Episode 75: Crossing the Corporate Veil: Tax Planning For Canadian Business Owners 

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Are you tired of the salary vs. dividends debate for Canadian incorporated business owners? 

In today’s episode, we’ll dig deeper into the land of personal and corporate tax minimization strategies to uncover some Canadian Wealth Secrets to tax-free or tax-optimized income from your corporation.

As incorporated entrepreneurs and investors, we are tirelessly working to optimize our businesses to increase income and reduce expenses – typically re-investing our profits back into our own business or seeking to grow those profits through other investment vehicles. 

However, despite this endless commitment to growing our businesses and our investments, the vast majority of serial entrepreneurs and investors leave little to no time, energy and effort to understand how they can pay less income taxes in order to fatten those margins and ultimately unlock additional capital for reinvestment in whatever opportunity you feel is best for your wealth building path. 

Big Takeaways:

• Should I buy assets in my personal name or Canadian corporation? 
• How should I structure my personal income using salary and/or dividend? What’s the right mix? 
• How to create flexibility and security when mixing asset ownership on each side of the Canadian corporate border.
• How to use your retained earnings as fuel for your Canadian corporate wealth building engine. 

Resources:

• Episode 66: Salary or Dividends? How Should I Pay Myself To Minimize My Tax Burden?
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX. 

Let’s Connect For A Discovery Call!

For those interested in having a review of your financial wealth plan, learning more about potential joint venture (JV) opportunities, or a mortgage review, book a free discovery call now.

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Detailed Episode Summary 

Optimizing Income Tax for Canadian Business Owners

Jon, Kyle, and Jon Orr discussed strategies to optimize income tax for Canadian incorporated business owners. They highlighted the importance of understanding the corporate veil, the difference between personal and corporate taxes, and the implications of salary versus dividend payments. They also stressed the need for advanced thinking and compliance to maximize after-tax income. The trio agreed to delve deeper into these strategies in future episodes of their podcast, “Canadian Wealth Secrets.”

Proactive Tax Planning Strategies for Incorporated Business Owners and Entrepreneurs

Kyle and Jon discuss proactive tax planning strategies for business owners, exploring the idea of strategically using RRSPs to minimize taxes over the long-term. They consider the role and limitations of accountants in providing tax advice tailored to each client’s unique situation. Kyle emphasizes the importance of business owners understanding tax strategies themselves, while consulting accountants for specific guidance based on their full financial picture.

Maximizing Net Worth and Minimizing Taxes on Both Sides of the Corporate Veil

Kyle and Jon discussed strategies for maximizing net worth and minimizing tax liability. They highlighted the importance of understanding the corporate bail, leverage, and the benefits of having a tax-free strategy. They also discussed the need to overcome mindset barriers to optimize corporate and personal wealth management plans. A key point was the flexibility that comes with having assets in both a corporate and personal structure, which allows for more intentional planning and investment strategies. They emphasized the importance of considering future planning and capital gains tax when deciding whether to hold assets personally or in a corporate structure.

Strategic Financial Management and Tax Optimization Strategies

Kyle suggested a strategy for managing personal and corporate finances, emphasizing the flexibility and potential tax benefits of extracting funds from personal assets, such as rental properties, instead of corporate salaries or dividends. He highlighted the importance of considering tax brackets and being strategic to optimize taxation. Jon showed interest in this approach, recognizing the value of having options and the potential for increased control over one’s financial situation. Both discussed potential missteps, such as not withdrawing or reinvesting retained earnings, and the benefits of thinking beyond the easiest solutions.

 Corporate Structure for Wealth Creation and Tax Savings

Kyle and Jon discussed the potential of the corporate structure as a tool for wealth creation and tax savings. They emphasized the importance of shifting one’s mindset to view the corporate structure as an engine for generating income and an investment vehicle for growing wealth. They also stressed the need for guidance and support to implement these strategies effectively. They encouraged listeners to follow their podcast for more tips on saving taxes and managing business and personal finances. They clarified that their content was for informational purposes only and not to be construed as legal, tax, or financial advice.

Transcript:

00:00:00:03 – 00:00:21:10
Kyle Pearce
Are you tired of the salary versus dividends debate for Canadian Incorporated business owners? In today’s episode, we’ll dig deeper into the land of personal and corporate tax minimization strategies to uncover some Canadian wealth secrets to tax free or tax optimized income from your corporation.

00:00:21:12 – 00:00:39:02
Jon Orr
As incorporated entrepreneurs and investors, we are tirelessly working to optimize our businesses to increase income and reduce expenses, typically reinvesting our profits back into our business, or seeking to grow those profits through other investment vehicles.

00:00:39:07 – 00:01:07:21
Kyle Pearce
However, despite the endless commitment to growing our businesses and our investments, the vast majority of serial entrepreneurs and investors just like us leave little to no time, energy or effort to understand how they can pay less in income taxes in order to fatten those margins and ultimately unlock additional capital for reinvestment into whatever opportunity you feel is best for your wealth building plan.

00:01:07:23 – 00:01:21:01
Jon Orr
Let’s get into it. Here we go.

00:01:21:03 – 00:01:26:00
Kyle Pearce
Welcome to the Canadian Wealth Secrets Podcast with Kyle Pearce and Jon Orr.

00:01:26:01 – 00:01:38:10
Jon Orr
We are recovering high school mathematics teachers and education consultants whose Ontario spirit led us to begin multiple businesses in real estate investing, digital courses and coaching and consulting. After the bell rang at dismissal time.

00:01:38:10 – 00:01:58:01
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we now help other entrepreneurs, business owners and investors just like us, to grow their wealth into a legacy that lasts generations through hidden investment and tax secrets. Your financial advisors won’t believe our true.

00:01:58:03 – 00:02:14:04
Jon Orr
All right, Kyle, let’s just get right into it. I’ve got lots of questions on tax optimization, tax strategies all the time. You know me. You know, I’m always trying to figure out what is our best strategy. You are so great at always kind of figuring out those strategies. And I like to poke holes at your strategies and I go, let’s.

00:02:14:06 – 00:02:37:17
Jon Orr
So I’m excited to kind of dig into what we’re going to talk about today and thinking about the corporate veil and thinking about this duality that we often experience as business owners, that you do have like a personal side, but if you are the, say, the sole owner of a corporation or business, or maybe you’re a partnership inside that or there are multiple shareholders, there’s still that how much do I pay myself?

00:02:37:17 – 00:02:59:02
Jon Orr
We talked about that on a podcast episode prior about salary versus dividend. We’re going to go even deeper today because that corporate veil of like to figure out how do I optimize these strategies so that I can figure out how much personally to like, pay myself to live or to minimize tax, but also like, how do I send myself money from the corporation?

00:02:59:02 – 00:03:03:08
Jon Orr
Like, what is that mix and how do I do that in a compliant way?

00:03:03:12 – 00:03:22:15
Kyle Pearce
Yeah, for sure. And you know what? This is something and we did talk about the salary dividend sort of discussion in a previous episode. We’ll put that in the show notes if people haven’t listened to it. So today will probably start with that idea and then kind of build from there and kind of look at some other ideas that are sort of circling around.

00:03:22:15 – 00:03:42:08
Kyle Pearce
And when I get on a call with anyone, be it from this audience, they’re Canadian while Secrets audience or just other folks who have found my services in other means. We get on to a call and we start with the discussion around their corporate structure. But very quickly, we sort of zoom out and we look at both the personal and the corporate side.

00:03:42:08 – 00:04:09:13
Kyle Pearce
And this is one piece that makes this more complex is that you have this sort of borderline I like to consider it that corporate veil is like you’ve got two worlds going on now. You may personally own the entire corporate structure. Maybe you and a partner own that corporate structure. But the reality is, is there’s a little bit of this wall going on here and there’s a lot to know about what’s going on on either side of that wall.

00:04:09:15 – 00:04:46:09
Kyle Pearce
Right. So really thinking about this and having an understanding as to when in life I want to do X and when in life I want to do Y is really important. So, for example, for you and I, John, in this past year, we were kind of thinking to ourself, Wow, it was first time in a long time that we didn’t have sort of a forced t for income coming in and we were thinking of like, how do we maximize our strategy, including what we have On the personal side for me was RS PS, for example, and for you it was like what you had going on in your holding company to really try to utilize.

00:04:46:09 – 00:05:09:10
Kyle Pearce
We have a few moving parts here is that every single year we personally file taxes, right? You’re going to personally file taxes and you almost want to at least maximize some sort of income coming to you personally because again, you probably or may never be in that low of a bracket ever again. But how do I do that in the most efficient way?

00:05:09:10 – 00:05:30:09
Kyle Pearce
Should it be coming from my corporation? Should it be coming from, say, an RRSP? What should I be doing in order to make this happen? So today we’re going to talk about some of those ideas and ultimately just to kind of start and sort of get an idea, I mentioned that there are some almost tax free ways that you can pull some income.

00:05:30:11 – 00:05:49:24
Kyle Pearce
So I want to get those ones out of the way because for some people they’re thinking about this. And I have calls with clients all the time. They say, well, listen, I pull, say, a $40,000 dividend or a $50,000 dividend from my company and that’s it. I don’t pull a salary. I don’t have any other income showing on my personal taxes.

00:05:49:24 – 00:06:13:10
Kyle Pearce
And they say things like, you know, it’s essentially tax free. Now, why they say it’s essentially tax free is this would be considered an ineligible dividend, meaning I’m going to pull this from a privately owned and held corporation and that dividends are going to come to me and it’s going to with the gross up and the discount or the tax credit, all of those things happen and it’ll look almost like.

00:06:13:10 – 00:06:34:08
Kyle Pearce
So, for example, someone pulling $40,000 in ineligible dividends is going to pay a total personal tax of about 1200 bucks. That’s basically free. You’re like paying hardly anything. You can lower that down and get it to actually zero if you wanted to. So a lot of people are thinking like, well, of course, like I’m going to pull dividends.

00:06:34:09 – 00:06:52:21
Kyle Pearce
But what they’re not seeing is what’s happening on the other side of the veil. On the other side of the veil, that money was already taxed right? It could have been taxed at 12.2% here in Ontario on the first 500,000. Or it could have been all the way up to 26 and a half percent. I know we use Ontario numbers quite a bit.

00:06:52:21 – 00:07:19:15
Kyle Pearce
They’re always the high numbers. So everybody else is that or lower. So really it depends on what’s going on inside the corporation to really decide whether that dividend move is actually a smart one or whether you’re paying tax. But you didn’t recognize that, oh shoot, it was getting paid on the inside of the corporation. And that is something that we want to make sure that people are kind of thinking a little bit more flexibly about how these rules work.

00:07:19:17 – 00:07:41:01
Kyle Pearce
And then later in this episode, we really want to dig into some more. We’ll call them Advanced Strategies. It will require some advanced thinking, but we want you to think about what is possible when we do things correctly, when we do them well and compliantly, that we can actually navigate this in a way that’s probably in your mind right now you’re thinking is not even possible.

00:07:41:01 – 00:07:48:16
Kyle Pearce
But there are some ways, given certain situations where we can do some pretty complex things in a fully compliant way.

00:07:48:18 – 00:08:02:13
Jon Orr
You gave us that example about just thinking about as this money that if I’m going to pay myself a dividend and then I’m going to pay the tax on the corporate side, then I have to pay the tax on the personal side and thinking about what is that threshold personally to try to minimize tax. That’s a great example.

00:08:02:13 – 00:08:26:03
Jon Orr
But here’s a question I think many that I ask a lot of the time, and this is also a question that I think the listener right now is wondering, is that you’re listening to us talk about these strategies in a way that we’re saying you should also know these strategies in knowing more information is always great for your decision making, but somebody’s going to say, Kyle, isn’t this why we pay our accountants?

00:08:26:05 – 00:08:42:11
Jon Orr
They’re supposed to figure this out for me so that we just talk to Bob over, right? He’s talked about trying to be proactive. It’s like, Well, isn’t that why we have an accountant? Especially if you have a corporation? It gets more complicated. Let them figure it out. They just tell me. I tell them how much I need. They tell me.

00:08:42:16 – 00:08:59:12
Jon Orr
Here you go. This is the best way to do it. For example, is it important for us to know these things, to know these strategies? If the accountants supposed to know them and do that work for us? I constantly think about this 8020 rule. Where’s my expertise lie in terms of like my own business and going, should I be thinking about these things?

00:08:59:14 – 00:09:10:09
Jon Orr
Now you’re listening to this because you’re looking for Canadian well, secrets, but I’m like, Where are we draw this line? But I think it’s important that we know these things. But where do you stand on this Before we get into the weeds here?

00:09:10:11 – 00:09:34:14
Kyle Pearce
Yeah, this is one and we discussed this at a high level on different episodes and accounts are put in a really tough spot because they’re being paid to do a specific job. And the job isn’t tax minimization. They are not supposed to be seeking out ways for you to minimize your taxes. Now, I think everybody wants that to be the case because you’re like, well, you’re filing the taxes, so tell me what to do.

00:09:34:19 – 00:09:53:02
Kyle Pearce
And some accountants will. And I know Bob and his team are certainly like this. They’re going to go out of their way to try to dig a little bit and try to give you some alpha on some of those strategies. But the reality is that’s not what they’re billing you for, right? They’re not billing you for mentorship around taxation or on strategy.

00:09:53:04 – 00:10:18:14
Kyle Pearce
And this is where I think there’s a responsibility of at least a owner in a corporate structure. So it doesn’t have to be all of the owners of the corporate structure, but a owner must at least have an ear to the ground to kind of be seeking out different ideas here. And the reason why is because your accountant likely doesn’t know all the things going on in the day to day.

00:10:18:14 – 00:10:54:19
Kyle Pearce
Sure, they see what happens after, after everything’s booked and everything’s done. But the reality is, is that why did I do certain things? Why did certain transactions happen the way they did? Was it because of a lifestyle choice? Was it because of our investing in the business choice? Was it because of some other reason? And this is where things get really muddy unless they have a full understanding of why you’re making the decisions you’re making throughout an entire year, throughout an entire financial year, they could potentially offer an idea that might actually not be a great fit based on the bigger plan that you have.

00:10:54:19 – 00:11:13:04
Kyle Pearce
Right. So I do want to let some accountants off the hook. There are some are like, I’m not going to give you an opinion on that. And the reason why is because they don’t feel like they have enough insight into the whole story for them to be able to provide advice. Right. I always say to clients on any call, I’m like, this is not advice.

00:11:13:04 – 00:11:34:21
Kyle Pearce
This is a idea or a perspective for you to consider, because the reality is, is when I’m on a call, for example, I hear all kinds of details of what’s going on in that company. But as that relationship grows from call to call to call, you get to know people better. You start to understand what kind of business owner are they, what are they after, what are they seeking?

00:11:34:23 – 00:12:04:11
Kyle Pearce
Who are they as people? And you start to realize that, oh my gosh, there’s so much more to this story that had they taken it as advice on the first call, might not have been the right move. Right. Because there’s too much to go through. There’s too much nuance there. So that’s where I think folks who listen to podcasts like this one, your the right people who are going, okay, I know that I need to take some responsibility here in order to at least understand in general what’s happening.

00:12:04:11 – 00:12:30:09
Kyle Pearce
You don’t have to be an expert, but so that you can bring the right questions to your accounting team, right. So that you can bring some ideas to the table. And when those ideas are presented, if you have a good team, they’re going to take that idea and they’re going to be able to work with you on it and say, you know what, This might be a good fit because of this or I don’t know if this is a good fit for you because of that, based on what I know about you.

00:12:30:09 – 00:12:53:17
Kyle Pearce
But this is one of those pieces that I think for you and I, we had been sort of seeking that out for over a decade, is trying to find, say, the team that would do all of that thinking for us. And I think that’s essentially what we’re trying to provide here is we’re trying to fill that void in the space so that we can at least be that stepping stone for people not to say, replace their teams.

00:12:53:17 – 00:13:13:02
Kyle Pearce
I tell people all the time, it’s like, Hey, your accounts probably got tons of ideas, but they may not be able to or they may not feel like they’re appropriate for you. Or maybe they just know, hey, based on what I know about you or I don’t want to stick my neck out too far and say, here’s this creative strategy and maybe it doesn’t work out for you.

00:13:13:02 – 00:13:31:19
Kyle Pearce
And then there’s a negative consequence there. So there’s a lot going on there. So just kind of rethink that and think about who is on your team and what is a real role and what is it that we sort of expect from them. And a lot of times we expect a lot more than what we’re actually supposed to be expecting out of those teams.

00:13:31:19 – 00:13:36:10
Kyle Pearce
So I’m kind of giving our CPAs, CPAs a little bit of a free card there. Sure.

00:13:36:12 – 00:13:56:17
Jon Orr
So that’s an important aspect we do want to consider. And now as we get into it and we think about this corporate veil and thinking about how do we cross and what do we need to know, what would you say is the number one idea or thing that a business owner needs to know about this corporate veil so that they can save on their taxes?

00:13:56:23 – 00:14:14:10
Kyle Pearce
Well, I mean, understanding again, I know in the intro we said we don’t want to risk too much on the salary dividend debate, but really understanding how those two works are going back to that episode is really important because most don’t understand what’s happening there. And therefore, if you were to just Google a calculator, I Googled one today.

00:14:14:10 – 00:14:42:23
Kyle Pearce
I was just playing with some numbers here to bring up some examples. And you just put in employment income, then you put the same number as an ineligible dividend. Keep in mind your private company’s dividend does not get the same preferential treatment as a publicly traded companies dividend from Canada. Okay. So if you want like a tax free strategy, it’s like, hey, I get on calls with people and they’re like, I’ve got only dividend paying Canadian corporation stock inside my RSP.

00:14:43:04 – 00:15:08:03
Kyle Pearce
And I’m like, Well, that’s not a great move because you have a way better tax advantage by having those out in the unregistered world because of that dividend, that eligible dividend credit. So that’s worth going down a rabbit hole for those dividend stock friends. But when I think about my in an eligible dividends coming from my corporation, if I just plug it into a calculator, I’m going to go, oh yeah, dividend all day, I’m just going to tell my account, send me a dividend.

00:15:08:05 – 00:15:25:06
Kyle Pearce
Now the account might assume, oh, they want a dividend because it’s kind of a pain in the butt to set up a salary. The payroll account that you have to set up with Sierra. Now you have to pay the taxes directly from the corporation to today. So as an account, they might be like, oh, from a simplicity perspective, sure, let’s do that.

00:15:25:06 – 00:15:59:22
Kyle Pearce
Meanwhile, you’re thinking you’re getting actually a tax incentive for, say, a 30,000 or $40,000 dividend every year, when in reality you might actually be getting zinged, especially if your company is earning in that 26 and a half percent tax bracket, meaning you’re earning more than 500,000 in retained earnings every year or net operating income, I should say. So if you’ve got money above that gap, it’s even more crucial that you understand the difference because a salary is going to actually give you an expense to the company.

00:15:59:24 – 00:16:24:22
Kyle Pearce
So you get to save on that 26 and a half and then you can take that salary, that smaller salary yourself and just kind of work up the grid as you typically would or work up the brackets as you typically would. So these are really important things because when we go to Google, if we only quickly look at something like a calculator, we can come to the assumption that I have the answer to my question when in reality I may not.

00:16:24:22 – 00:16:35:07
Kyle Pearce
Right? And then there might be some other assumptions going on on my team as to why Kyle suggested that I should just toss a dividend at myself instead of setting up that payroll account.

00:16:35:11 – 00:17:03:13
Jon Orr
Yeah, I think playing with that threshold and thinking about $49,000 tax bracket and thinking, okay, so if my business is making a good chunk of operating income and I have to pay 26 in change per tax on that income, I can save that send a certain amount down as a payroll into my salary. And if I think, okay, well, there’s a tax bracket around the 49,000, let’s kind of get to that point.

00:17:03:15 – 00:17:16:00
Jon Orr
And then I know I’m going to pay around a bunch of tax at that point, but then go, okay, well, now, does it make sense to kind of play with the dividend at that point to go, let’s send the rest down that way. And that’s where some of that playing has to happen, right?

00:17:16:01 – 00:17:38:06
Kyle Pearce
Yeah. And I would say, too, it’s like you got to look beyond just your company as well because if you have so I have a lot of clients that I asked them about their tax free savings. I asked them about their spouse. And a lot of people have a lot of money in that RSP, but then they’re going to the company, for example, to pull, say, a salary, a minimal salary, for example.

00:17:38:08 – 00:17:59:24
Kyle Pearce
And the question I have for them is like, what’s your plan with your RSP? Like for most, it’s like, I’m just going to let it ride. It’s almost like in their mind it’s this foundational thing when in reality it’s like, Listen, your corporation, you could turn that into an amazing sort of foundational tool in the long term by keeping more in their growing it in different ways.

00:17:59:24 – 00:18:22:23
Kyle Pearce
We’ll discuss some of those ways in just a little bit. And actually, you’ve got a timer on that RSP that that money has to essentially get out by the time you and your spouse sort of move on. Otherwise, there’s a big tax that’s coming all at once. Right? So when I look at that and I go, well, I mean, if you’ve got a lot of money over there and you’ve got a lot of money over here, where do I want to go?

00:18:22:23 – 00:18:43:10
Kyle Pearce
Do I want to go across the corporate veil or is there something better I could do in the meantime? And to me, I’m going, listen, if my RSP is invested in, I don’t care what it is, if it’s index funds, if it’s private, read whatever you decide it to do, It’s totally up to you. The reality is, is you can do those two things in two different places.

00:18:43:16 – 00:19:07:14
Kyle Pearce
There’s a little bit of a difference in how we might do it inside the corporate structure. But I do know that the bigger that RSP gets, guess what? Every day that that RSP gets bigger, it’s one less day that I have to get it out in a more tax efficient manner. What I mean by that is we have let’s say we all know I always joke with clients that I’m going to live to 110 and I already know that I’m going to do that.

00:19:07:14 – 00:19:32:00
Kyle Pearce
Elon Musk going to help us get there. If that’s how long I have on this planet, Let’s say my wife, my spouse is the same. Then I have X number of years for me, that would be seven years. It’s a long time. I’m 41, but you get the idea if it’s 85, If you’re looking at average age for most people, you only have so much time for you to be able to melt that RSP down in the most efficient way.

00:19:32:02 – 00:19:51:18
Kyle Pearce
Whereas with your corporation, we have other things we can do over there that can allow you to not only grow your net worth for your entire estate, but then also allow you to actually preserve that capital when that age 110 shows up for me and my spouse and we want to move on to the next world.

00:19:51:20 – 00:20:12:23
Jon Orr
Do you think it’s like a mindset issue that people don’t touch their RRSPs when they start making the money in their corporation and going like, I’m building assets over there, I’ve got this personal asset here? And we started that maybe before we started our corporation and or made the gains in the corporation that actually are going to secure my future and maybe my retirement.

00:20:13:00 – 00:20:20:16
Jon Orr
And it’s like, I can’t touch that. It’s been ingrained in us that we can’t touch that until we retire. And there’s a certain age even that retired.

00:20:20:16 – 00:20:51:05
Kyle Pearce
Now they want to put it off because they’re like, I don’t want to run out, right? I totally get that. I’m not saying to melt it down and then spend it aimlessly or frivolously, but it’s like we got to get it to hit taxation in a more strategic way over time. But you’re 100% right. One of the biggest challenges, two big mindset pieces that I get with most clients, even business owners, but less so with investors in real estate, because real estate investors have sort of worked on their mindset in order to get into that world.

00:20:51:05 – 00:21:21:04
Kyle Pearce
The one is, is spending down anything that’s called a retirement account because in their mind they’ve sort of committed this thing. It’s like this long term plan. It’s the safety net, it’s all of those. So I totally get it. I understand it. That’s a hard one. So people don’t like the idea. They like to say, I’m not going to touch my RRSPs until blank, whereas I try to get them to flip it around and go, No, no, you touch your RRSP right away when you’re in a low income year, meaning I don’t like say, retire, but oftentimes it’s retiring.

00:21:21:06 – 00:21:45:21
Kyle Pearce
Or when you take a year off on sabbatical or like whatever you do, that’s a good time to use that money. Whereas what a lot of people will do, they’ll be like, I’m going to take my CPA right away and I’m going to take my OAS right away instead of deferring it off because you actually get a larger return by deferring those two pieces, which I know are based on how long you live.

00:21:46:01 – 00:22:05:17
Kyle Pearce
But the reality is you don’t have trapped equity in there. You want that to be the biggest amount possible and you want to utilize those earlier years from, say, I don’t know, 60 to 70 or whatever age range. You want to try to drain out more from your RSP, you can still reinvest it. That’s the thing. You don’t have to take this money out and reinvest it.

00:22:05:19 – 00:22:30:11
Kyle Pearce
You just have to get it to cross the RSP tax pail. Right. And then decide what you’re going to do with that elsewhere. The other mindset thing, John, that I get with people on calls is when we introduce interesting strategies on how we can maximize our net worth while preserving our net worth over time and into the next world for our estate.

00:22:30:13 – 00:22:48:00
Kyle Pearce
Is this idea of leverage right? So not only do people not like spending down a retirement account and paying that tax on the way out, so they’d rather not. It’s almost like an avoidance strategy is like, I don’t want to touch it. I want that number to stay high and I know I’m going to have to pay tax down the road, but I’ll deal with that then.

00:22:48:01 – 00:23:16:00
Kyle Pearce
The same is true when we try to help them create, let’s say when we think about that RSP, the tax free savings on registered rental properties, any assets that you’ve built inside your corporate structure, those are assets that you can do one of two things with in the long run, right? You can either sell them and drain them by spending and paying tax or we can leverage and that is the opposite.

00:23:16:00 – 00:23:40:10
Kyle Pearce
Instead of spending it down, it’s that leverage is working its way up and we have an even harder mindset. We are so stuck on this idea of debt is bad that it’s like a strategy that on paper can save people. In some cases it’s like millions and millions of dollars over their lifetime. People are like, it’s leverage and it’s like it’s scary.

00:23:40:10 – 00:24:22:23
Kyle Pearce
And people say, I don’t like the feeling of owing someone something. And I’m like, That does suck. But when you have all of these other assets here that are there to help you in doing that, it’s really about building your mindset around why do I have these assets in the first place? Who did I build them for? And if I don’t do something more creative than just slowly spending it down little by little, am I okay with losing potentially a quarter to half of that net worth when I leave this place because of the taxation craze, the tax bill that will ultimately be put into a lot of people’s hands after you’re gone.

00:24:23:00 – 00:24:55:00
Kyle Pearce
And I’m like, If we can overcome that mindset, we can better plan and better optimize our corporate worth strategy. I call it the corporate wealth management plan, but with every corporate wealth management plan comes a really important personal wealth management’s plan and strategy, because those two have to work together so that you can create the optimal strategy that’s going to allow you to live a better lifestyle based on the income that you can create for yourself.

00:24:55:02 – 00:25:23:07
Kyle Pearce
Paying as little tax as possible, and actually increasing your net worth over time while doing those things instead of it being the opposite, where I’m either lowering my lifestyle because I don’t want to spend my net worth keeps going up, but I don’t want to spend, so I lose lifestyle. Or on the other hand, I start spending paying lots in tax because I didn’t optimize, so my net worth still goes down and then eventually later on, usually there’s a big tax bill anyway.

00:25:23:09 – 00:25:43:19
Kyle Pearce
So it’s like you got to decide who is it that you’re doing this work for? And as we said in the intro, why am I working so hard every day to grow my business, to grow my investments, to grow my net worth, to whatever the thing is, your list of items that sort of motivates you moving forward, like, why do I care that a mutual fund returns 8% instead of 7%?

00:25:43:19 – 00:26:09:22
Kyle Pearce
Or this returns this versus that? If I’m not willing to work on the mindset and the big picture plan so that what really matters when like the government wants to take between like 26% and 52%, when they want to do that, that to me is a lot more important than, say, the mutual fund that charges an extra 1% in MLR or whatever it is, even though I will try to avoid that too.

00:26:09:22 – 00:26:16:13
Kyle Pearce
But why am I focusing so heavily on that when I’ve got a much bigger problem I should be doing first?

00:26:16:15 – 00:26:35:18
Jon Orr
All right. So here’s another question, and I think this will get us into something that I think we are pretty passionate about as well. Let’s say here’s a question about the corporate veil is like, should I? And this was a question I think we get asked a lot is like, should I buy that rental property or should I buy that asset in my business’s name?

00:26:35:18 – 00:26:54:03
Jon Orr
So in the corporation or personally? And I think the answer lies in like where this capital gains, what’s going to happen when we go to sell this asset, right? Where do we save on tax there and can we do any sort of you’ve done a lot of thinking and share that thinking of what the future looks like because that’s an important part of tax planning.

00:26:54:05 – 00:26:59:23
Jon Orr
What is our planning for the future? When we say go to purchase an asset in, think about the capital gains tax.

00:27:00:00 – 00:27:28:18
Kyle Pearce
The I love it. For me, the big thing is like, where’s the money coming from in order to make this investment? And I always celebrate. Sometimes I’ll get calls from business owners who and I say business owners as investors as well interchangeably, right? You’re running a business. You’re running investments to support your income and lifestyle and a lot of business owners will say like, yeah, you know, I have a corporate structure, I have this, I have that, I own an operating company, I have a holding company, but I own these three properties personally and like, they’re like, embarrassed by.

00:27:28:18 – 00:27:51:24
Kyle Pearce
And I’m like, well, actually, to be honest, other than potential liability that that might create for you, that actually gives you a ton of flexibility because now you’ve got income on both sides of that veil. And why I think that’s important is it allows you to do things more intentionally or I guess more simply without having to get into more advanced, complex strategies.

00:27:51:24 – 00:28:17:18
Kyle Pearce
Because when you get into it complex strategy, right? When I’m working with clients who have lots of retained earnings stuck in their corporation, I always say it’s like feels like it’s locked in that corporation. It’s like there’s a big mindset. Not only do they have to understand the process in which I might be recommending or suggesting they consider, but we also have to look at the big picture and go, okay, this mindset has to be overcome and now we’re going to do this Advanced strategies.

00:28:17:18 – 00:28:47:21
Kyle Pearce
So that it stays compliant. There’s no additional shareholder benefit here. There. All of these things are really important and their accounting team has to be on board. There’s a lot of work there, whereas a business owner who comes to me and goes, Hey, I got three investment properties here, I’ve got five inside the corporate structure, I’ve got these investments here, have got some Maurice, PS, I got some tax re, I’m like, You’re in a great spot because think of the flexibility that you have as we plan this forward for you and why I say think about flexibility.

00:28:47:23 – 00:29:24:21
Kyle Pearce
But again, mindsets needed. If I have three investment properties and I own them personally, I’m looking at this going, okay, eventually at some point I may choose to maybe not take that salary or dividend from my company, from my corporate structure. I can actually look to those properties as long as I’m okay with leverage and I could go, I’m just going to refinance one of these properties or I’m going to pull a home equity line of credit on one of these properties and I’m going to use that to help sustain my lifestyle beyond the minimal amount that I’m taking from my RSP or that I’m taking from my corporation or whatever it is.

00:29:24:21 – 00:29:57:10
Kyle Pearce
Because again, I’m not advocating you don’t take any income because it’s probably not a bad idea to get income out of that RSP, take maybe some income out of the corporation like at a minimal amount. And then where am I going to get the top up money? Right? Where am I going to get the top up money? If I could take that money out of a property that a tenant is paying for, and that’s a business that I personally own, the income on the rental income is going to be put on in my personal taxes, which ultimately, if it actually shows up as income, meaning there’s not enough expenses to write off.

00:29:57:10 – 00:29:58:04
Jon Orr
Me in cash flow.

00:29:58:09 – 00:30:34:21
Kyle Pearce
You’re actually unless you’re in a really high tax bracket, you’re probably in a better place for that rental income to come personally than it does to the company or to the corporation. Right? Because inside the corporation I’m paying 52 and change in Ontario on rental income and I don’t like that if I can avoid that. Whereas personally, if I can monitor, if I can be strategic in what my tax bracket is on a personal level, knowing that I have all these assets on both sides of the corporate line, I have more flexibility, I have more options.

00:30:34:23 – 00:30:48:16
Kyle Pearce
If I’m willing to put the time, effort and thinking into a real strategy that will ultimately save you a significant amount in the potential taxation that you do experience.

00:30:48:18 – 00:31:09:18
Jon Orr
Love it, All of it. I think just thinking and planning for flexibility is the game changer. For me, that’s like a super secret sauce, right? It’s like, how do I navigate? Because I think the mindset is once I have a corporation, it all goes in there. And I think that’s a traditional mindset that it’s like, I think partly the benefit of putting your especially your investment properties in there is liability.

00:31:09:18 – 00:31:27:03
Jon Orr
But I mean, in your thinking about that, a lot of times it’s just like, let’s get it in there and then I can let that income grow or I can get it taxed at a different rates. Like, I don’t have to think about it personally in order to pull that money. But I think there is a lot of benefit in deciding that flexibility of like how much is here in my personal side of that veil and how much is in the corporate side.

00:31:27:03 – 00:31:37:05
Jon Orr
Like I think given a lot of insight, what are some common mistakes, misconceptions, missteps people have had and you’ve seen over the last few years?

00:31:37:08 – 00:32:01:14
Kyle Pearce
Yeah, I would say like some of them, like I’ll I’ll talk about one that’s kind of common because it’s easy. Like it seems obvious, right? So, for example, a lot of times this happens when, let’s say, a real estate investor is going to buy a property inside a corporate structure in their holding company, and whatever company that they have there and they actually land the down payment from themself personally to the company, which is great.

00:32:01:14 – 00:32:25:08
Kyle Pearce
There’s nothing wrong with doing that. So I take money personally. I lend it to my company. You can take interest on that, which would be income. On a personal level, it depends. You would have to think on that. But here’s the part that I think is really a misstep or a missed opportunity is in a tax year, say, this year where somebody says, well, I have X number of dollars in promissory notes owing back to me.

00:32:25:08 – 00:32:51:16
Kyle Pearce
So I’ve given a shareholder loan to the company, and the company now owes me that money back, which will come back tax free. Right? Because the money I already had in my hand was already personally taxed. So that’s great to have. However, I see sometimes people are like, I’m not going to take any salary or any dividend or I’m not going to pull any money from the RSP or any of these taxable buckets that they have because this money is owing to them because it’s easy, right?

00:32:51:16 – 00:33:11:18
Kyle Pearce
They’re like, okay, I got I have 150,000. Owing to me personally, I’m just going to pull that 150 out. There’s no tax on it feels great. Like it totally feels great. I get that. But why not Look at it and go, okay, well, how much do I or should I take out in order to maximize my use of the taxation system?

00:33:11:18 – 00:33:29:18
Kyle Pearce
So when I look at the brackets, like, how can I take out enough where I’m going to get taxed at a low bracket in this given year and then take some of that promissory note back? I don’t need to take it all back now. I mean, I can if I want if you have something you need it for, you want to reinvest it, but at least get some taxes on the book.

00:33:29:19 – 00:33:48:03
Kyle Pearce
If you have money that’s sort of stuck in one of these buckets in one of these places, take advantage of some of that so that you’re being a little bit more strategic. Now. You have to run in your head like, what’s the cost of your thinking? What’s the cost of you wanting to optimize instead of just doing what’s easiest?

00:33:48:03 – 00:34:09:04
Kyle Pearce
And for me, I love doing that thinking. So to me it’s like a reward when I can kind of figure out something that’s going to save X number of dollars. And it just allows me to feel good about what I do for other people. It stresses them out so if that’s a cost that you’re willing to negate there, you’re going to it’s just a cost of me doing the business in the way I do.

00:34:09:06 – 00:34:29:12
Kyle Pearce
Then I mean, hey, go for it. But I would argue the people I chat with are coming out because they actually don’t want to just sit there and take the easiest road. A couple other things that I want people thinking about is like, how do I take retained earnings inside a corporation? You’ve got this money in this company.

00:34:29:12 – 00:34:47:00
Kyle Pearce
It feels like it’s locked in there in a jail. And in some ways it is. But ultimately, at the end of the day is what do you need the money for? For some people, there’s this urge. It’s like, can I get it out? I just want it out. Yet on the other hand, we look to the RSP, people look at the RSP, and for some reason, like, I’m not going to take any out.

00:34:47:02 – 00:35:12:22
Kyle Pearce
Right. It’s like so conflicting because you feel like the corporate structure isn’t yours for some reason when in reality it is. And there’s things we can do in the corporate structure to help you grow that asset base and shift your mindset towards other strategies where, Hey, guess what? Your company can still earn money where you’re taking those funds and you’re reinvesting them in other things.

00:35:13:02 – 00:35:31:24
Kyle Pearce
There’s even ways where there can be where you can ultimately be doing some of this quote unquote work. So that you can take those assets and leverage against them in order to grow income in other places. All right. I don’t want to get too specific as to what that looks like and sounds like because it is so nuanced.

00:35:32:01 – 00:35:54:14
Kyle Pearce
But the Income Tax Act gives us opportunities that if we do it compliantly and when we look at all the past court cases, the Supreme Court, where people have been audited and there’s been some sort of legal battle, there’s precedents that are set in certain cases where we can go, you know what, this corporate structure isn’t such a bad thing after all.

00:35:54:20 – 00:36:18:18
Kyle Pearce
It is if I ignore the nuances, if I ignore the strategies, if I don’t create opportunities for myself in order to build the right assets, which are going to help me down the road. One is insurance, for example corporate owned insurance. I want that in there. I want to grow that asset tax free, and then I want to utilize that tool in different ways.

00:36:18:22 – 00:36:36:24
Kyle Pearce
Compliantly so that I can essentially save myself on essentially hundreds of thousands for some people, but ultimately usually millions of dollars in potential taxation when that corporate structure grows into what we like to call a wealth creation machine.

00:36:37:01 – 00:37:03:22
Jon Orr
Yeah, love it. There’s so much potential when you think about with the corporate structure, and I think we miss out a lot on that planning and just knowing that there is some possibilities of growing it or that money and gaining that income so you can save on tax, which was more money in your pocket. I think a lot of us are kind of just thinking our our accountants will do this work, which is maybe not the case in terms of the planning for the future, planning for what’s happening right now.

00:37:03:24 – 00:37:28:09
Jon Orr
And just knowing these strategies are available can help you help make decisions in now, like I think what you were alluding to about why the corporate structure can be so great as is thinking about like you’ve built probably the majority of your income inside your corporation through some sort of operational means, right? Whether it’s an operation business, whether you’re consulting or whether you’re providing a good or a service.

00:37:28:11 – 00:37:52:21
Jon Orr
And then when the money in that retained earnings stays in the business stays in the corporation, it almost acts as like in this was a big eye opening I think you helped me with years ago was that it’s almost like you get to open another business because now you’re not in the business of whatever the operation is. That’s like the engine that generates the other income for you to go and make money in another arm of your business.

00:37:52:21 – 00:38:12:21
Jon Orr
So it’s almost like that’s your investment arm. Maybe it’s all of a sudden you are dabbling in real estate investing. It just adds to that layer. And I think using strategies around tax savings in that realm is so important. So that’s kind of my secret sauce here. What would you say is your big takeaway from all the strategies we’ve shared so far for the listener?

00:38:12:21 – 00:38:15:10
Jon Orr
And maybe, maybe you’ve got one more up your sleeve?

00:38:15:12 – 00:39:01:23
Kyle Pearce
Yeah, well, I would say I think one of the biggest Canadian wealth secrets that are out there is how powerful a corporate structure can be, not only as the engine as you articulated, like those operating tend to be where people are attracted that low active income tax rate inside the corporation, the first 500,000, and then even that 20, whatever it would be, depending on where you are, 26 and a half percent on the net operating income above 500,000, when you take those dollars, those 88 cent dollars and you take, you know, call them 75 cent dollars, 74 cent dollars and you turn them and put them into machine, those that can grow wealth and also

00:39:01:23 – 00:39:37:18
Kyle Pearce
give exits opportunities either while alive. If you’re using advanced strategies that are done compliantly and done by people who know what they’re doing right. So that’s one big thing. Don’t just let people talk about these ideas. They need to actually do this work with you. We offer that type of support. You take those dollars, you are working with more of that original dollar that you earned and therefore you have a less distance to get back to call it break even with your gross income that you earned in there than we do on a personal level.

00:39:37:18 – 00:40:02:14
Kyle Pearce
So as I like to say, it’s like by understanding strategies that we can put in a place, we have to shift our mindset in doing it at the same time. But as that mindset shifts and you start to look at the corporate structure as something that can actually be a wealth creator for you and your legacy in your state, while also still helping you to service your own lifestyle along the way.

00:40:02:16 – 00:40:28:17
Kyle Pearce
You get wins across the board. It does require thinking. It does require guidance, and that’s something that we tried to do with all of our clients who do hop on a call. So, hey, if any of that resonates with you, if you’re listening to this and you’ve been head nodding and kind of going like, yeah, I, I actually don’t look at my corporate structure as sort of a wealth creation tool yet or I look at my RSP is this thing that I’m going to touch last.

00:40:28:19 – 00:40:54:19
Kyle Pearce
These are mindset challenges that will cost you and your estate a significant amount of money in the long run. So hop on a discovery call. Let’s chat. Let’s start helping you along that journey by reaching out to us at Canadian Wealth Secrets dot com forward slash discovery. We’ll hop on a call it. Whenever I have an opportunity I try to even respond ahead of our call to kind of get a little more context.

00:40:54:19 – 00:41:20:07
Kyle Pearce
So I was doing that recently for a couple podcast listeners and really just trying to get a sense of where you are in your journey and how can we help you with that mindset, with that understanding, and as we always promise at least one actionable next step that you can put into place right now to get you on track towards that wealth creation tool that you’re going to turn your corporate structure into.

00:41:20:13 – 00:41:50:06
Jon Orr
We want to thank you for listening to this episode of the Wealth Secrets Podcast. It’s first time you’ve listened to an episode, then welcome. We encourage you to hit that follow or subscribe button so that you get next week’s episode, the next episode, because we’re putting out secret sauce info bites about how to save on your taxes, whether it’s personal, whether it’s corporate, thinking about your business strategies, your planning strategies is we do that every single week, so hit that, subscribe or that follow button.

00:41:50:06 – 00:41:58:02
Jon Orr
And next week you’ll you’ll be listening to us again and getting that secret sauce right in your beer. That feels weird to put sausage.

00:41:58:08 – 00:42:21:01
Kyle Pearce
But yeah, I don’t know how that feels. Like sticky. I’m not sure. Well, all right. Canadian Wealth Secrets Seekers. We’re going to see you next time.

00:42:21:03 – 00:42:29:16
Jon Orr
Just as a reminder, the content you heard here today is for informational purposes only. Stop, construe any such information or other material as legal tax, investment, financial or other advice.

00:42:29:18 – 00:42:50:12
Kyle Pearce
And Jon Orr is a mortgage agent with bricks, mortgage license and two threes 006803. And Kyle Pierce is a licensed life and accident and sickness insurance agent and corporate wealth management advisor with the Bancorp team that includes corporate advisors and pan financial.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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