Episode 142: How to Turn Your Fixed Income Assets Into a Tax Efficient Canadian Wealth Building Machine

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What if you could unlock more cash flow from your business without taking a bigger salary or dividend hit—while also ensuring your estate planning is airtight for the next generation?

Many Canadian incorporated business owners, especially those with family-run operations, face the challenge of balancing tax efficiency, cash flow management, and legacy planning. If your Canadian Controlled Private Corporation (CCPC) has significant retained earnings but you’re unsure how to access them at a personal level without a hefty tax burden, this episode is for you. We break down a real-life case study of a family farm business looking for smarter ways to manage wealth, personal minimize income taxes, optimize corporate investments, and prepare for estate taxes all without sacrificing liquidity.

Rather than taking the common yet costly route of large dividends or salary increases, we explore alternative tax strategies that keep more money in your hands while securing Canadian financial flexibility. This episode dives into an innovative approach leveraging corporate-owned life insurance to protect assets, create tax efficiencies, and ensure a smooth transition of wealth to both farming and non-farming heirs.

• Learn how to access Canadian corporate retained earnings without triggering heavy income tax liabilities.
• Discover how a high early cash value participating whole life insurance policy can safeguard your estate while remaining liquid as a part of your fixed income investment portfolio.
• Understand how to fairly distribute assets among heirs without forcing the sale of the family business or other assets.

Hit play now to uncover the Canadian wealth-building strategies that could transform your Canadian corporate cash flow and estate plan—without unnecessary income tax losses!

Resources:

• Ready to take a deep dive and learn how to generate personal tax free cash flow from your corporation? Enroll in our FREE masterclass here. 
• 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!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• Dig into our Ultimate Investment Book List
• 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. 
  

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 cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Achieving financial independence requires smart planning, especially when it comes to growing your net worth and generating passive income. We explore conservative leverage strategies such as the Smith Maneuver to convert non-tax deductible interest on your primary mortgage to tax deductible interest as well as conservative leveraged life insurance strategies including immediate financing arrangements (IFA). For business owners, navigating the complexities of corporate structures, tax implications, and investment strategies can feel overwhelming. From understanding capital gains rules to leveraging life insurance for wealth optimization, the right approach can transform your financial future. By aligning your strategy with tax-efficient tools, you can unlock the full potential of your business and investments, ensuring sustainable growth and long-term independence.

Transcript:

What if you could unlock more cash flow from your business without taking a bigger salary or a dividend hit? In today’s episode, we’re diving into a real life case study of a family farm operation looking to maximize wealth efficiency while planning for the next generation. With significant retained earnings in their corporate investment account and a mix of farming and non-farming heirs, the challenge is balancing tax efficiency, estate planning,

and their legacy goals. We’ll break down how a strategic approach utilizing what the family business is already doing through their corporate investments can help keep more money in their hands while securing the farm’s future and the family legacy for all of the family involved. Let’s get to it. All right, my friends, you are here with another Secret Sauce episode with Kyle.

And I’m excited to share this scenario because I think a lot of people will relate to it. Whether you are a incorporated business owner through the family farm, like the client we’re going to be talking about here today, or whether it is some other type of business or other type of family situation, many of the strategies that we’re discussing can be utilized and used in different scenarios in order to help you think through how you can

as I like to call it, have your cake and eat it too. It’s not an either or when we’re doing any type of wealth building plan, be it investments, be it tax efficiency. Really what we wanna do is we wanna get all the pieces working together. And like you probably know, you don’t want to be going all in on any one thing. That is not the right move because guess what? Things can change and volatility can hurt and…

making mistakes can happen. So you want to make sure that you’re not sort of going all in on one thing and remaining all out on another. So today we’re going to talk about how we can take what this particular family farm business is already doing and how they can optimize the situation without actually losing what it was they were doing anyway. So let’s talk a little bit about the client. The family farm is co-owned by two partners. It’s actually

This particular individual, his name, we’re gonna call him Jim today, and his brother-in-law. They own the family farm together. And interestingly, they both have two children. So both partners have two children. One from each family is working in the family farm already, and the other in each family is not. That adds complexity here, as you can already imagine. This happens all the time in all kinds of different businesses where one…

child goes into the family business and another does not. It’s very difficult to try to figure out how will we do this down the road when the time comes for me to move on to the next place and I want to make sure both my children know I love and cherish both of them, right? How do we do this in a way that is fair? So the other piece here is that we have retained earnings that are stacking up and

why they reached out in the first place was to essentially figure out how they could potentially utilize retained earnings better for their own personal lives. And we’re going to talk a little bit about that here today. All right. So let’s talk a little bit about this first. First off, it was very, very clear to me early in this process that Jim actually lives a pretty modest lifestyle. Now,

there’s, you know, you have to dig there because some people live a modest lifestyle because they have to. Other people live a modest lifestyle because it’s just the type of person they are. And then there’s kind of the others like the optimizers out there that live more of a modest lifestyle just because they’re a little bit more frugal, right? And I’ll be honest and say I’m sort of fall into that camp where I cannot justify taking a certain amount of money out of my corporation when I know how hard I’m going to get hit with taxes, unless

I’m utilizing some sort of strategy. So when they came to us, they were really interested in trying to figure out how do we utilize an immediate financing arrangement or an IFA as it’s called in order to fund a corporate owned policy and then be able to essentially access more cash at a personal level through leverage. And we went down the rabbit hole there. And while that is still gonna be something that is on the table for them to do in the future,

We’ve actually come to the realization that that’s not actually the real need that they have, right? So initially they were thinking, well, if I could fund using retained earnings inside my corporation and fund a high early cash value life insurance policy, and then we go to a third party bank, which we help all of our clients to do, we actually get them connected with the best lenders based on their situation. And we get them this immediate financing arrangement. Now this is essentially a loan in most cases.

and, but it can be a line of credit. There are different products out there that can provide kind of like a home equity line of credit, but it’s against your life. So you could call it a life insurance equity line of credit if you want a LELOC as some people might call it. So while we went down that rabbit hole, what we recognize is that the bigger challenge for them here is actually not trying to get more money in their personal hands. I think everybody wants to know that they can.

if and when they need to. But it’s not about actually getting it today and having it in their personal hands, because this particular individual, Jim in particular, didn’t actually have anything they needed the funds for. They are thinking about fixing up a property, right? They own a rental property that is personally owned. So they were talking about maybe doing that. But because it’s a short-term issue, we talked about all kinds of other options that they could do.

first of all, pulling equity from that property itself could be something easy to do. They have a home equity line of credit they could pull from that. So if it’s something short term, it’s not really necessary to go through this process to get that money for this one time thing that they actually plan to pay back as soon as that property is fixed up within a year or so, right? Even just lending money from the corporation short term to the shareholder and then paying it back before the next year end is an option that they have.

that really the whole IFA idea, this immediate financing arrangement idea, while we’re going to keep that as a strategy that they may implement in the future, that’s not really what they need right now. What they need is they have to actually figure out, OK, how am I going to get access to those retained earnings if and when I want them or need them? And then more particularly is like down the road, there will be some big capital gains

happening inside of this corporate structure, right? So there are gains going on, both in terms of the value of the farm and the land and all of the things that they’ve been doing inside the business. But actually, what we’re going to do is we’re going to talk about how do we help utilize and put a tool in place. This is the high early cash value life insurance policy. We’re going to put one in place so that they can do the immediate financing arrangement except

We’re not going to do it immediately, right? We’ll do a financing arrangement later. We’ll call it the whenever they want financing arrangement. So that’s going to be in place. But the more important part that they really need to get under control is the fact that they’re going to have large capital gains. And they actually already have some capital gains even in their investments that they currently have.

So as we break things down, I want to share what I learned through this discussion with Jim along the way. And I’ll tell you what we decided to start with as a strategy for them. Because one of the hardest things is to take a bunch of money, no matter where it is, if it’s trapped in retained earnings or if it’s in assets, wherever it is, it can be really difficult for someone to go, OK, I’m going to take a big chunk of this or take a big chunk every year and put it into something like a permanent insurance contract.

Right? While we can offset these contracts early, right? Right? As of today, it looks like around year five for most of the insurance policies that we put in force. We always tell clients that you want to have at least a 10 year runway. Why? Just in case you just never know if dividend scales go down or if anything changes. We want to make sure that in your mind you had a longer term approach going here. And the beauty is the longer you go, the more efficient and effective

the strategy becomes anyway. So that really should be the goal. If it’s a quick fix, it’s not really what we’re after here. There are no quick fixes. If they were quick fixes and they were easy, then more people would know and understand how to do these things. So there is a little bit of learning and understanding to do. Now, luckily for you, you’ve got a former high school math teacher and math consultant on your side to help you along. And remember,

We only do this work because we needed to do this work for our own businesses, right? Our real estate corporations and our operating companies. Okay, so this is the stuff that we do. so let’s talk about what they’ve got going on because the perfect situation is when I chat with a client and they’ve already got something happening where they’ve already sort of in their mindset, I want to do X, Y and Zed and X, Y and Zed. can take one of those Xs or Ys or Zeds and I can utilize that.

to get the same outcome they were trying to get anyway, but then throwing in the other bonuses of having the available IFA option, the immediate financing arrangement option, right? So being able to leverage if and when they choose to do so in the corporation or personally. And then the other thing is being able to take care of the legacy aspect, which is the capital gains piece here. All right, let’s talk a little bit about this. First off, we’ve got four kids involved. Two are part of the farm.

and two are not. So this is a problem because if everybody was involved in the farm, it’d be nice and easy when people pass on. There will still be capital gains, but because they have investment accounts inside the corporation, it’s possible that just by liquidating those investment accounts, they would be able to cover capital gains, taxes, and keep the business rolling along. Right? Now the problem though is that when you have two children, and in this case we have two partners, each have two children and

each have one child that’s a part of the business and one that is not. That’s a problem unless you really don’t like the non-farming children, right? Maybe you wrote them off and said, I don’t want them to have anything. But when you decide who should get what, ultimately, you’re probably going to want the kids who are involved in the farm to actually keep going with the farm. But then you also have to think about like, what am I going to do for the other kids if you feel completely

compelled to it might not be the same amount because these kids have been working in the farm and helping it grow and there might be some reason why the non farming children don’t get the same amount, you know, when it comes to an actual bottom line number in terms of the assets they receive, but you’re probably going to want them to have something. the question then becomes is where does that money come from? And in a lot of cases, what ends up happening is

people have to start selling off assets, right? So you might have to sell off land in the farm so that the farming children can pay off the other siblings in order to make things fair based on the will or however things were described. Well, in this particular case, it’s nice because what we actually see here is that they already have a corporate investment account utilizing retained earnings. So because they already have that, I start there and I go, OK, well, what do you have going on over there? Like, what are you invested in?

And is there a way for us to get similar returns or better returns for portions of this portfolio while also opening the door to having this tool that can be leveraged in the future, which is great for these partners while they’re living so they can do whatever they choose to do with this money in a tax efficient way. But then also so that the death benefit when it pays out, the net death benefit pays out through the capital dividend account.

Now, for those who have heard us talk about the capital dividend account before, this is sort of like a mythical thing for a lot of people. It’s basically just a tracker, a ledger that keeps track of any capital gains that are not to be taxed. So as many of you would know from listening to this show in Canada, currently we are using a 50 % capital gains inclusion rate. That is not a 50 % tax as we’ve described before. is anytime you sell

an asset for a capital gain. So you make money on the sale of an asset. You would take that capital gain, and half of it is due to be taxed at whatever the rate is. If it’s at a personal level, whatever your personal rate is, if it’s at the corporate level, it’s at the corporate tax rate. So when we do this and we actually work through it, the capital gains tax is not nearly as high as we might think, as many might think, which is 50%. That’s not the case here.

but it still provides a problem. And then a bigger problem here is that the retained earnings themselves are dollars in the corporation that have been taxed at a corporate level, but they have not been taxed yet at a personal level. Great for growing assets, but not great for trying to get them out unless we’re only taking the tax-free portion of the capital gains through the capital dividend account.

So let’s chat a little bit about this. What they’ve got going on in their investment account inside the corporation. This is actually inside a holding company. It doesn’t matter which one, but you know, here it is inside of Jim’s holding company. They have about two and a half million dollars of investments. And I asked them, what are you invested in? And what they’re invested in is 500,000 sitting in a high interest or a high yield savings account.

earning about 3.5%. And they’ve got a million in XUU, which is a BlackRock ETF. That’s a broad US equity total market cap equity fund. So good fund, great fund. And they’ve got about a million dollars in VFV, which is Vanguard’s S &P 500 ETF. These are Canadian dollar ETF funds.

I’m not here to advocate that they’re the best ones to do, but they are low fee and they are good fun. So I’m happy with that. I see that. I’m like, that’s great. That’s awesome to hear. What nuance I heard here from Jim though was that Jim said, you know, they’re in two different funds. One is really diversified and one is a little bit more US centric and actually both are US centric here. Okay. One is the total US total market. Whereas

the VFV is only the S &P 500. So basically what you have is all US equities. I’m not against that, by the way. But it’s not as maybe broad or diversified as they might think. So it’s all US, nowhere else. And of course, if the S &P 500 goes down, you can imagine that the total market S &P cap will go down as well. So really what we’ve got is a lot of money kind of in one fund.

in a sense, OK? So they’re not that different. So it’s not that diversified. However, when we look at the ratio, we’ve got 20 % in cash, which is like fixed income, and 80 % are in equities. And I’m actually happy with your equity allocation here, like 80%. That’s actually, by the way, I should mention this partner is about 58 years old right now. So a lot of times, people actually start getting away from going in equities as they get a little older.

Here, if you choose to go less equities, I’m always encouraging people to start setting up high early cash value permanent insurance because let’s look at this cash that’s there. Why is the cash there? Well, one thing is safety is what they describe. The other one is so that they have liquidity, right? So liquidity and safety are, they kind of go hand in hand, but they kind of don’t like safe is like it will be there one day.

That’s good, but the liquidity part is like if they need the funds for something just in case. So what are they doing? Well, they’re earning 3 1⁄2%. So they’re earning $17,000 in interest every year on this $500,000. Now, that’s great, except for the fact that that interest is being taxed at 50%. It’s not a capital gain. This is at about 50%. That’s the passive income tax rate for companies that are earning investment income. So the issue.

we have here is that what we really have going on here is that they’re actually earning around 1.75%. They’re earning about 1 and 3 quarter percent on that money. Better than nothing. Don’t get me wrong. Now, it’s better than burying it in the backyard. It’s better than doing any of those things, putting it under the mattress, all of those things. It’s better than doing that. But instead, imagine if we were to take that $500,000, we were to repurpose it to slowly. It doesn’t have to be all at once. And it actually can’t be all at once, because we do need to fund this over a number of years. We could get the same 20 % fixed income asset allocation, except we would have zero volatility, and we’d get a

better return because you’re going to get that for ish or GIC like return, but without the actual taxes. So this thing is going to grow cash value around that amount. And the death benefit will continue to grow as well with the huge, huge win of the death benefit paying out through the capital dividend account or at least the net death benefit. All right, so that is

massive massive win so that means if we could you know wave a magic wand and get all five hundred thousand dollars into a policy let’s pretend we fund this for a few years already it’s already all in a policy what we’re gonna have is we’re gonna have a cash value that’s continuing to grow cat tax free we’re gonna have an asset that they can now leverage through an immediate financing arrangement now it might have not be immediate as I mentioned but we could do that as well

So it’s still accessible if they need the funds. Now we could borrow directly from the insurance company. That’s even easier and faster and quicker. But we also get the benefit of this asset will jump in value when we pass on versus the cash sitting in that account right now are worth what it’s worth. And the interest continues to essentially get chopped by half every single year. So

What we’re able to do for Jim is we’re able to take those funds and use it to structure a policy that’s gonna help him to fund this over a five to 10 year period. Again, we always aim for 10. We fund it so that it’s more going in in the early years and it might be less going in in the later years. However, we wanna try to get that money in there so that as soon as he funds the first payment, there is now a permanent death benefit in place.

that will go up in value each and every year that he continues to fund this policy. And then once he’s ready to offset, offsetting means he can stop funding it and the cash value will continue to grow each and every year. And assuming we’ve made it to around that 10-year mark, that death benefit will also continue to grow as well. This is a major win here for Jim because he doesn’t have to find new money.

The money is sitting right there earning a really low interest rate and getting chopped in half every time that payment is made at tax time for the corporation. And he’s getting a huge, huge win. Now, just to give you a sense as to a policy, at least the design we started with, this is not the policy design we ended with. They actually went with a higher value because each and every year they continue to add retained earnings.

to those accounts. if 20 % of retained earnings keeps going to cash and 80 % keeps going to the market, those 20 % every single year moving forward also need a place to reside. We can send them to the high interest savings account and we can lose half of the interest each and every year, or we can continue to fund this policy and keep it going. So I’m gonna show you the first example that we had shared. It’s again, not the final example we had used. You’ll notice that his age is there, he’s 58 years old.

If you’re on YouTube, you can see this up on the screen and follow along with us here. But this policy we started with was $100,000 maximum funded policy, which you could also backdate by a full year. And basically what that means is he’s a year younger and he gets to also fund two years at once. So if he went with this policy, he would be able to put $200,000 into this policy to keep going.

And then moving forward, he could put anywhere between $42,000 in change and $100,000 in change for as long as he wants, because this would be considered a life pay. Doesn’t have to go all the way till he passes on. But the longer he goes, the greater the cash value and the greater the death benefit grows along with it. So by year 10, if he kept doing this, he’s put a million in, his cash value is at about $1.2 million.

His death benefits at 2.5 million. And if you were to pass in that year when he’s 68 years old, he’d have about 1.6 million of the total death benefit coming out through the capital dividend account tax free to the shareholders. This is a massive, massive win because not only is this going to outpace the high interest savings account, but it’s only going to go up. It’s never going to go down. We don’t have to worry about, you know, once

interest rates come all the way down again that you know his savings accounts now earning peanuts. Here we have something a little more consistent. I shouldn’t say a little more much more consistent but also no volatility at all an amazing volatility buffer and he gets to check off all three things on his list when he’s ready or if needed able to use leverage for cash flow at a tax efficient in a tax efficient manner or for investment.

We also have the available cash value right now inside the corporation should the company need it or the farm needed or maybe there’s an opportunity to buy land. And finally, there is the tax efficient death benefit. And the longer we choose to fund this thing, the better off if he lives an average age of say 85 years old, he could have put in about 2.7 million if he chose to.

and his cash value would be up just south of 5 million, while the death benefits 6.1 million and 4.6 and change million gets to come out completely tax free. Now, when we look to those corporate investments, he had already said he already has a $500,000 capital gain, but it’s unrealized. But when he sells those assets, when he sells those ETFs, that $500,000 capital gain

is going to be taxed, which means he’s going to pay about a quarter million, nope, not a quarter, sorry, an eighth of a million, which is about $125,000 or so in tax. He’ll have about 250,000 of that that gets to come out tax free through the capital dividend account. But ultimately, at the end of the day, that $2.5 million investments fund that he has right now on paper,

is really only worth more like one point. Let’s say sorry. Yeah, 1.55 million is what that would be worth in personal hands right now. Why is that? Well, about $2 million of retained earnings plus $500,000 of capital gains. We’re going to lose $125,000 to the capital gain. And we’re also going to lose about just south of a million dollars in

dividend tax that is going to have to be paid when he takes that out to his personal hands because there’s so much retained earnings. So ultimately at the end of the day, that $2.5 million as of or before this policy went in force would be worth about 1.55 million in their personal hands. Now we’re able to actually have liquidity so we don’t actually have to sell those assets at any time anytime soon, but we also have a growing asset.

that can be leveraged and can come out in a tax efficient manner down the road to solve that legacy and family challenge with some farm kids and some non farm kids taking place inside their situation. So with this, hopefully you found that this episode has been helpful as we have dug into Jim’s case here. Every scenario is different, but

with the right strategy, you can keep more money in your hands, you can protect your legacy, and you can make your wealth work harder without taking unnecessary tax hits or unnecessary risky bets. If you’re running a family business and looking for smarter ways to manage your corporate wealth, let’s chat. Visit Canadian wealth secrets.com forward slash discovery. If you’d like to book yourself a discovery call, it is 100 % free and

If you are an incorporated business owner, we recommend that you head over and take our incorporated business owners masterclass, which is at Canadian wealth secrets.com forward slash masterclass. Until next time, we will see you later. And just as a reminder that this content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

And as a reminder, I am lice life license and accident and sickness licensed and I am the VP of corporate wealth management for the pan Corp team. That includes corporate advisors and pan financial. So reach on out to us if you’d like to chat sometime soon. Take care.

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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