Episode 110: Unlock the Power of Retained Earnings: Tax Strategies for Business Owners and Wealth Builders [Secret Sauce Ep23]

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Incorporated business owners: what if you could use your retained earnings to grow your wealth, reduce taxes, and leave behind a supercharged estate—all at the same time?

For business owners and high-net-worth individuals, managing retained earnings or excess income and minimizing taxes can feel like navigating a maze with no clear path. You’ve worked hard to build your assets, but traditional strategies often leave money on the table or locked inside your corporate structure. This episode dives into an innovative approach to turn your retained earnings into a powerful wealth-building tool while minimizing tax implications.

Imagine transforming your operating or holding company into a dynamic pass-through structure that allows your money to work harder for you. Using permanent whole life insurance policies as a strategic lever, you can unlock opportunities for tax efficiency, long-term growth, and an enhanced estate plan. Whether you’re a business owner or simply someone with a significant net worth, these strategies can help you keep more of what you earn and maximize your legacy.

1. Discover how permanent whole life insurance can serve as a tax-efficient pass-through structure for retained earnings.
2. Learn how to leverage corporate assets for real estate, private lending, or other investments without triggering excessive taxes.
3. Understand how this strategy can supercharge your estate value and offer long-term financial flexibility.

Click play now to learn how to transform your retained earnings into a wealth-building powerhouse with innovative tax strategies!

Resources:

• Dig into our Ultimate Investment Book List
• 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!
• 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.  
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Discover how to unlock the power of retained earnings with tax-efficient strategies tailored for business owners and wealth builders. This episode dives into using corporate structures, like holding companies and permanent whole life insurance policies, to maximize retained earnings, leverage them for investment opportunities like real estate and private lending, and create a tax-advantaged estate. Learn how to turn your corporate and personal wealth into a dynamic, growth-focused financial strategy for long-term success in Canada.

Transcript:

Hey there, Canadian wealth secret seekers. It’s Kyle here again with another secret sauce episode. And this time we’re going to be digging into more discussions about our favorite pass through structure for wealth building, which is the permanent whole life insurance policy, except this time we’re going to be calling out to our business owners. Now for those who are not business owners, stick with us because the strategy can still be used at a, at a personal level.

However, we’re gonna talk about how doing this inside of an active operating company’s corporation can actually help them with doing things better than what they’re doing now. And then as a second phase, being able to open the door for all kinds of opportunities to think of their entire net worth as a bit of a pass through structure. So we’re gonna dig in here and I’m gonna start with.

the diagram that I often draw for many of our incorporated business owner clients. So those who are on YouTube, you’ll be able to see this document or this drawing. For those who are not, I’ll do my best to describe and to guide you along. But ultimately, I’ve got this box here that I’m gonna call our company, and this is gonna be our corp. And I really don’t care whether it’s an operating company or a holding company.

Of course, if you have a holding company, it’s gonna be better to be here in the holding company. However, for those with an operating company, as long as you don’t plan to sell or anything like that, doing it right there is definitely accessible and optional. However, what this person’s doing does sort of dictate or suggest that a holding company is a good move. So this person already has a holding company. That holding company actually owns the operating company, which I’m drawing here underneath.

And there’s a bit of a problem because the actual operating company is sending tax free dividends up to the holding company. Now don’t get confused here. The operating company did have to pay tax on these dollars, but because they’re sending it up to the holding company and not out to a human, there is no more or additional taxes being created here or having to be paid. But this

creates a problem because this particular individual actually has about $500,000 of retained earnings each and every year. We’re not even going to factor in all of the retained earnings they already have in there because inside that holding company, they have all kinds of assets. They’ve got real estate, they do private lending, they do all kinds of things and why they’re doing it inside of this holding company and not out here is because there’s something there. If I take money out and I take too much out,

at any given time, specifically within the same year, we’re going to be paying a significant amount in personal taxes. So here’s kind of the rule of thumb that I try to give people that I chat with is that all the money that you’re earning here in Canada is going to have to be taxed at least one time. And the real question is how do you keep it limited to one time? And how do you also keep it at the lowest possible rates? Now for that operating company,

for the first $500,000 they earn per year, they actually are being taxed at 12.2 % here in Ontario. Of course, of, you know, numbers are a little bit different from province to province, but generally, the small business credit is allowing you to have this favorable rate, which is great for business owners. But the problem is, is that let’s say they have $500,000, it’s been taxed at this low rate,

and they want to get it out to their personal hands and they want to get it out each and every year. Well, what ends up happening here? And I’m going to draw this out for those who are with me here. If we take out the $500,000 and you put it into your personal hands, whether you choose to go salary or dividends, there’s nuance there. Of course, we’re not going to dig in that to that today, but what someone’s likely going to do if they’re going to take out 500,000, they’re probably going to be paying a round trip of around 39 ish percent.

All right, and therefore they’re gonna be losing just short of $200,000 to tax and they’re gonna be left with about $300,000 in their hands. So this is of course a problem, right? If I have $300,000 in my personal hands now, I have to almost double that number in order to get back to the same amount that I could have had here inside my holding company. So.

What do people do? Well, they start to invest that money inside the corporate structure, right? And that’s fine. There’s no problem with that. The only challenge there is that now we have these new capital gains rules, right? Which again, we have a capital gain of let’s say we take that 500,000, which I’m drawing here a big box that 500,000 is retained earnings. And let’s say it doubles in value to a full million. So now I’ve added on another 500,000. Well,

capital gains rules assuming they do go through right where we’re acting under the assumption they’re going to go through but it’s not a guarantee yet- is that two thirds of this capital gain. Is going to have to be taxed now it’s not that you’re giving up two thirds of the game it’s that two thirds of the game is taxable. That means the other one third gets to come out through what we call the CDA or the capital dividend account credit so this is like.

know, we’re going to call that the CDA credit. That’s great. That chunk over there. This other two thirds though is exposed to tax. And really what it comes down to is about and I’m saying about one third of it is going to go to taxes. So that’s going to essentially disappear to taxes. Now there’s not much we can do there. Now if I did the same thing at a personal level, let’s be honest, if you had more than a $250 or $250,000 capital gain,

you’re have the same net result on the capital gains. So capital gains is something that you are gonna have to pay. You or someone down the road is gonna have to pay them, right? We can kick the can by not selling those capital gain like assets and that can kick the can, but someone down the road is gonna have to pay. But here’s the other piece that’s sort of hidden is that we have these retained earnings and those need to come out of the corporate structure at some point down the road, right? Ideally, you’re either,

going to they’re going to get expensed away because you’ve just kind of like, you know, spent the money inside the corporation. That’s not super helpful. If you want it at a personal level, if I want to get this chunk out, I’m eventually going to have to deal with taxation. So what we introduce business owners to is the idea of using a permanent whole life insurance policy as a pass through structure, because let’s be honest right now.

that $500,000 that’s sitting in a checking or a savings account is sitting in a pass-through structure. It’s just not a very good one, right? So that it’s sitting there, and it’s maybe earning a little bit of interest, but I’m losing 50-ish percent of it to passive income taxes. So what we’re saying is, imagine if you were to take that money, and we’re going to use the full $500,000, not saying this is the right idea for someone who has only $500,000 sitting there. We’re probably going to adjust down from here, but let’s

for today’s discussion, we’re gonna put all 500,000 into this policy. And now while there is a startup cost here, which basically limits the cash value in the early years. So it’s almost like, you know, it’s sort of stuck. It’s like when you buy a rental property, you you put the down payment and that down payment, even though like that money is in the house, it’s in the walls of the house, it’s sort of stuck there until you sell.

Now the problem is if you sell that property without improving the property right so if you sell it for say the same price that you bought it for in the same year for example probably going to lose money right so the same idea is happening here it’s like starting a bit of a rental property or a bit of a business however for today’s discussion we’re going to leave it at five hundred thousand for there and ultimately this business owner had planned

to continue investing in real estate like you see in the diagram here, which is gonna grow a capital gain. That’s a capital gain tax that’s gonna be generated over time, but he still has the retained earnings stuck in the corporation. Well, what we wanna do is we wanna start and I’m gonna call this phase one is by funneling money through this policy. We are then opening the door to the opportunity to actually leverage. So we’re actually going to borrow

before we put the money into whatever the investment might be. If it’s private lending, if it’s real estate, whatever you want to do, we’re going to do that. So we’re still going to get the same net result in terms of potential capital gains in that case. Or if we do lending, you’re still going to have passive income taxes on lending inside the corporation. But we’ve got some added benefits here. So we’re actually going to be dealing with some of the challenges that are created. So first off,

want to talk about, let’s pretend it’s real estate here. So we’re investing it. We’re putting it through this quote unquote pass-through structure. And we’re going to use that money. We’re going to leverage that money to buy our next real estate deal. We know there’s going to be capital gains associated on the long end. We also know there’s potentially some passive income that might be created through the cash flow after we deal with any of the expenses that can be written off. Well, what we’ve done here is we’ve essentially created

more than just a pass-through structure for the fun of it. Because a couple of things are happening. First of all, this $500,000 policy is likely, depending on the person, right? So depending on the person and their age, it’s going to get them a significant amount of death benefit. And I’m going to assume here that based on $500,000, I’m going to keep it conservative. I’m going to say that you get somewhere around a $6 million death benefit.

Why that’s important, and we’re just talking year one here for a second. If we talk about year one and something were to happen, not that we want that to happen, but if something were to happen to the insured person, the key person in this business, this death benefit will pay out to the company completely tax free. So that $6 million is now sitting inside this company, inside the pass-through structure known as the savings or checking account. And it’s sitting there waiting. But something else that you get

The shareholder that now holds the shares to this company could be a spouse, could be children, could be charity, could be whoever they have willed these shares to now has a capital dividend account credit. They call it the CDA. This is the same capital dividend account that keeps track of the tax free portion of your capital gains. Remember, we talked about the one third CDA credit that you get off of your capital gain. Well,

we get the same credit except it’s not just one third. They don’t look at the death benefit as a capital gain where you get one third of it. You actually get the net death benefit coming out after considering what you’ve put in as premium and the adjusted cost basis. So if we talk year one and we talk about later that week, this were to happen, not that we want that to happen, but if it did, this 6 million is gonna pay out to the company and

at least 5.5 million will be available to the next shareholders to take out as a tax-free dividend. Now, why I say it’s at least 5.5 is because we get to actually deduct the actual cost of insurance, which is where the adjusted cost basis number comes from. So 6 million minus the adjusted cost basis number is going to give you what’s going to come out through the capital dividend account credit.

Now, why this is important, if we look just in year one for a second, we have $500,000 stuck in the company. If we take it out as a dividend, we’re going to probably have about $300,000 in our hand now, and then I get to go and invest just like I was gonna do here inside the holding company. Instead, what we did is we put the 500,000 into the early high cash value policy.

which again, we’re not going to have access to 100 % of that 500,000 unless we talk to a third party lender. It is possible. It is available. But we’re going to just keep things simple for today that that 500,000 then gets leveraged into an asset just like you were going to do anyway. But if we pass away, multiples of that 500,000 comes out.

Now, some people would say, OK, that’s fine for year one, right? Like it’s, in a way, the return on that is massive, right? We don’t want that to happen. And probability suggests it’s not going to happen, right? You’re not going to likely pass away. So that’s not really what we’re doing here. But as we continue to fund this thing and continue year after year to fund this policy, in this case, it’s with $500,000 per year, we’re funding this policy. Both the cash value is growing and the death benefit is growing simultaneously.

So that means that we’re actually doing two things at once. We’re being able to continue investing like we would, but we’re also creating a large estate value, a large net estate value where any of those capital gain taxes that are triggered are going to be taken care of. But also because we’re getting the net death benefit out through the CDA account tax free, we’re also dealing with the retained earnings.

If this person funds this policy for say 10 years, they put 5 million into this policy, their death benefit is going to continue growing. And I’m going to argue it’s probably going to be north of 10 million by the year, by, by year 10, that 10 million minus whatever the adjusted cost basis is, might be somewhere around six or 7 million gets to come out tax-free. The remaining amount gets to stay in, but that’s if they die in 10 years.

If they stop funding in 10 years and then just allow this policy to continue doing what it does, the death benefit is going to continue growing. And eventually, if they live closer and closer to the average age of death for a Canadian, what they’re going to notice is that the adjusted cost basis is going to essentially eat away at all of the retained earnings that you were originally going to have to pay tax on. So what does that mean? It means that those retained earnings will not actually be taxed.

if you live a long average, I say not a long, but an average life based on a 10 year funding schedule, right? So there are of course nuances if you fund longer and so forth, fund less, those things do factor in, but the big goal here is that we’re getting our cake and we get to eat it too. We get to make the investment and we get to rescue those retained earnings dollars.

Now, I want to talk for a second just about the idea of, let’s say we borrowed to put it into a passive income generating asset. Even though real estate is passive income generating, a lot of times there’s enough expenses there through loans, through depreciation, through expenses to fix the property, all of those things. A lot of times, you might not show a ton of passive income, or at least in the early years. But if there is passive income there,

and we were leveraging against this policy in order to buy that asset, we can actually potentially write off the interest as well against the bucket that we’re borrowing from. So we’re talking about supercharging here where we’re able to have $2 or $1 working in two places because $1, your dollar, is stuck in this policy. 

But the insurance company or the lender, if you go to a third party lender is giving you a different dollar to invest over here. And they’re creating a expense that can be used as a write-off for that investment that you’re making. So if you’re doing private lending and you’re earning 10 % or 12 % a year, guess what? In a corporation that’s only five or 6 % after the 50 % passive income tax. In this world, you get to funnel through

get all the benefits of the death benefit, the access to the capital, the liquidity, and you get to create yourself a interest expense that can be written off against the passive income that that investment might be generating. Now we’re talking about this scenario and I’d like to call this sort of like phase one for most of our incorporated business owners to be thinking about. If you have retained earnings,

You have essentially two options, slowly draining it out, slowly, slowly, potentially painfully, just like you would with an RSP, or you can do something better. You can start funding this pass through structure so that you can be maximizing not only your net worth while you’re here, but also supercharging your estate after you’re gone. Why this is helpful is because it actually gives you a bit of a permission slip to spend more while you’re here.

right? We talk about the book sometimes die with zero and would die with zero like the idea that some people might get is that maybe they don’t worry so much about their estate, but it’s actually the exact opposite. They talk about keeping access to your capital and then giving it to people while you’re here and while you’re alive. Well, this allows you to do that. And it also, you know, on the back end that you’re setting people up for success as a built in here. So you get to spend less in passive income tax.

through these expenses, you get to potentially spend less on the tax of those retained earnings by having as much money flowing through this policy as possible. But then in phase two, once these policies are structured, once you understand the idea behind them, you have the opportunity to then, at a personal level, start using leverage strategies. And on the screen, you’ll see that I have this.

box that says leverage and it’s outside of this corporate structure. This is a way where you can get access to more personal funds in your personal pocket without necessarily having to trigger a bunch of personal taxes because guess what you have a personal net worth and one of the things on your personal net worth statement is the shares in this corporate structure. So not only do you have potentially your RSP bucket your tax free savings maybe other investments you have

your primary residence, but you also own this corporate structure. So lenders know what you own and depending on how it’s structured, we can essentially collateralize any of your assets in order to use in a more tax efficient way. Now, if that sounds like you and you want to get to phase two, we always recommend starting with phase one because this cash value policy is going to be on the balance sheet and it’s going to beef up your

actual corporate balance sheet, which again, beefs up your personal net worth. And that gives you all kinds of leverage opportunities as you want to start pulling additional income later in life in tax advantaged ways. So my friends, if this episode, if you’re here, that means that something’s intrigued you about this episode to stick around. Whether you have a business or not, I encourage you to start thinking about whether you’re in a position

Usually the number we usually like to think about when you’re talking about a pass through structure is around a net worth of about $2 million. and if that’s you, you should be reaching out to us over at corporate or at sorry, Canadian wealth secrets.com forward slash discovery, where my team and I at corporate advisors can help you, with getting your ducks in a row for setting up this phase one, as we call it of this corporate structure and this pass through structure.

Reach out to us over at Canadian wealth secrets.com forward slash discovery. Now, if you are not an incorporated business owner, but you do have a significant net worth of anything around North of $2 million, there could be the opportunity and the benefit to set up a pass through structure much like we’re discussing here. You will not have the benefit of the capital dividend account or some of the other nuances there to solve some of your now tax issues.

However, it can still be something that allows you to not only build your net worth over time, but also extremely supercharge your estate. So reach out to us when you have a chance, canadianwealthsecrets.com forward slash discovery. And we look forward to chatting with you real soon.

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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