Introduction

A corporation with $2 million in retained earnings has reached a level where the planning decisions made each year have compounding consequences measured in tens of thousands of dollars annually. This is not the level at which the basic questions are asked — it is the level at which multi-entity structure, investment allocation, estate planning, and retirement sequencing all converge.

The Passive Income Position at $2 Million

A $2 million corporate investment portfolio at a 5% return generates $100,000 of annual passive income — well above the $50,000 AAII threshold. At $100,000 of AAII, the SBD is reduced by 250,000 of eligible active income ($100,000 - $50,000 × $5 reduction per dollar = $250,000 of SBD reduction). A corporation with $400,000 of active income would have only $150,000 eligible for the SBD — with $250,000 taxed at the general rate.

If the entire $2 million is inside the operating corporation, the SBD erosion is approximately $35,750 in additional annual corporate tax compared to having all income below the SBD threshold.

The Two-Entity Structure Is No Longer Optional

At $2 million, the holdco is not a planning consideration — it is a structural requirement for protecting the SBD on active income. The investment portfolio should be split:

Operating corporation: Retains working capital and a small investment reserve — enough to generate less than $50,000 of annual passive income. At a 5% return, this means the operating investment portfolio stays below approximately $1 million.

Holding company: Receives the excess — $1 million or more — through annual inter-corporate dividends. The holdco accumulates and manages the investment portfolio without affecting the operating corporation's AAII calculation.

The Investment Allocation at $2 Million

At this level, the investment portfolio inside the holdco warrants deliberate asset allocation planning. The key considerations:

RDTOH tracking: Different types of investment income generate different RDTOH accounts (eligible RDTOH for eligible portfolio dividends, non-eligible RDTOH for other passive income). The RDTOH balance affects the tax cost of distributions and should be tracked accurately.

CDA building: Growth-oriented investments that generate capital gains over time build the CDA balance — the source of future tax-free distributions. At $2 million, the CDA strategy should be explicitly planned rather than passively accumulated.

Asset location: Certain investments are more efficient inside the corporation (growth equities with capital gain treatment) and others are more efficient inside registered accounts (fixed income with interest income — which is fully taxable in the corporation but tax-deferred in the RRSP).

The Estate Planning Dimension

At $2 million in corporate retained earnings, the deemed disposition at death — the capital gain on the shares — is a significant estate planning concern. As discussed in Article 130, the shares' FMV reflects the underlying retained earnings. A professional with $2 million in a holdco and low ACB shares has a deemed capital gain at death approaching $2 million.

The planning tools at this level:

An estate freeze — converting existing common shares to fixed-value preferred shares and issuing new growth shares to family members or a family trust.

Corporate-owned life insurance to fund the terminal return tax.

Annual distributions to reduce the retained earnings (and therefore the share value) over time.

The Annual Planning Rhythm

At $2 million, the annual planning conversation with the CPA should cover:

Annual passive income from both entities — is the operating corporation below the AAII threshold?

RDTOH balances and the optimal dividend type for the year

CDA balance and timing of capital dividend elections

Compensation structure and RRSP contribution

Estate freeze timing and share value

Life insurance adequacy relative to the terminal return exposure

This is a full annual review — not a filing exercise.

When to Speak With a CPA

At $2 million, the CPA relationship should be proactive and year-round rather than reactive at filing time. The planning decisions at this level have compounding effects that accumulate over years — and the cost of not making them is measured in permanent tax leakage, not just delayed filings.

Rotaru CPA works with incorporated professionals at the $2 million retained earnings level on multi-entity structure, estate planning, and annual tax optimisation. Book a consultation to review your full wealth picture.