Episode 230: Should I Invest Personally or Corporately to Optimize Tax in 2026?

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Should you build your next investment property in your personal name or through your corporation?

If you’re a Canadian business owner sitting on retained earnings or personal capital, figuring out how to fund your next real estate investment can feel like a high-stakes puzzle. Should you leverage your HELOC or dip into your corporate cash? Does owning the property personally offer more flexibility—or should it live in a holding company for tax benefits and liability protection? This episode dives into a real-life case study to help you navigate these exact decisions with clarity.

By the end of this episode, you’ll learn:

• The key tax and long-term planning trade-offs between owning investment property personally vs corporately.
• Three practical funding strategies—including when to borrow from your HELOC, your corporation, or a third-party lender.
• How to plan for future capital gains and use corporate-owned insurance to prepare for estate taxes without losing liquidity.

Press play now to confidently map out the smartest path for funding and owning your next investment property.

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.

Canadian business owners seeking financial freedom and early retirement are rethinking how they approach property development, corporate structures, and long-term wealth strategies. Whether you’re weighing HELOCs vs. corporate borrowing for funding investment properties, or deciding between salary vs. dividends in Canada, every financial decision shapes your broader Canadian wealth plan. This episode explores how to use retained earnings strategically, optimize RRSP room, and implement tax-efficient investing through corporate wealth planning. You’ll gain insights into real estate investing in Canada, personal vs. corporate tax planning, and how to build a wealth reservoir that supports legacy planning and estate transfer goals. Discover smart capital gains strategies, investment bucket planning, and how to align your financial systems with a modest lifestyle wealth mindset — all while creating flexible, diversified financial buckets for long-term success.

Transcript:

Jon Orr

Okay, so let’s talk about, I think a common question that us business owners have, and also business owners across Canada have. We get asked this question a lot, so this is why we bring these types of questions to the podcast, is because if we’re getting that question asked many times, then we wanna share our thoughts on it, and that’s what we wanna do here, is provide some facts, provide some suggestions, but the question really is, is to say, and this comes from a scenario, and we’ll impact the details, but really the,

The crux here is to say like, okay, I want to invest in a project or I want to invest in an investment or I want to buy an investment or I want to use money that I have available for investment purposes. The crux here is I’ve got a business that has significant retained earnings every year and therefore I’m always wondering where I should park those dollars. But I also have

a significant amount of capital available to myself on a personal side. So we got that wall up and it’s saying like, okay, so I have my, it’s access through my cash value, my corporate or my cash value, my whole life policies. Maybe it’s in my HELOC. Maybe I just have a pile of cash sitting here not being used because I get paid a lot. And I’m left wondering, this is the question we can ask. Where, like should I use corporate dollars?

to make that investment and keep it inside the corporation because it could grow over there? Or do I use it personally, or do I do that investment personally and grow it on the personal side? Because in a way, it’s all my money because I’m the sole owner of the corporation and eventually it will come to me down the road. So I’m just trying to think about where’s the best place to park these dollars to optimize but also maybe, I think we often,

just wonder is like, I don’t want to miss out on or realize 10 years down the road, I made the wrong decision. And that’s what we’re going to talk about today. But we’re going to use a specific example.

Kyle Pearce

Yeah, I love it. I love it. And to be honest, like whether you’re incorporated or not, I think it’s an important discussion because we’re to use a case study from a call ahead. It’s actually from a call yesterday. It’s the beginning of the new year. Got a lot of people coming in. Everybody is like trying to get their heads on straight for 2026 ready to rock and roll. And this scenario, even though this is an incorporated business owner, we have a lot of people who are not incorporated and are debating whether they should incorporate specifically for

real estate. So in this particular case, we have an incorporated business owner. They own him and his spouse own a piece of property. Doesn’t matter where it’s in Canada, this piece of property, they plan to build an investment property on it. They’re not sure if it’s going to be short term, longterm rental, like what any of those details are yet, but they’re trying to get their heads on straight to figure out how do I fund this thing? And the big question for them is like, should we have purchased this property in

their corporation or in a holding company, they did it in their personal name. So this is already done. So like this very specific case, they already own this piece of property in their personal names. And now the question is like, how should we do it? Now, beautiful set up here. They’ve got a primary residence that they have a mortgage on. However, they have more than a half a million dollars of home equity line of credit room, which means they must have more

Jon Orr

Okay.

Kyle Pearce

than that in equity as well, right? Cause we can’t borrow 100 % of the equity on our primary residence. So they’ve got an ample amount available to them on their home equity line of credit, but they also have about the same amount in retained earnings inside the corporation that is currently sitting in cash. Now, for those who have operating companies and they’ve been building their businesses, you know, you know, we’re calling you out on this. Like your bank accounts have,

too much money in it, assuming, assuming the business is going well, right? Like if business is going well, you have too much money in there. And the reason you do is because you’re just like, you’re like, what if, what if, what if I don’t know if you know, the, the business is going to continue as as is, is it going to go up and down tariffs, all this fun stuff. So there’s more than enough money sitting now, you had mentioned this in the intro to the episode, and the reality is that money is yours, whether it’s in a house.

whether it’s in a corporation, like it’s all yours. The difference is the different tax implications that might happen. And there’s the immediate tax implication we’re gonna talk about here. We’re also gonna talk about some like longer term tax implications of doing things in different ways. So today we’re gonna discuss like where could they fund the build of this home on this property? Because remember the property is already purchased.

no mortgage on this property, they own the land, but they do need funds in order to build it. Now you could just go and get a construction mortgage, pay private rates, like that’s one option, but they’ve got enough liquidity here that obviously it makes sense. So first and foremost, what we should talk about is like, is keeping the land in their personal name the right move or not?

Jon Orr

Right.

Okay, so what you’re meaning is, because the way I was imagining it is like, I could own the land personally, but then I could build on it as my investment property, and maybe the business owns the investment property, but the person, I still own the land personally, and then there’s some sort of nuance there that can really be beneficial to myself, my business, and everyone all around because of taxes.

That’s what you’re saying. It’s like, should we keep it here or should we sell that property to my business or lease it to my business so that I can then, maybe there’s some nuances there that can actually help me down the road.

Kyle Pearce

Yeah, a hundred percent. Now let’s pretend for a second that they didn’t buy this piece of land yet. And they were like ready closing days coming up sometime in the next month or so, like where’s the best spot for it to go. And this is actually a really tough question because the reality is, that while there’s a bunch of retained earnings sitting there in the business, so they could maybe open it and buy this land in a holding company and use retained earnings, there’s no tax event that’s going to happen. They could do that.

The negative is that now we have more assets again inside the corporation. We usually say wherever you earn the money is where you probably should do the investing. The fact that they already personally own this property makes it a little bit of a hassle if they do want to transfer ownership to the corporation or to the corporate structure, right? So they could open a holding.

Jon Orr

Yeah, there’s a sale there.

Kyle Pearce

Yeah, like they’ve got to go and they’ve got to, you know, deal with all the fun stuff and moving the ownership around. However, the benefit of doing so is that at a personal level, they would get reimbursed by the corporation, right? The corporation would essentially be buying this property off of themselves. We would probably encourage that, you know, hopefully there’s no capital gain on that. They just transfer that money. Now they’ve got, they’ve essentially rescued a bunch of money at a personal level, which is great. The negative of doing that,

is that any rental income that we have is going to any taxable rental income, right? So any net operating income from that property is going to get taxed at the highest rate unless we take it out as a dividend. However, we’re gonna have some liability protection there as well. So it’s possible that moving that property over makes sense. However, however, as we’ve mentioned on some previous episodes,

If we’ve already got something in our personal name, like they’ve already got this land in their personal name, they already own it, there’s no mortgage against it, nothing like that. Sometimes it’s nice to have some of their assets in their personal name, especially if we’re going to use some leverage strategies down the road. So let’s like wave a magic wand for a second. Let’s fast forward 10 years from now. They built this property, it’s funded, all these details are worked out.

And now it’s earning income. That income comes to them personally, which could be good or bad, depending on how much money they have coming in from other sources. But they also have the ability to personally and easily leverage against that property. If they do want to release some of that equity, maybe use it for lifestyle, maybe use it for other personal investments. There’s some flexibility there that I do like about having this piece of property in their personal name.

Jon Orr

So you’re saying property and investment, like that’s sitting on that, like the actual building is sitting on that property, all in the personal name has these benefits.

Kyle Pearce

Yeah,

it has those benefits. It just becomes a little bit easier to access than having to go across the corporation and have to deal with it there. Now, let’s flip things a little bit. Let’s say this person reached out to me and they already own the land in the corporation. I would probably say you already own it in the corporation. Let’s just keep it in the corporation. Let’s just use retained earnings there and build that investment inside the corporation. So

What I’m trying to make sure is very clear here is like there isn’t like a guarantee win, you know, to go one way or the other. You lose a little bit of flexibility like later down the road to leverage against that, that, that, ⁓ investment property in the corporation is a little bit more of a hassle from a personal level, right? Like getting some of those funds out might be a little bit more, you know, complex, but ultimately I’d probably just do it there. So if

this person came and they’re like, I don’t know where to buy it. We would want to talk about those things. Did they want to have some additional assets in their personal name? So they have a little bit more flexibility. How much is the company going to generate over time? Cause the reality is if let’s say they want to keep operating their business for say 10 years.

that retained earnings number is gonna continue to grow, grow, grow, grow, grow. So at that point, you’re gonna look at it it’s gonna feel lopsided. You’re gonna be like the only personal investments I have are my primary residence, which a lot of people don’t even consider an investment. It’s an expense that luckily appreciates over time and any other little investments that they might’ve had in their RSP, tax-free savings account or non-registered funds. So again, I’m gonna say where you buy it,

may differ because they already own it in their personal name. I’m gonna advocate for the fact that they just build it in their personal name. That way they have a asset outside of the corporate structure, gives them a little bit more optionality as we like to say on the show and they start to build from there. So once that’s figured out, the question then becomes is like, how are we gonna fund this thing, right?

Jon Orr

All right, so, right, so like, where’s the money? That’s what I

was gonna say, that now it’s like, okay, let’s say we’re going to try to keep personal on personal. Now do I borrow the money from my corporation or pay myself for my corporation or do I use my home equity line of credit?

Kyle Pearce

Yeah, and really there’s kind of like three big options we have here, right? Like the first one is you could go and try to get construction financing, right? Like we could literally not touch your primary residence, not touch the retained earnings, and we could just go out and we can look for a construction loan. Now,

Jon Orr

Well, you got the money, let’s pay ourselves.

Kyle Pearce

Yeah, 100%. So, you we can go down the rabbit hole of like how that could work and why that might work, but you’re going to pay private lender fees, right? And there’s a lot of hassle to do it.

Jon Orr

I guess this is

something that we used to be concerned about is trying to use other people’s money as much as possible. Like if I can get the money now, then might as well, like maybe I wanna go get that money, because we’ve always kind of thought optionality is one of our kind of pillars, is that I wanna keep my options open no matter what move I make. So I got my home equity line. If I’ve already decided this is gonna be personal, I’ve got money at the corporate level I could borrow, which is,

might as well, I could, could, can borrow it from myself because I’m borrowing it from my primary residence. Or I could, like you’re saying, I could go third party and third party means I still have both of those other pots of money available to do stuff with, right? And there’s some, some, some opportunity costs here by using my own money.

Kyle Pearce

Right. And this is this.

Right, exactly, exactly. you know, right away, like initially you would say like, OK, well, going to a third party lender, construction financing, anything like that, there’s a lot of hassle. Right now we’re dealing with ⁓ me and Matt are dealing with a 10 unit to a 20 unit conversion right now. And it’s like, my God, it’s like the amount of paperwork that we have to do in order to, you know, get the financing in place. It’s just a big hassle. But then there’s also the cost, like it’s going to be probably 10 percent ish.

in terms of the interest that you’re going to be borrowing at. So the real question becomes is, if you’re not using those funds in your home or in the retained earnings, if you’re not using those funds, the question is, where are they going? So if you’ve got a plan, you might have a plan for them. And if you do, amazing. But the reality is that a lot of people are like, ooh, if I’m going to get construction financing at 10%, they might start to go and get

Jon Orr

Right, if they’re gonna sit there.

Kyle Pearce

like we’ll call it like, you know, they’re stacking the dry powder, right? They’re like the just in case. I know that’s how I get when we’re doing a big, you know, big project or something like that. I always like to know that I’ve got a little bit of backup here. Like I never want to be, you know, put on the ropes if something were to go wrong. So in this particular case, there’s no investment say opportunities on the horizon. They’ve got a lot of money sitting in cash in the business, which is to me, the first indicator that

You don’t necessarily want to lean on somebody else’s money if you’ve got a ton of your own money sitting there doing nothing, right? So in this case, we’re really going to battle between the home equity line of credit and the retained earnings. Now, my big vote, the easiest way to do this would be to lean on that home equity line of credit. All right. So said another way, if you were willing to get a construction loan to build this property anyway, that money is still owing. It would be

Jon Orr

Hmm.

Kyle Pearce

technically securitized against that property. Now all we’re doing is we’re shifting the security from the new investment property they’re building on the land they own. And we’re shifting that liability to your primary residence, which pause for a second, like pretend you’re in that moment in that space, all of a sudden it feels scarier, right? Like it’s your home.

Jon Orr

It does.

Kyle Pearce

And this is the same thing Smith maneuver folks deal with. Like everybody’s always keen to do the Smith maneuver, but then when it comes down to it, emotions take over a little bit. So there is an emotional, you know, negative feeling that you might have when you go, okay, I’m going to shift that borrowed funds from this property and this building that we’re going to be constructing. And I’m going to shift it to my primary residence. However,

Super easy. You’ve already been approved for this home equity line of credit. They’ve got it available. They literally just have to pull the money as they need it and put it into this property. And they’re probably going to play prime prime plus 0.5 prime plus one in order to do this prime as, as of today is 4.45, right? So you’re going to pay like four and a half to maybe five and a half percent. And you get to write off the interest because you are borrowing

the money in order to invest in order to grow your investment. So you are essentially doing a investment loan, which is the important part of the Smith maneuver. We’re not actually doing the Smith maneuver here, but we are using a investment loan in order to fund this property. So it really, that would be a really easy way to go. Plus I’m looking across that corporate border and I’m seeing the retained earnings there.

and I see the dry powder there, which is like, should be the thing that helps you sleep at night. Like you have to just envision those dollars are in the property that you’ve just borrowed against.

Jon Orr

Yeah, this in a way, in a way for sure, because it’s like, you might think that, I just heard this idea recently, and I think it was from the Freakonomics podcast, and they were talking about how economists view their money versus how we view our money in reality, because the math says that,

the money sitting in, the accessible money you have in your hold co is the same as the accessible money you could borrow from your corporation. It’s identical, like it’s one pot or the other, it doesn’t matter, it’s all accessible to you. And therefore, if you borrow it from here or you borrow it from here, it’s the same idea. So if I borrow it from my corporate side, I’ve got the dry powder on my HELOC.

If I pour it from the heat, like I got the dry powder that I could eventually use as my emergency fund and pay myself down the road if they’ve ever I needed to. Economists would say it doesn’t matter. But the reality is it feels like it completely matters because borrowing from your primary residence is supposed to be always people like, that’s my safety net. That’s my home. I don’t want to lose my home. I’m never going to move out of here. It’s like that inaccessible money in a way because you don’t want to sell your home to recoup.

why the economist would say it’s fine because it’s like if you got underwater, you reach into the corporation and pay yourself, you you’re gonna have to pay yourself whatever your taxable rate is, whether it’s dividend or whatever. So it’s not the exact, you’re not just dumping the exact money over to you. You have to pay yourself to recoup. Like there’s money there to like move around and it doesn’t really matter where that money lives. That’s what the economist would say. But we have to battle the emotional,

and getting over that. And we’ve talked about this in our last podcast episode is that sometimes putting that down on your spreadsheet or your net worth statement to say, you know, this money is for that, but it’s here. And this money over here is right beside it, just to balance it out so that you’re like, it’s there and it’s okay because those two pots, doesn’t matter. If the one pot comes above this one, or I flip it, the net result is identical.

Kyle Pearce

Right, yeah.

Yeah, no, exactly, exactly. And I’ll be honest and say, we still have to every so often, like for me, it’s like not, know, monthly, I have to like remind myself, I have to go back to the spreadsheet and I have to look and remind myself of how things are going. Because when we’re optimizing like this, when we’re trying to invest beyond the typical RSP tax-free savings account, and that’s it, when you’re doing things differently, when there’s,

more capital there when you have corporations, when you have real estate, you are running a business. And ultimately at the end of the day, you’ve got to keep tabs on that business. Anyone who runs a business and at the end of the year is sort of like, I don’t know how much money I made or how much money I spent or any of those details. That’s a really slippery slope. And the same is true here. So being able to convince yourself

when it makes sense in order to do something like this. Here’s the other aspect, as you had mentioned, sure, if things went south on this, right? First of all, we have to remind ourselves, no matter where I took the money from, the money is still gone, right? Like, let’s pretend for a second that like the entire, you know, this is a build. It’s not as if, you know, the property is not gonna have any value at the end, but let’s pretend for a second, somehow you put a bunch of money, you put half a million dollars into this thing, and all of a sudden it was zero.

If it goes down to zero, all of a sudden it’s like that money was gone regardless of where you took it from. Whether I took it from my home, whether I took it from the corporation, whether I borrowed it from a construction loan, I owe that money somehow. So the easier, the better off I am to be able to feel like, hey, that money there is accounted for. Not to mention that you don’t necessarily have to pull out.

500,000 out of your corporation to dump on your home equity line of credit. You just need to have enough to cash flow it to make sure that you can pay that interest on that home equity line of credit. So that’s a really important aspect here. So to me, that would be the number one source that I would be leaning on. And then the question would be, what do we do with the retained earnings? And there’s a few things that we can do. Now, if

you’re feeling a little bit of stress that you’ve borrowed money against this property or home and in this home equity line of credit, that’s your primary residence and you wanna make sure that those dollars are available, you could let them sit in a high interest savings account, like that’s one option. You can put them into a GIC or a cashable GIC, you can put them into a money market fund.

You could even put them into the S &P 500 and to an ETF if you’re okay with the risk that it brings on. These are all things that you could do. However, for a lot of people, if they’re not planning to take it and put it into any explicit growth asset because they know that they’ve borrowed, like they’ve got a big growth project going on already, they wanna make sure that they’ve got that liquidity.

that’s a great spot for someone to maybe consider looking at corporate owned insurance and making that a portion of where those funds go. You can’t get it all in and all at once. So it’s not like you can just take 500,000 and chuck it into a policy. You’re gonna pick an appropriate sized policy so that you’ve got something going on there. That opportunity fund is growing. Our wealth reservoir as we call it is growing. And then you might choose to segment.

where the rest of the money is going. Maybe some’s going to a money market fund. Maybe some’s going into the market, because you want to take advantage of, you know, we’ve got essentially a Goldilocks scenario, you know, unfolding here for much of the world in the beginning of 2026. You can be doing all kinds of different things, but what we don’t want to do is we don’t want to put all of those retained earnings, let’s say, into something that’s high risk where

you might get yourself stuck in a catch-22, right? Maybe something goes over budget on the property or maybe something happens in the market and then you’re sort of stuck with your tail in the door.

Jon Orr

Right.

Right. And that’s, that’s the main reason why we choose to put our retained earnings primarily into that vehicle right away. mostly because we create that wealth reservoir for ourselves so that if we need to cover a deal that’s kind of gone sideways or we need to invest in something that we know that this is where we want to move next, we have that capability, but we’re also growing it.

while we’re waiting and it’s not just being sitting there. So we’ve created that reservoir for ourselves that way. That’s why we choose to use that tool.

Jon Orr

Okay, so we just, you know, chatted about this one scenario and really kind of thinking about what happens if we use our HELOC to fund the building and the building of this property and we looked at the pros, the cons. Now let’s look at the option where we borrow money from the corporation and we think about, you know, this side of the thing.

Kyle Pearce

Yeah, absolutely. So we’ve got all this money sitting over there. And actually, right now, it’s sort of sitting doing nothing, right? We see this happen a lot of times. And the first and foremost, we have to decide, like, is that money important for anything? Meaning, like, is it needed for, business cash flow? In their case, it’s actually not. They’re in a position where they don’t require that money at this time. So then the question is, like, can we actually use that money without transferring?

the property to the corporation. Cause we already discussed earlier, like we could sell quote unquote, sell the property to the corporation and then just keep everything within the holding company and have it built in there. That’s one option. Little bit more legwork. Like I said, we like optionality, having some investments, both sides of the corporate border. So in this case, we’re like, well, what about like the retained earnings? Like, do I have to take it as a salary or dividend in order to build this property? And the answer is,

Jon Orr

Right. Sure. Good.

Kyle Pearce

maybe depending on how you move forward. So let’s talk worst case scenario. Like they could take that money, assuming let’s say it’s a half million they need. Of course, you’re not gonna take it all at once. You’ll take it little by little, but let’s say you needed $500,000 to build this home on this property, the building on this property. They pull the 500,000 out. They could take that as a bonus, bad move. That would be considered like salary.

or we can take it as a dividend, that would be the better move, but still like huge hefty tax bill, right? If you’re in Ontario, we’re gonna be talking like close to 40 % ish round trip. So we wanna avoid that if possible. So a move that we could consider, if like one hand we’re looking at the HELOC, which is borrowing money, we could look at actually borrowing money from the corporation. So we can do this. Like a lot of people right now are like, don’t hit stop.

If you’re like, my gosh, I can borrow money from my corporation and I’m just never going to pay it back. Cause you have to be able to pay this thing back. So we’ll talk about the nuance about it in just a moment, but we could borrow from our corporation and we should do it at a set or predefined interest rates. So that’s something that’s really important as well. Like the company needs to quote unquote, like make some money on this thing, right?

Jon Orr

Right, there’s separate

entities. Like you can’t just pass this over and go, hey, here you go, free money.

Kyle Pearce

Exactly, exactly. So there is a preset rate of interest that you can look up and year by year this changes over time. But that interest that you’d pay, you would pay it back to the corporation. Now, like, on the one hand, you’re like, but I own the corporation. So I’m kind of paying myself back, which is kind of nice. There is going to be tax on that. So it’s not like you’re going to, you know, it’s not like a net even on that interest. But it’s better than say paying

the bank and then not getting any of it, right? Now I get the tax back on that interest, because I could write it off off of my HELOC, but over here, I’m gonna pay interest over there and the corporation is gonna have to pay some tax on that.

Jon Orr

Right. it’s

probably considered passive income.

Kyle Pearce

Exactly, exactly.

So, you know, the nuance there is passive income is going to automatically be like by default, you can just think of it as like it’s going to automatically be taxed in the quote unquote highest tax bracket is how you can think of it about 50%. Albertans, you know, luckily, they get 40 46 % right now, I believe it is round trip. But remember that it also creates a credit for your

refundable dividend tax on hand account, which means we could take some of that money out as a dividend and you would get a little bit of a tax credit back. We’re not gonna go down that road here today, but Google it, look it up or check out our website to learn a little bit more about that. But reality here is how long can I borrow the money from or for, okay? So the key piece here is that when you do this type of arrangement, there is a set period of time

I have to pay the full amount back by the end of the next year end. Sorry, let me say it again, because that could be confusing. We have to pay it back by the year end of the next year’s year end. Whoa, okay, pause for a second and let’s chat that one out, right?

Jon Orr

Yeah. Right, so, well I was just gonna say it, like let’s say right now, we’re recording this in January, let’s say I borrow the money now, I have all this year and then all of next year, because that’s the next year end to pay this back. But if I borrow it in let’s say September, I have the remaining of this year and then all of next year. it will depend on how long you have access to this money, depending on the day you borrow it.

Kyle Pearce

Yeah,

100%. Now here’s another nuance too, cause I don’t want someone running off and they’ll be like, like it always matters on the calendar year. Like what you said, John, makes sense for make math moments or for Canadian wealth secrets. Cause we have a year end date of December 31st. However, if I look at our property company, our property company has a year end at the end of June, June 30th. So let’s think about this. A lot of people have a typical calendar year.

year ends, sometimes you’ll pick different year end dates. This is sometimes the accountant’s kind of going, listen, it’s a less busy for me at different times of the year. So let’s change your year end so that, you know, it’s not all coming down on their plate all at once. So in the case where let’s say our year end was December 31st, if you borrowed that money on January 1st, you now get to essentially borrow those funds until the end of.

the next year, which is fantastic. So basically like two years less a day, you are essentially able to borrow these funds. Now, if I borrowed it on December 31 of this past year, and my year end is December 31, I’m actually I’m going to push it to December 30, even because I don’t know, there might be a nuance, I wouldn’t put it right on the day, to be honest. let’s say we go December 30, all of a sudden, now, I have to have this thing paid back by the end of

this calendar year because I didn’t wait these extra couple days to get into the next fiscal year for the business.

Jon Orr

Right, right, right, right. Okay, so we just wanna, I think what we’ve done right now is provided some insight to both lending options at this point. So we’re not, in this point in the episode, we’re not saying, hey, do this or this. We’re just saying these are the options, these are the facts around these options. Now I wanna jump to…

long-term implications like estate considerations like if I if I do one versus the other if I I I Own it personally. I think we’ve kind of come to the conclusion that we want to own this We want to kind of use this personally the land personally build on this personally But then borrowing options is I think where our choice is but long-term if I’m if I’m thinking about a state if I think about legacy this is part of our wealth planning we always want to think about that component as well as

If I do build it personally, is it easier to pass on? Should that reconsider into my, maybe I should own this in the corporation. If I kind of go to think long-term in terms of passing on the estate and the estate, maybe the corporation could go to shareholders instead.

Kyle Pearce

Yeah. Yeah, now also, I wanna also just kind of tie the last little section up with a little bow. Like the assumption would be likely, like some people would probably scratch their head and say, well, like, how do I end up paying the company back by the end of the next year? And well, we’re gonna refinance that property, okay? That might’ve been obvious for a lot of people out there, but just in case.

In either case, you’re probably gonna refinance that property if it’s going to be used for income purposes, right? If it’s gonna be an investment property, you might as well get a mortgage on that property. Interest rates probably gonna be fairly better than say the HELOC interest rate or maybe even the interest rate you’re paying your own company. So you’re gonna refinance it, pay it back or pay off as much of your HELOC as you can. Now,

I want to also cover like what happens if I can’t pay it back, like for whatever reason I couldn’t get this loan, I couldn’t get this mortgage on this rental property. The problem you could run into in the corporation by borrowing funds is that let’s say that due date comes the end of the year that you these dollars are due back to the corporation. We now have to market or book it as income. Okay, so that is the one like risk of using that model is if if I can’t get the money back now.

what would I do if I couldn’t refinance the property? Well, remember this person had this HELOC over here. I would probably just use the HELOC and now I pay it back over there. And you know, now everything is sort of fixed and tied up with a bow. So I just wanted to make sure that portion was clear. But now that we built this property, everything’s been paid back or paid back where it needs to go, right? So the corporation’s made whole or your HELOC maybe is made whole. We now own this property and we own it personally. we…

kind of zoom out and we keep this property and it continues to generate income. One negative is that we now have like the personal liability associated with this property in terms of like if for whatever reason there was some sort of, you know, reason to, you know, lawsuits or something like that. I mean, again, not a huge concern for me personally, but again, knock on wood, not your lawyer and a lawyer might think differently there. But from a tax perspective. In some ways, like there could be some benefits here. Like once again, if I earn revenue or if I earn rental income here at a personal level, some of the things I like about it is that now like the write offs are going to be at the personal level, right? So it might be helpful for me kind of controlling my own personal tax bill that I have a little bit.

⁓ If it’s owned in the corporation, we’re automatically going to pay ⁓ a higher tax rate upfront on that passive income. But if we take out dividends at a personal level, we can get a bit of a tax credit. And basically, it’s supposed to essentially all come out in the wash. That’s like the way the system’s designed. Little more complex when you incorporate the incorporated structure. But now let’s talk about like the estate. Like we go all the way down to the to the end, quote unquote.

Jon Orr

Right.

Kyle Pearce

got a primary residence. So that’s likely going to be the thing we deem as I shouldn’t say likely it is because if this is a rental property, then I can’t claim that as my primary residence. So I’ve got no tax implications on my primary residence, but there would be tax implications on the capital gain of that rental property, right? So that rental property is likely going to appreciate assuming that we own it for a number of years down the road.

and let’s say I own it all the way until I pass on to the next world, really the implications are gonna be fairly similar regardless of where it is. So some people might think it’s like if I have it in the corporation, maybe I’ll pay less tax by doing that. But on the capital gain, currently the capital gain rules are essentially the same regardless of whether it’s owned in your holding company or whether it’s owned in your personal name. So.

that tax bill is essentially going to be the same. Now, some people might be able to find like some nuance here or there that maybe, you know, something’s gonna adjust, but let’s be honest and say if this property grows by a million dollars, that capital gain, 50 % of that capital gain is going to be included in your tax when you sell it or when you pass on and the same is gonna be true for the corporation.

and you’ll be rolling those shares over to someone else likely in your estate or maybe it’s a spouse or a child or maybe it’s a charity. But ultimately at the end of the day, the capital gain is gonna be the same. And then the next question would just simply be is like, how do we plan to pay for that capital gain?

Jon Orr

Right,

right, right, right. Now, before we get into that part about paying for the capital gain, let’s, because I think this is a valid question, I think many people might not understand the answer to this question is they think maybe there’s a loophole here, which is like, let’s say I, this is my, this rental property, but I’m like, I bought this rental property because it’s, and I want to build on it because someday I might want to move in there.

Kyle Pearce

Mmm.

Jon Orr

and

it’s great. And so it’s like, now I sell my primary residence, don’t pay capital gains there, move into the rental property, and now I think it’s my primary residence. I got it, I’ve got it. It’s now like, hey, there’s no way, there’s no way I’m paying capital gain now, it’s my primary residence, right?

Kyle Pearce

Yep. I’ve got this. Yeah. Yeah. Leupold found. Yeah, well, and this is a really interesting one as well. I saw someone I wish I had the name to, to properly cite it, but they were talking about, you know, the, the primary, residents in the tax exemption, the capital gain exemption on your primary residence. And something like this sort of came up. So what eventually happens, let’s say we do sell that primary residence, that primary residence again, may have grown by a million, 2 million, hopefully 10 billion, right? You’re like, my gosh, I hope, you know, we’re going to benefit from that amazing.

problem is, let’s pretend that these two properties are in similar areas. The reason why I say that is maybe the market’s probably moving up in a similar fashion in these areas. The problem is, is whatever gain I saved on over here on this property, I sold it, I pocket the money, when I move into the rental property, I now, all of a sudden, here’s the big if, I want that to be deemed my primary residence. What essentially happens is it stops

being a rental property, and then it becomes your primary residence. And from that date, that move in date or whatever that date you declare, you are now making that your primary residence. From there on, you will no longer pay a capital gain, but there was a capital gain up until that point. So remember a moment ago, I said, I hope it my primary residence grew by a billion dollars. Well, if it’s in the same market, and let’s say there were similar value properties when you know, at this time,

Now I’ve got a billion dollar capital gain that I’m going to have to deal with over here. So we’re going to have to make some decisions on that as to whether we do truly want to call that our primary residence or not. Right. Which means do I anticipate like there’s going to be more gains in the future and like I’m going to maybe be there longer term and I want to benefit from that or maybe I don’t. You know, and I just I don’t want to, you know, transfer that ⁓ primary residence ⁓ exemption over there.

Jon Orr

Mm-hmm. Yeah. Well, I was just thinking, like you sold your primary residence because you’re like, I want to downsize. I’m going to move into my beachfront property that I’ve bought for a rental property and now I’m going to live there. And therefore, like, because I sold my property, I probably take the equity along with it now. But now I have funds to pay the capital gains tax at that moment because you’re going to pay that you’re basically you’re you’re triggering that tax event the day you move in there to to be accountable for. OK, so let’s move on to thinking about dealing with the capital gains, because obviously if I have

You know, I think what lot of people do in terms of capital gains is, especially when a state’s transfer is like, hey, there’s a bunch of money here in a pot, we’ll pay all the capital gains, we’ll pay all the taxes, and then what’s left is what I got. But why don’t you explain, you know, in this scenario, how we typically help our clients think about the capital gains and accounting for paying that capital gains so that you don’t have to say, work that into your plan, basically saying like, when I die, when we liquidate everything, everything gets cut in half because I’ve got to, or cut into a quarter because I’ve to account for this capital gains tax.

Kyle Pearce

Yeah, I love how you made that correction because it’s like I’m going to probably have to pay half on half of the capital gain, right? So it basically is a quarter. And that’s based on today’s rate. So, yeah, like if the scenario with the the selling of a property while we’re alive, there’s really like we don’t really have like any tools other than leverage or actually like selling and utilizing profits in order to cover that that tax amount. But what we do have at the end of life

when we’re transferring assets is we do have some tools that could be helpful. Now, some people are like, well, if I just take all this extra money and I put it all into the S &P 500 and we just scale it all the way out for X number of years, it’s like the growth is gonna be high, there’s still gonna be capital gains, but it’ll be enough that I can cover, like totally, like that’s one strategy that totally works. Like you can definitely do that. For a lot of other people though, they’re kind of looking at things and going like, if I can…

basically transfer any of these funds that I have in lower risk, non-volatile or less volatile assets into something that is going to help me deal with the fact that my net worth will decrease when I pass, assuming you own assets other than a primary residence and a tax-free savings account. So that’s like the only scenario where…

you’re not going to see your net worth decrease due to capital gains is because you don’t have to pay any capital gains on either of those two assets. But like all the other assets, I’m going to have to like pay a capital gain or my estate’s going to have to pay a capital gain on it. So for us, it’s, I don’t want to say it’s fairly simple because like there’s work to be done here to figure it out, but we try to look at your entire portfolio and say, how many of these dollars can we reallocate into a policy?

that is gonna be high cash value now, meaning so we still have liquidity. So those dollars are still accessible in a very similar fashion and we can use them for leverage. If let’s say there’s an opportunity, let’s say, hey, a property, a fire sale on a property and you wanna lean into that bucket, amazing, it’s there, you can do it. But that asset will actually grow in value when we pass. So it’ll be the only asset in your entire portfolio

that actually goes the other way, right? All these other assets are going down except for your primary home and your tax-free savings account. This one asset is actually worth more when you pass, so be careful who you tell. You don’t wanna tell the family or the beneficiary, just kidding, you don’t wanna be looking and overfunding that policy.

so that it’s just for the next, you know, the next generation. But if I could get both, if I could take the money that I wanted to keep relatively liquid or low risk or non-volatile, right, we call it our volatility buffer. And if I can funnel those dollars into a policy, that policy is gonna be worth more when I pass. And therefore those dollars, creates a liquidity event, cause it does actually pay out with no capital gains, whether it’s.

Jon Orr

Right.

Kyle Pearce

personally held or whether it’s held inside the corporation. Definitely a bonus if you have a corporation with retained earnings, you get the bonus of being able to get some of those retained earnings out tax free. We now have the money in order to deal with any of the deemed disposition capital gains. Meaning like maybe we didn’t want to sell the primary residence and we didn’t want to sell the rental property. We don’t have to pull or borrow funds from those assets or sell off other assets.

in order to create the liquidity necessary to pay the tax bill at that time. Yet while I’m living, those dollars are still performing like they were gonna perform anyway. So I’m calling out GIC people, I’m calling out money market people, I’m calling out high yield savings account people, anybody who’s putting money into that like more fixed income, lower growth, like we’re talking about those people plus

you’re also winning on the fact that it does grow tax free. So we don’t have to take up any of our tax free savings account or RSP room for non-volatile assets. Like we want those buckets to be growth assets. Like we want to create a tax problem. Like a lot of people are like, I don’t want my RSP to get too big. I’m like, well, that’s kind of like the wrong mentality to have, to be honest. Like I certainly don’t want to pay half of it in tax down the road, but I certainly want to see my investments perform well, right? So

These are things that we wanna be thinking about. And in this particular case, while they build the property over here in their personal name or in their corporate name, it’s actually not gonna make a significant difference in my opinion, from a tax perspective, what side of the border it’s on. It just really deems on where we’re gonna fund it in the short term and really what is quote unquote easiest. And to me, it’s doing it in my personal name.

probably pulling from the HELOC and leaving the retained earnings there just in case something goes wrong. It’s probably gonna be the easiest way to go and then making sure that we positioned ourselves to think about those capital gains that are gonna be created down the road and get like, trust me, we speak to so many people that are like the die with zero folks, right? That are like, I don’t wanna silver spoon the next generation or whatever, totally get it and that’s fine. But if you could,

make it better and whether you donate it to charity or not, without actually losing your overall return by being strategic on the funds that go in, I think it’s a no brainer. And most of our clients that become clients are, you know, think it’s a no brainer as well. And that’s really what it’s all about here is really trying to figure out what’s easiest, most efficient, and what’s going to get you the most bang for your buck. As we say, it’s like you get to have like the, you know, the win, win, win, win all the way around.

Jon Orr

Right.

Kyle Pearce

That’s really what we’re after here.

Jon Orr

Yeah, and I think we covered a lot of ground. took, you know, think about this particular scenario and weighing through the options to owning it, you know, and building it personally, corporately, funding it personally, corporately. You know, what does it look like when the estate passes personally, corporately? So I hope we’ve given you some insight into that. ⁓ And then also when you think about that last component, and if you do own, say that,

that participating whole life policy inside the corporation. We do have a free masterclass on how the corporate owned insurance strategy can unlock trapped retained earnings on the personal side. So there is some advanced techniques there. You can head on over to our masterclass, a course, a free course on how that works and how you can set that up for yourself. You can head on over to CanadianWealthSecrets.com forward slash masterclass to learn more.

And if you need us to take a look at your personal situation or your corporate situation, you have a complex situation, we’d love to help you. Just like we were talking with this individual about their scenario, book a strategy call over at CanadianWellSecrets.com forward slash discovery. Just as a reminder, the content you heard here today is for informational purposes only. You not construe any of this information as legal tax investment or financial advice.

Kyle Pearce

And as a reminder, Kyle is a licensed life and accident and sickness insurance agent and the president of Canadian Wealth Secrets 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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