5 Tax Mistakes London Ontario Business Owners Make Every Year

The Costly Tax Mistakes London Business Owners Keep Making

Running a business in London, Ontario takes focus and energy. The last thing most business owners want to think about is tax strategy. But ignoring it can drain tens of thousands of dollars from your business over the years.

After working with business owners across London and Southwestern Ontario, I see the same costly mistakes again and again. Here are the five most expensive, and exactly how to fix each one.

Mistake 1: Not Optimizing the Salary vs. Dividends Mix

One of the most important decisions a London business owner with a corporation makes every year is how to extract money: as salary, as dividends, or as some combination of the two. Many owners pick one approach and never revisit it, leaving significant money on the table.

Why This Costs You Money

Salary and dividends are taxed differently, and each has distinct planning implications.

Salary is deductible to the corporation, creates RRSP contribution room (18 percent of salary, up to the annual maximum), requires CPP contributions (both employee and employer portions, totalling approximately 11.9 percent up to the maximum pensionable earnings), and is subject to source deductions.

Dividends are paid from after-tax corporate income, do not create RRSP room, are not subject to CPP, and are taxed at lower personal rates through the gross-up and dividend tax credit mechanism.

The Canadian tax system is designed so that, in theory, integration makes the total tax on corporate income paid as dividends roughly equal to the tax that would have been owed if the income were earned personally. In practice, integration is imperfect, and the optimal mix depends on your specific situation.

A common mistake is paying yourself entirely in dividends to avoid CPP contributions. While this saves CPP premiums short-term, it means no CPP pension entitlement and no RRSP room. For a business owner in their 30s or 40s, the lost RRSP room alone can cost hundreds of thousands in tax-deferred compounding over a career.

How to Fix It

Run the numbers annually. The optimal strategy for many London business owners is to pay enough salary to maximize RRSP room (approximately $180,500 for 2026), then top up with eligible dividends. For business owners closer to retirement with substantial savings, a dividend-heavy approach may make more sense. Annual tax planning reviews are essential.

Mistake 2: Ignoring Individual Pension Plans

An Individual Pension Plan, or IPP, is a defined benefit pension plan registered with the CRA that allows incorporated business owners and incorporated professionals to contribute significantly more toward retirement than an RRSP alone would allow. Despite being one of the most powerful retirement savings tools available, most London, Ontario business owners have never heard of it.

Why This Costs You Money

RRSP contribution limits are capped. For 2026, the maximum RRSP contribution is $32,490. For business owners over age 40, an IPP often allows for annual tax-deductible contributions that exceed the RRSP limit, sometimes by a significant margin. The older you are, the larger the contribution room, because the plan is designed to fund a defined benefit pension based on your years of service and earnings.

Here is where it gets even more valuable. If you have been incorporated for many years and have been paying yourself a salary, you may be able to make a past-service contribution to your IPP. This is a large, tax-deductible, one-time contribution that recognizes the years of service you have already provided. For a business owner in their 50s who has been paying a consistent salary for 15 or more years, this past-service contribution can be well into the hundreds of thousands of dollars, all deductible to the corporation.

Business owners in London, Ontario who rely exclusively on RRSPs are leaving significant tax-sheltered room on the table. Over a 10- to 20-year period, the additional contributions allowed by an IPP can result in hundreds of thousands of dollars more in tax-sheltered retirement savings compared to an RRSP alone.

How to Fix It

Talk to a financial planner who understands IPPs and can model the numbers for your specific situation. The IPP works best when you are over 40, have been incorporated for several years, and are paying yourself a regular salary. The cost of setting up and administering the IPP must be weighed against the additional contribution room, but for most qualifying business owners in Ontario, the math is overwhelmingly in favour of the IPP. Coordinate this with your overall retirement planning strategy.

Mistake 3: Missing the Corporate Life Insurance CDA Strategy

This is the mistake that surprises most London business owners when I bring it up. Corporate-owned life insurance is not just about protecting your family if something happens to you. It is one of the most tax-efficient wealth transfer tools available in Canada, and most business owners have never heard of it.

Why This Costs You Money

When a corporation owns a permanent life insurance policy and the insured person dies, the death benefit is paid to the corporation. The amount of the death benefit that exceeds the policy's adjusted cost basis is credited to the corporation's Capital Dividend Account (CDA). Funds in the CDA can be distributed to shareholders as tax-free capital dividends.

This means that a significant amount of wealth can be transferred from a corporation to the next generation completely free of personal income tax. Without this structure, money retained inside a corporation is eventually taxed at personal rates when extracted as dividends, whether during the owner's lifetime or by their estate.

Additionally, the cash value growth inside a permanent life insurance policy is not considered passive income for purposes of the small business deduction grind. This makes corporate-owned life insurance a powerful way to build tax-sheltered wealth inside your corporation without jeopardizing your access to the low small business tax rate.

To put this in concrete terms: if your corporation owns a $2,000,000 life insurance policy and the adjusted cost basis at the time of death is $200,000, then $1,800,000 gets credited to the CDA and can be paid to your beneficiaries completely tax-free. Compare this to the alternative of accumulating $2,000,000 inside the corporation in a taxable investment portfolio and then paying it out as dividends, where your family might lose $800,000 to $1,000,000 in combined corporate investment tax and personal dividend tax.

How to Fix It

If you have a profitable corporation with retained earnings that you do not need immediately for business operations, speak with a financial planner who understands both life insurance and corporate tax planning. The ideal time to put this structure in place is when you are healthy and have a long time horizon, because premiums are lower and the policy has more time to build cash value. Read our full guide on corporate life insurance for more details.

Mistake 4: Not Planning for the Passive Income Rules

Since 2019, the federal government has imposed a passive income grind on the small business deduction. If your corporation earns more than $50,000 in passive investment income in a given year, your $500,000 small business limit begins to shrink. For every $1 of passive income above $50,000, you lose $5 of small business limit. At $150,000 of passive income, the small business deduction is eliminated entirely.

Why This Costs You Money

A Canadian-controlled private corporation pays a combined federal and Ontario tax rate of approximately 12.2 percent on the first $500,000 of active business income that qualifies for the small business deduction. If your corporation loses access to this deduction because passive income exceeds $50,000, your active business income gets taxed at the general corporate rate of approximately 26.5 percent instead.

On $500,000 of active income, that is an additional $71,500 in corporate tax, every single year. For a profitable London, Ontario business with a healthy corporate investment portfolio, this is a trap that can be triggered without the owner even realizing it.

How to Fix It

Monitor your corporate passive income carefully. If it is approaching $50,000, consider strategies to manage it: using corporate-owned permanent life insurance (which does not generate passive income that counts toward the grind), restructuring investments to favour capital gains over interest income (since only 50 percent of realized capital gains are included), or paying out dividends from the investment portfolio to reduce the corporate asset base.

This is an area where working with someone who understands both corporate financial planning and investment management structures can save you far more than the cost of advice.

Mistake 5: Having No Succession Plan

Most London business owners pour their energy into building and running their business. Very few spend adequate time planning for what happens when they want to step back, sell, or pass the business to the next generation. This is not just a personal oversight. It is a tax mistake that can cost hundreds of thousands of dollars.

Why This Costs You Money

Without a succession plan, a business transition triggered by retirement, disability, or death is often chaotic and tax-inefficient. Common problems include:

No buy-sell agreement. If you have business partners and one of you dies or becomes disabled, what happens? Without a funded buy-sell agreement, the surviving partners may not have the capital to buy out the departing owner's share, and the departing owner's family may be forced to accept a discount or fight through litigation.

No estate freeze. An estate freeze allows you to lock in the current value of your shares for tax purposes and pass future growth to the next generation. Without it, all of the future growth in your business accrues to your estate, increasing the capital gains tax bill when you die. For a London, Ontario business that appreciates by $1 million or more between now and the owner's death, the tax on that unfrozen growth could exceed $250,000.

No timeline. Succession planning is not a single event. It is a process that typically takes three to five years to execute properly. If you start planning the year you want to retire, you have already missed opportunities to structure the transition in a tax-efficient way.

How to Fix It

Start succession planning at least five years before you expect to transition out of the business. Key steps include:

• Implement an estate freeze to cap the value of your current shares and issue new growth shares to the next generation or a family trust.
• Create and fund a buy-sell agreement with your business partners, typically funded by life insurance so that cash is available when needed.
• Develop a timeline that includes leadership transition, client relationship transfer, and gradual reduction of your involvement.
• Coordinate with your personal estate planning to ensure your business transition aligns with your overall wealth transfer goals.

This is one of the most complex areas of financial planning, and it sits at the intersection of tax law, corporate law, insurance, and family dynamics. Getting it right requires professional guidance. Getting it wrong can unravel decades of hard work.

The Common Thread

Every one of these mistakes shares a root cause: business owners are so focused on running their business that they do not step back to plan the financial structure around it. But the business owners in London, Ontario who build lasting wealth treat tax and succession planning with the same discipline they bring to operations.

If you recognize yourself in any of these mistakes, you are not alone. These are fixable problems. The key is to act before the tax bill arrives.

Next Steps

I work with London, Ontario business owners to build comprehensive corporate financial plans that address all five of these areas: salary and dividend optimization, Individual Pension Plans, corporate-owned life insurance, passive income management, and succession planning. Every plan is tailored to your specific business, your family situation, and your goals.

Book a free 15-minute call and let's review your current structure. In most cases, we can identify significant tax savings within the first conversation.