Short answer: Keep enough that you never have to sell, borrow or withdraw at a bad time. For most owners that means about six months of operating costs and owner pay, plus the taxes you already know are coming, plus spending you have planned in the next three years. If your revenue is uneven, keep more. Only money beyond that reserve belongs in a long-term strategy. These are rules of thumb, not tax rules.
How do I size the reserve?
Think in three buckets. Add them up. Whatever sits above that total is the money you can think about committing for the long term.
| Bucket | What it covers | Illustration |
|---|---|---|
| Operating reserve | Six months of operating costs and owner pay | $40,000 a month x 6 = $240,000 |
| Known obligations | Corporate tax, HST, declared dividends, personal tax on planned payouts | $60,000 |
| Planned spending, next three years | Equipment, a renovation, a hire, a buy-in | $50,000 |
| Total set aside | $350,000 |
Illustration: If the corporation holds $600,000, the amount to think about committing is $250,000. The figures are examples. Use your own.
Why six months?
It is a rule of thumb, and I use it because it covers most slow stretches a healthy business hits: a late-paying client, a lost contract, a seasonal gap. It is not a tax requirement or a regulation.
What if my income is uneven?
Add months. A business with a few large clients, project work, or seasonal swings can reasonably hold nine to twelve months. The test is how long it would take you to recover if your largest source of revenue stopped.
What happens if I commit too much?
The cost shows up when you need the cash early. Each long-term option has its own version of that cost.
- A market investment may be down when you need it, so selling locks in a loss.
- Real estate can take months to sell, and selling costs are high.
- A whole life contract usually has cash value below the total premiums paid for the first several years, depending on how it is designed. Surrendering early costs you.
- An individual pension plan is locked in until retirement.
None of these is a flaw. They are the price of what the structure does for you, and the reason the reserve comes first.
How long should long-term money stay committed?
My rule of thumb is five years or more for market investments and ten years or more for permanent insurance. If you may need most of the money back sooner than that, it belongs in the reserve.
Does the reserve count as passive income?
Yes, if it earns interest. Cash in a corporate savings account or a short-term deposit produces interest, and interest counts as passive investment income toward the $50,000 threshold that reduces your small business deduction. Most owners hold reserves well below the level where this matters, but a large reserve earning a high rate can add up.
Related questions people ask
Is six months enough?
For a stable business with diversified clients, usually yes. For a business with one or two dominant clients, long sales cycles, or seasonal revenue, nine to twelve months is more common. Pick the number that matches how long it would take you to recover.
What should I do first if I have no reserve yet?
Build one before committing to anything long-term. Direct new profit to the corporation's reserve until it reaches your target. A long-term strategy funded from an empty reserve is how owners end up borrowing at the worst moment.
Should the reserve sit in the corporation or personally?
It depends on what it covers. Business operating costs belong in the corporation. The personal portion of owner pay can sit in either place, but money in the corporation is not yours until you pay it out and pay tax on it. Your accountant can help you decide how much to hold on each side.
Where can I read about the long-term options?
See what to do once your RRSP and TFSA are maxed and whether to invest inside your corporation or take the money out.
Want to see how this applies to your corporation?
Book a call and we will look at your numbers together. If none of this fits, I will say so.
Book a call with Donny