PC). Her PC generates $400,000 in annual active business income and holds $1.5 million in passive investments. She draws a salary of $150,000 and has maxed out her RRSP. She plans to sell her practice in 10 years and retire. What is the most tax-efficient strategy for managing the passive income within her PC now?

Answer options:

• Increase her salary to reduce the PC's active business income, as her personal marginal tax rate is lower than the corporate rate on passive income.
• Shift the passive investments into a personal non-registered account to avoid the high corporate passive investment income tax rate.
• Explore investing in Canadian public company shares to benefit from the dividend tax credit if paid out as eligible dividends to her personally. ✅ Reinvest all passive income within the PC to defer personal tax, even with the higher corporate tax rate on passive income.

Correct answer: Reinvest all passive income within the PC to defer personal tax, even with the higher corporate tax rate on passive income.

Explanation: Despite the higher corporate tax rate on passive income (which results in Refundable Dividend Tax On Hand - RDTOH), deferring the personal tax by retaining income within the corporation can still be advantageous due to the integration principle when dividends are eventually paid. Reinvestment within the PC can allow for compounding growth.