Don't Ignore Tax on Your Corporate Portfolio
How active trading destroyed returns through hidden tax costs—and why business owners consistently ignore investment income taxes
Client Profile: Mike
Background
Profile
Business owner, active trader
Trading Strategy
Individual stocks (TSLA, META) and ETFs (SPY, QQQ)
Trading Frequency
Multiple transactions, some positions <24 hours
Portfolio Performance
Period
7 years (January 2019 - January 2026)
Starting Balance
$510,000
Ending Balance
$1,540,000
Monthly Deposits
$1,000 throughout the period
Tax Situation
Total Taxes Paid
$128,700
Tax Years
2019-2025 (7 years)
The Problem
Taxes buried in total corporate tax bill
Perception vs. Reality
What Mike Thought
15.48% pre-tax IRR
True After-Tax IRR
11.63% (if liquidated)
Tax Drag
1.49% per year
The Discovery: Opening the Tax Returns
What we do together is simple: we open the tax returns and we run the IRR calculator to find out exactly what the net IRR on the portfolio is after tax.
The Process
- We reviewed Mike's T2 returns for each year (2019-2025)
- We identified the actual taxes paid on investment income for each year
- We entered all the data into the IRR calculator
- We discovered the true after-tax performance
The Reality
For years, Mike felt he was achieving good results. But in effect, not so much. His true after-tax return was 11.63%, not the 15.48% he thought he was achieving. The difference compounds over time.
The problem: Business owners rarely ask their accountants to break down the tax bill by source. They see one number—total corporate tax—and move on. Investment income taxes are buried within, so there's no clarity on how much precisely is wasted on tax from investment income.
The True Performance Numbers
Based on 7 years of actual data from Mike's portfolio
Key Insight
The difference between 15.48% pre-tax and 11.63% after-tax is 3.85 percentage points. This tax drag compounds over time, costing millions in lost growth over decades.
The Hidden Cost: Tax Drag Over 20 Years
The 20-year projection tells the real story
20-Year Ending Balance (Pre-Tax IRR)
$27,398,789
If taxes didn't exist
20-Year Ending Balance (After-Tax IRR)
$13,893,066
Reality with tax drag
Total Tax Cost Over 20 Years
$13,505,723
The cost of ignoring tax efficiency
Tax optimization matters.
The difference between pre-tax and after-tax returns compounds over time. A 1.49% annual tax drag costs you $13,505,723 over 20 years.
Strategies like corporate-class funds, capital gains optimization, and CDA planning can significantly reduce this cost.
The Comparison: Active Trading vs. Tax-Efficient Funds
Two approaches for managing corporate investment portfolios
The Hidden Risks of Active Trading
CRA Business Income Risk
With Mike's numerous transactions and positions sometimes lasting less than 24 hours, CRA can easily qualify his trading as business income.
The Impact:
- Double the tax (business income ~50% vs capital gains ~25%)
- Penalties and interest on reassessments
- Retroactive impact on multiple years
The Time Cost
If the time invested in trading was invested in Mike's business, we're talking at least 2-3 hours per day.
The Opportunity Cost:
2-3 hours/day × 365 days × 7 years = 5,110 to 7,665 hours (1.25 to 1.9 years of full-time work). Can you imagine how much better his core business would have become?
The Emotional Need
I admire and understand the emotional need for control satisfied by personally trading the non-registered corporate account. But at what cost?
The Solution:
Trading is fine in RRSP or LIRA accounts (no tax on investment income). Use tax-efficient funds in your corporate account for long-term wealth building.
Key Takeaways
What this case study demonstrates
Calculate Your True IRR
Business owners consistently ignore investment income taxes because they're buried in the total tax bill. Use the IRR calculator to find your true after-tax performance.
Tax Efficiency Matters
A 1.49% annual tax drag costs $13.5 million over 20 years. Tax-efficient funds can deliver 15%+ returns with less than 1% annual taxable gains.
Time Has Value
Active trading requires 2-3 hours per day. Tax-efficient funds require zero time, allowing you to focus on your core business where you can generate real value.
The Solution: Get the Best of Both Worlds
You can satisfy the need for control while optimizing tax efficiency
For Corporate Accounts
Use tax-efficient investment funds (corporate-class funds) that prioritize tax efficiency:
- 15%+ returns with <1% annual taxable gains
- Lower risk than active trading
- Zero time required
- No CRA business income risk
For Personal Accounts
Active trading is fine in RRSP or LIRA accounts:
- No tax on investment income in registered accounts
- You can satisfy the need for control and active trading
- Tax efficiency isn't a concern in registered accounts
- TFSA: Not suitable for active trading (limited contribution room)
The Result
You maintain control where it matters (your business), satisfy the emotional need for active trading in registered accounts, and optimize tax efficiency in your corporate portfolio.
Calculate Your True After-Tax IRR
The problem is clear: business owners consistently ignore taxes on investment income because they're buried in the total tax bill. There's no clarity on how much precisely is wasted on tax from investment income.
Important Disclosure
This case study is illustrative only and not a substitute for professional advice. The calculations and projections shown are for educational purposes only and are based on assumptions that may not reflect your actual circumstances. This case study is not a replacement for your tax returns, investment statements, or professional financial advice.
Tax rates, investment returns, and your specific situation will vary. Always work with your CPA, investment advisor, and other professionals to make decisions based on your specific circumstances. Past performance does not guarantee future results.