Episode 251: Fixing a $7M Canadian Retirement Plan Gone Wrong

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What do you do when you’ve built more wealth than you need—but your success is quietly setting up a massive future tax bill?

This episode walks through a real planning scenario that will hit home for many Canadian business owners, entrepreneurs, and investors. You’ll hear how one retired entrepreneur did almost everything right—paid off the house, built strong investment buckets, and created lasting financial security—yet still ended up with hidden tax inefficiencies inside a RRIF, personal accounts, and a holding company. If you’ve ever wondered whether your current structure could create unnecessary drag later, this conversation shows where those problems come from and what can still be done to improve them.

You’ll learn:

1. How large RRIF balances can create a growing tax problem in retirement, even when you do not need the income.
2. Why asset location matters—especially when comparing TFSAs, non-registered GICs, and corporate investments.
3. How strategies like leveraged investing and corporate-owned whole life insurance may help reduce tax drag, improve estate efficiency, and create more flexibility for future withdrawals.

Press play to hear how a “good problem to have” can become a smarter, more tax-efficient wealth plan. Built from your uploaded transcript.

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.

In this episode of Canadian Wealth Secrets, we explore how Canadian entrepreneurs can use smarter financial planning, retirement and wealth management decisions to build a stronger Canadian wealth plan and move closer to financial freedom Canada. Through a real client-style case study, the conversation unpacks practical tax strategies, RRSP optimization, tax deferral, capital gains strategy, estate planning Canada, and legacy planning Canada for business owners with corporate and personal assets. You’ll hear how financial buckets, investment bucket strategy, and corporate wealth planning can support tax-efficient investing, passive income planning, and building long-term wealth Canada, while also addressing personal vs corporate tax planning, salary vs dividends Canada, corporation investment strategies, and corporate structure optimization. The episode also touches on leveraging investments, insurance, business owner tax savings, retirement planning tools, financial systems for entrepreneurs, and financial diversification Canada to help listeners create a clear path toward financial independence Canada, whether they are focused on an early retirement strategy, a modest lifestyle wealth goal, or broader estate planning and corporate finance efficiency. 

Transcript:

Jon Orr: Today we want to walk you through a real planning scenario that I think many Canadian business owners, entrepreneurs, investors are going to relate to. This is the story of a retired entrepreneur who did everything right, built successful company, sold that company, accumulated a significant amount of wealth both personally and inside the corporation. Hey, this is a great problem. This is great problems to have, sure. And today,

Kyle Pearce: Good problems to have.

Jon Orr: this retiree is financially secure. There’s no debt, there’s no stress, there’s no concern about running out of money. Like this is where you want to end up. This is where you’re aiming for. But after a few meetings together, after our discussions, some things became very clear. The wealth structure was actually creating some inefficiencies.

And that’s really what we want to talk about here today is This individual is paying more tax than he was necessarily supposed to be or could have been paying less. The corporate investments were building a future tax liability. Some of his assets were producing income he didn’t really need. And in other words, success had created the tax problem.

And we often say this here on the show and actually in our calls is that this is good. This is a good problem to have is that when you have the the feeling like I could have done this better, you’re in a good spot. Like you have to be in a good spot because now you’re going like, I could have had even more.

And so that’s what we wanna talk about here today. We wanna look at it from two perspectives, two different time periods because this person is retired. They have these structures in place currently, but now what do we wanna address is what does this individual need to do moving forward from the age of 65, knowing that it’s not too late to change structure and strategy?

But also what could this person have done 15 years ago, starting at say age 50 or 45 or whatever age, but what could the structures have been adjusted to earlier so that the problem that you’re facing now is feeling like is not the problem or maybe there’s another problem that is even better to have. And that’s what we want to address here today.

So Kyle, let’s get into it. Let’s get to the specifics. Fill us in. Give us some numbers, give us some structures, what, fill this financial snapshot in for this retiree.

Kyle Pearce: Absolutely. And if you’re on YouTube, we are going to draw this out as we go. We’ve actually had a lot of comments recently where we probably could have or should have drawn something out. And people on YouTube specifically are saying you should have drew that out. So we’re going to draw this one out. But we’re also going to articulate this as best we can.

So if you are driving in the car, you’re walking or whatever it is, listening to the podcast, that you can stick with us. So we have this individual. They’re around 65, we’re not even gonna give them a name because remember we always modify things a little bit as we go so that we’re not revealing too much personal information or anything that can make someone identifiable.

But this individual, successful entrepreneur sold their business or wound the business up anyway, right? So they actually sort of passed it on and wound up their aspect of the business. So they’re no longer involved. And they’ve got a good problem, like you said, like they are financially set. And the words they used as well was sort of like, I have more money and assets than I need.

And they recognize that there’s going to be a big tax bill and probably a bigger tax bill than they could or should have in the end, so to speak, right? So we’re going to go through this and we’re going to talk about this because one of the biggest challenges that we have as we’re building up our pile is trying to focus on the right thing.

So first and foremost, you and I always talk about this is like, we often have to remind ourselves in our own businesses that like, having a successful business is going to be most important because that’s going to create the volume we need in order to be able to contribute those dollars to investments, right? To get those flywheels going.

So as a business owner or a T4 employee, you’ve got to get that income flywheel going from the work that you do from day to day. And as we’re doing that, we don’t wanna distract ourselves from that flywheel. We don’t want that flywheel to slow down. We also wanna start thinking about how do I build up this more passive flywheel, right?

And get that thing spinning. So he’s done a great job doing that. But along the way, I would argue that somewhere either maybe not recognizing early enough, right? That’s just through not knowing. You don’t know what you don’t know. Or maybe being so busy in the business like we can, you know, totally relate to that in our businesses as well.

We’re very busy that we leave things and then oftentimes it’s only after we’re able to sort of sit down and that can be at, we’ll call it retirement age when all of a sudden you’ve got time on your hands and you start to reflect on like what could have been or should have been in a specific All right, so as we set this thing up, we’ve got a 65 year old individual. They are now quote unquote retired.

They are now not working in the business and now they’re looking at things and they’re starting to see how things are shaping up. And you’ll see here, first and foremost, I have a very like not so, you know, not so pretty sketch of a home here, but he’s got a primary residence here of about. $1.75 million in values, no debt.

There is zero debt in this person’s life. Again, good things like this is all very good, very textbook. we’re not, when we talk about some of the suggestions here, we’re not suggesting it’s right for everyone either. What we’re gonna do is we’re gonna kind of go around and talk about some of the adjustments that could be made because remember it’s just about knowing what’s possible and then you still get to decide at the end.

Jon Orr: All right, no debt on that home. All right, good to know, good to know, no mortgage. There’s some options there.

Kyle Pearce: whether that’s like right for you, right? And sometimes I always say it’s like the more simple the plan, it’s likely the more tax you’ll end up paying and the more complex the plan, the less tax that you’ll pay, right? And the same can be true about what you invest in and how you invest in all of these different things, right?

Jon Orr: But then you more, but it could be also more time spent, the more complex your plan you have, sometimes it’s like, it worth it? You have to ask yourself that because I’m going to save tax, I am gonna save tax, but it is complex, therefore I have to know about it, I have to learn about it, I have to be on top of it because does everybody know about it?

All of these questions come into play. How many hours a week does it take or how many hours a year does it take? These are questions. But anyway, that’s a side note.

Kyle Pearce: That’s exactly the trade off. Yeah, and behaviorally, like how does it make you feel right? And these are really important aspects, which again is why, you know, we get people all the time arguing it was like, you should never have any permanent insurance. And it’s like, we’re big fans, because actually, we don’t like the way it feels to have everything in the market and to see all of the assets that we have that are liquid going down by a lot all at once.

Like it’s, that’s just us. We know mathematically, it will not. outperform being 100 % equities over the long term, assuming you’re diversified. But the reality is, it’s everyone lands somewhere in between, right? It’s somewhere in the middle. The answer is somewhere in the middle. So here, we’re just gonna talk about how we could optimize and then maybe there’s one or more of these ideas that this particular individual may follow through on.

So as we mentioned, we got the primary residence here, no debt. Great, so that gives us like, that’s like a part of the wealth reservoir now, if you have a home equity line of credit available, which he does. So he has access to like, we’ll call it like just in case funds there. We don’t wanna necessarily like rely on that or you know, anything like that.

But when you know you’ve got all these other assets stacked we look at these different assets, we have a big bucket over here, probably one that catches your attention or one of them is the RSP slash RRIF bucket. Now why I have both of those listed is because based on the age, they actually chose to convert the RSP to a RIF early.

A lot of people think like the RIF can’t be done. early on in the process and the answer is actually you can do it very early and ultimately you can do it. I actually don’t know if there’s a minimum age for it but as soon as you do convert you do now have to start taking withdrawals and there is a formula for this so you don’t have to take out as much as you do once you’re 72 but for a lot of people if you have a large rrsp you might want to consider as soon as you’re not taking income from other sources.

For him, it was from his operating company. Now it’s just a holding company, holding those assets over there. As soon as you stop creating that active income, or you’re no longer taking your T4 income from your employer, you now might wanna consider at least converting some of your RRSP to an RRIF. Some of the benefits is when you take the minimum out, is you don’t have any withholding tax, which is nice.

So there’s like an advantage there. Like you pay tax at the end of the year, come tax time, not all the way, you don’t have 10 % or 15 or 30%, depending on how much you’re taking out of the RRSP. So he’s gone ahead and he’s completely converted the entire thing to an RRIF. The balance is $2.25 million.

And based on some basic math, he was thinking, looking at average rates of return, we have 8 % here. I can proudly say that what this individual had done over a fairly long period of time was actually better than 8%. So one of the stories they had was like buying Google and it was like $15 and things like that.

I was like, okay, yeah, so you probably did pretty well. So we’re gonna use 8 % in this example. But the reasoning here is that he knows at $2.25 million, taking even the RIF minimums out is going to put him in a fairly high tax bracket. And that number is going to put him somewhere around the 4 % rule anyway.

So if he continues to do what he’s doing, this buckets actually going to continue growing. And he’s actually being, I think fairly logical in terms of trying to spread out a little bit of that tax drag versus say going I’m not gonna take out of that bucket until I have to start taking it out and just let it compound over time.

I’d rather see a little bit coming out, especially for the income that he actually needs. So he’s already taking out.

Jon Orr: Now why is that the case? Like, tell me more about that. Like, tell me why, like, because I think there’s lots of lots of reason as we like, we could delay, but like, why is it, is it good to take it out? And we haven’t gone through all the other buckets that this individual has as well yet. So, but, but elaborate that on, on, on us for like saying, like, let’s, let’s get some of that out right away.

Kyle Pearce: Yeah, I mean, we can run specific numbers on this and we can look and say, this is exactly how it’s supposed to go or exactly how much you should be taking. But over time, ultimately, the bigger that bucket becomes, the more of a compounding, I don’t want to say problem it becomes because I don’t want people, you know, we get so many people in the industry that get fearful of like putting too much in the RSP.

Again, I think it’s a good problem to have. We want it to be big, but we also don’t want to put it off and start paying tax and other buckets that could be more beneficial, especially in years that I do wanna take more income than less. One thing that we don’t want people doing is let’s say leaning into other more tax efficient buckets too aggressively while this other inefficient tax buckets starts just ballooning and compounding.

Like we want to mix, right? And oftentimes I would say if we can use that riff bucket to take up some of our early tax brackets and then anything else that we need to top up for lifestyle, we start taking out of more tax efficient buckets like the non-registered or even a corporate brokerage account, right?

Where we’re only gonna pay on half of the capital gain and the other half is gonna be tax free. So essentially you can say like, you may pay less than half, you pay half or less on the tax that you’re gonna pull out of those on the actual money you pull out of those buckets without even considering, like that assumes half would be if you’re in the highest tax bracket and it assumes that you have a zero adjusted cost basis.

So essentially when you pull money out of those buckets, it’s gonna be at least less than half the tax that you’re gonna pay out of this other bucket, right?

Jon Orr: Okay, so let me go back. obviously we’ve got this bucket, this RIF bucket is growing, it’s growing more than what say a 4 % rule is saying. we’re gonna have a tax issue there. Okay, that makes sense. Now I think we should probably be clear about the amount pulling. Like if he does pull 4 % or if you think about like just minimum withdrawals, you’re looking at like a what, 90 grand a year in taxable income coming out of that bucket.

And so now I guess, before we kind of talk about those other buckets, we should probably address, like, what does he need? like, cause that, like when you said before, he’s saying, well, I need, I have way more money than I actually need to live on. And the income being produced by these buckets is more than I need.

so let’s say right there, if it’s like the 4 % rule or around the minimum is about 90 grand a year that he’s putting in his pocket, is that enough already to cover his? daily, you know, his yearly lifestyle expenses for what he wants or does he need more? Does he need to go into other buckets right now that we haven’t even got to, to draw more?

Like what did he say to you, what he needed to kind of like, you know, pay the bills and live the life and be retired, look like.

Kyle Pearce: Yeah, 100%. And actually that number is less than $70,000 after tax.

Jon Orr: So he doesn’t need the 90 grand. He’s already in a position where like, just in that one riff bucket, if I pull the minimum, I’m 20 grand more than I actually need. So that makes a lot of sense to pull a good chunk from that bucket, knowing that it’s going to continue to grow. He doesn’t need it all of it right now.

Okay, that makes sense. Okay, so we know that 70 grand, we got an extra 20 grand a year in a way. of income we don’t need that we have to figure out what to do with. What about tax-free savings accounts?

Kyle Pearce: Yeah, and he’s done well there as well. So obviously stuffing that very well. It’s up at about $800,000 and that’s at 6%. Now there were, you know, there were spousal accounts and so forth as well. So we’re talking about the combined tax free savings account, right? For the family. So this is this is $800,000 and we’re using a more conservative 6 % because he’s actually trying to like tone down into more just dividend paying type equities.

So toning down a little bit. So we’ve got about 6 % there on average. And again, no need for that money. So that’s a great bucket that he can lean on in years that maybe he does want more than 70,000 because that’s the other thing too. That’s very hard for a lot of people to figure out is you go like, I know how much I need to like quote unquote get by but What if I want a new car?

Like what if I, and I don’t want to take on debt? What if I want to go on the biggest, you know, a world cruise or like something big that’s going to cost a lot of money. That’s a great bucket to lean on. So he’s in a case or in a situation, unlike many other Canadians where sometimes they’re leaning on the tax free savings account every year because that’s their top up that they need in order to sort of hit their needs on a monthly basis and not pay any additional tax.

He’s in the opposite scenario. He’s actually got more money in his hands. And again, part of it’s because he’s converted the whole RRSP to a RIF. He’s gotta take those minimum withdrawals. In this particular case, I think it makes sense to do that. One thing that could have been put in place earlier, and it can still be done now, but I would argue we wanna do this ahead of when we’re quote unquote retired from a behavioral aspect is we could lean on leveraged investing.

meaning like we could have taken a chunk from the home equity line of credit, invested it in similar assets to what he’s comfortable investing in anyway, or maybe even more conservative assets. Maybe it’s like a global equity fund. Maybe it’s just a mutual fund that’s balanced. So again, high fees, but balanced so that it’s not gonna be super volatile.

But ultimately at the end of the day, by producing some interest on that investment loan, that interest could be written off against some of this a riff riff withdrawal amount that’s coming out. So if we were to think about this for a second and go, you know, if let’s say he had a million dogs, I’m using a million, I’m not suggesting anyone go out and member not financial advice here.

This is just for educational purposes only. But if let’s say he was using the Smith maneuver throughout his life when he had a mortgage, cause he didn’t buy his home with cash. He had a mortgage. if he used the Smith maneuver just in the most basic sense, and eventually had built up a million dollar debt against his home and had that money in the market doing what it does over the long term while he was producing income and while volatility isn’t as big of a factor, it might’ve been emotionally but not actually from a capacity standpoint, that million dollar home equity line of credit would cost around $50,000 in interest to hang on to.

Now a lot of people are like, nope, I’m out, 50,000. But if you think about that million, if that million was invested for let’s say seven full years at 10 % per year, that one million should be around $2 million. Now again, it’s not as simple as that. There’s volatility, there’s all of these things. But if we use the rule of 72, if he had done it for seven years at 10 % that million dollars should be doubled.

So we should have a $2 million non-registered account, a million dollar of debt against it, and now a $50,000 interest payment that’s gonna actually be funded from the RIF, which per year, which is gonna come out and it’s gonna be offset. So that $50,000 actually is zero tax, while that $2 million bucket continues to grow and compound over time.

Now that’s a simple way to look at it. You can go the other way and say, what if it was 7 % a year? Well, it take 10 years to double if we use the rule of 72. So 10 years at 7 % on average, if the mortgage was 25 or 30 years, it seems like that could have been a potential opportunity had he done that work earlier, well ahead of retirement, so that now his income goes from $90,000 on paper.

down to $40,000 on paper because $50,000 is going to be offset and his actual net worth is actually greater in this instance as well. We’ve got debt, but we’ve got actually a higher net worth given the fact that we had put some of that debt equity to use all along the way. So one aspect that could have happened, he can still do it now, but it’s not going to be as effective and I would argue because the adjusted cost basis is going to be so high.

Every dollar we take out of that investment bucket will be more return of capital than say a capital gain. But if he doesn’t need it for income, he could still do it. And as long as he’s comfortable with the investment he’s in, I would just argue, you know, deciding on a, on a whim that you’re going to do a million dollar leveraged investment is obviously not a safe move.

So maybe slowly working their way up, know, start with 100,000 one year, it’s not gonna be $5,000 tax deduction isn’t all that great, but then you work that up to 200, it’s a $10,000 tax deduction and slowly inch your way along as long as you’re going to stick to the plan and not veer from the plan along.

Jon Orr: And I think important aspect here is knowing or if you’re planning, like this is the important component of future projection of knowing what is it going to look like when I hit this gentleman’s age? Like when I’m 65, if I want to create this problem, do I want to be in that position or do I want to have say, the debt in that position because I think that’s the important part.

If you know that your RIF is going to be too much money, that’s the situation he’s in. I have too much for my future lifestyle needs, then what could you do now? What you’re saying is you could start creating a debt that can offset that future income and any current income you have now. from those sources as well as you’re building because you’re gonna get to that point and you’re saying, have got my better, I have a bigger net worth along the way.

I now have a place that can offset the income to reduce my tax drag at that point in the future because I made a move here now instead of saying, let me just pay off my mortgage. So, thinking about that as a place of. Hey, if I know, and that’s the condition I think, is if I know by knowing what my future expenses are going to be, and I know from my projections of what my RIF is going to be, then I can start the move now to reduce the tax in the future.

Kyle Pearce: 100 % and as we always say, it’s just simply a choice but knowing you have the choice I think is the power and then you have the power to decide if that’s something that you think is worth the while is it worth the hassle is it worth the effort so I love that so tax free savings account let’s keep rolling along here like tax free savings account obviously not an issue also one of these things that I would say is like hey like we want that thing to balloon as best we can, that thing is gonna be great. It’s not gonna be a burden tax wise down the road.

Let that thing do its thing. And I would argue that’s probably where we wanna have our more aggressive investments or at least a chunk of them. So you’ll notice like the average rate of return in the RIF is actually higher than say in the tax free savings account. So I might be shifting around and say, listen, if you’re trying to introduce more dividend payers, you probably wanna do that in the RIF, then you wanna do it in the tax free savings account.

And if you’re still in AI tech, companies or the cues or like whatever it is that you’re into, that’s probably a better spot in the tax free savings account. Again, same asset, just a different bucket. I’m not promoting that you do more aggressive investing. I’m saying whatever you chose as your investment diversification plan, you wanna have your more aggressive side of that happening in the tax free savings account, because we want that thing to compound as best we possibly can.

Now, here’s to me a clear issue. I see another bucket here. and it’s up on the screen. It is a non registered fund or a non registered account that’s only holding GICs. Now, you know, and again, no shame here, the client immediately like felt like they had to defend themselves and say like, well, I’m only doing that because that’s just money that I just don’t know if I want.

It’s like an emergency fund, essentially, you know, and I’m like that totally fine. The one negative that we’re getting as long as we recognize these pulling about three and a half percent

Jon Orr: I’m not sure exactly. It’s an emergency fund.

Kyle Pearce: per year, not a ton, but at least it’s not like inflating away, just sitting in a checking account. But that’s $350,000 producing like what, $12,000 of interest a year, which is tacking on to the 90 that he’s taking as income from the riff.

Jon Orr: Is 12,000 taxable income or interest?

Kyle Pearce: Well, so it’s gonna be interest which is gonna be considered regular ordinary income. So yeah, he’s getting that interest. So he’s gonna have to pay tax on that. And essentially, if you think about that, it’s like, you can almost picture these GICs, because you didn’t have to do this. I’m gonna put the GICs at the end, at the top of your tax brackets into the marginal tax bracket you’re in.

You’re giving up like call it 30, 35 % ish of that. three and a half percent. And again, at the end of the day, it’s better than zero. Like you’re still making money. No one’s going to turn down money, but it’s like, what could we have done better with this GIC? And we’ll talk about that in a moment.

Jon Orr: Are you? If you’re, well, I was just gonna say, are you? Because if you’re earning 3.5 % interest, but then you’re paying 35 % tax, that drops you. Like, are you at inflation? Are you like, are you losing money to inflation?

Kyle Pearce: Well, yeah, you could argue, right? By the numbers, the CPI numbers, you’d probably be at inflation, but I would argue real inflation is often floating closer to what you’re gonna get on a GIC, right? Like, mean, there’s a little arbitrage here, but the reality is CPI numbers are often like, they try to keep them intentionally down. They change the basket of goods they use and all that fun stuff. So,

Jon Orr: That’s what you’re doing. Okay, so we got some money there. Okay, this is our emergency fund.

Kyle Pearce: Yeah, we’re going to talk about this GIC. We’re not going to like just completely throw it out or anything like that. I mean, one thing you could do, but again, he wants access. He just wants it as quote unquote safety net, right? So there’s nothing wrong with that. But then we look at the holding company and the holding company in it has a million dollars of retained earnings, which you can see here on the screen.

I’ve got it kind of like segregated at the bottom here. This is retained earnings. And then he’s got like a a $2 million capital gain. So there’s a big capital gain member capital gains are not all bad, right? Because we only pay tax on half of them when we realize it. But these real these, these retained earnings, eventually, if we want those guys to come out, and if they came out all at once, so that this is if we took them in one fell swoop, or if we took it out even gradually, since he’s got money coming in through the riff over time, automatically, he’s gonna have to pay like somewhere around 30-ish, 39 %-ish to get those retained earnings.

So he already paid, likely if you’re in Ontario, he’s already paid 12.2 % on those retained earnings if you’re in the small, you know, under $500,000 of earnings per year. So he’s already paid 12.2%, then he goes to pull these things out and then basically he’s gonna have to like tack on like another 39 % over here.

Like there was already money. that was lost and now more of it’s gonna be coming out. Now there is some tax credits and so forth, but you can feel pretty confident that you’re gonna be losing about 39 to 40 % total round trip on that money coming out. So down the road, there’s a big tax bill there, whether he does it now or later.

And then of course, half the capital gains gonna come out tax free, which is great. So 0 % tax on a million dollars, which is great. but then there’s gonna be some tax on the other million. Half of it’s gonna go to the government. So, you know, we’ll say 250 is gone. The other 250 gets to return to the retained earnings pile, which actually makes more retained earnings than what we thought or what we see on paper currently.

And this is where I think there’s a big opportunity. And even though they’re 65 now, they actually have a big opportunity because they had said, They don’t need this money now and they may not ever need the money in the holding company ever for their own lifestyle. But they’re like, if I can reduce this tax bill for my spouse, for my children, for charity, for wherever this is going to go, there is an opportunity here without having a huge cost.

Like one thing is we can start funding a corporate owned policy from realizing some capital gains. inside of the brokerage account. So I’ve kind of drawn that in here. Here’s the policy here. And why we want to do that is because as we slowly fund a policy, that policy’s adjusted cost basis will eventually hit zero, assuming we live, you know, a fairly average lifespan and all of the death benefit from this policy can pay out to the estate tax free 0 % tax through the capital dividend account.

And therefore we’ve got an opportunity if we’re smart about how we create this policy. If we he’s at 65, if we did say a 10 year policy, even at the age of 65 and at somewhere around, I’m going to say around $35,000 of premium per year, we could fund a policy that after about 10 years is going to have a death benefit of about a million dollars.

which is not only gonna help us deal with some of the capital gains that we can’t avoid, some of the capital gains tax we can’t avoid, like the 250 in the corporation, but it also helps us funnel more of the retained earnings out through the capital dividend account at a lesser tax basis, which essentially is gonna be zero, assuming that the adjusted cost basis does make it down to zero.

Jon Orr: Right, right, so that’s a move he can make now because it’s not too late, know, feeling 65, you’d like, does life insurance make sense? You can start that process now because it’s sitting there, but okay, rewind 15 years or 10 years. What could he be doing that move earlier while he was operating the business, while he’s in the business to create it so that he’s already built up or.

the retained earnings is kind of like, there’s not so much sitting there at that point, like a big pot, but it’s already been moved into say the cash value or into the policy itself as a benefit.

Kyle Pearce: Yeah, well, I would say and this is the big conversation I have with most business owners is like what when they were running the business and if we have this conversation and say when you were running the business, did you ever have cash sitting? And the answer is almost always yes, right? Like you have to you have to have liquidity.

So what we would be doing is taking some of that liquidity, not all of it, not, 100 % of cash at all times. That’s just unrealistic to really expect. But we’d be taking a chunk of that cash and starting to build this policy up. earlier because remember the cash value is leverageable back to the corporation through a simple policy loan or we could do it through a third party loan as well.

So this is this is something that could have been done along the way just using some of the sitting capital. Now we look and he still even though maybe earlier in the journey had said well I never used to buy GICs when I was younger. Well guess what? Look at this. You just kind of like you just you know helped us confirm what we’ve said time and time again is as we get closer to retirement, as we age, we start to want more risk off assets happening.

And guess what? The policy cash value is gonna grow like a GIC, but tax free. So instead of this bucket over here sitting in his personal hands at 350 and getting taxed at whatever tax rate he’s at in that marginal tax bracket, he could have had that bucket working inside the corporation. little more nuance and how we might use leverage to access it when you’re retired.

But ultimately, right now, what we’ve recognized is he actually doesn’t need this income. Like he’s got enough predictable income here that you would have to have a major major market crash to even put like a notch into you know, the chink in the armor, so to speak, in his particular plan. So It’s not too late for him though.

This is the one thing that I think’s important, even though it makes sense to have done it earlier and it would be better at 55, even better at 45 and all it would be fantastic at 35. The reality is even if he does it now at 65, assuming he’s relatively healthy, right? No major medical concerns. What he might want to consider doing is taking this 350 of GICs that he owns personally, and funding a similar policy inside the corporation by actually loaning the money through a promissory note to his company.

Jon Orr: Okay, he’s, so lending the money back to the company, so now the company says I owe the shareholder the $350,000, but now I’m gonna use that $350,000 inside the corporation as my policy premium. Or part of it.

Kyle Pearce: Exactly. And if we use this $35,000 per year of premium as an example, we can’t even do it all at once like in nor would we. We would do it gradually. We’d say, you know what, 35,000 from this 350, we’re going to slowly put into this policy. We’re going to do it again next year, slowly put into this policy.

way it’s gradual. The promissory note balance is going to get larger and larger, meaning those dollars can come back to him personally. tax free and it doesn’t matter where it comes from. So for example, if he wants to slowly realize some capital gains inside the holding company up because again, he’s gone from $1 million of retained earnings.

He’s grown at $2 million unrealized capital gain and in growth assets. If he wants to risk off, he’s got to sell some of those anyway. So if he’s got too much Google sitting there, if he’s got too much of the Nasdaq or too much of the S &P or whatever it is that he has, He can slowly decumulate there and then just slowly use that to fund the policy, no promissory notes, or slowly refill his own bucket, which again, might be the tax-free savings account, because he gets an extra 7,000 of room every year, so that’s a good thing to keep funding.

He could put it into other assets as well. He might even consider having a personal policy for additional. cash value at a personal level where he can send some of those GICs to. So right now these GICs that three and a half percent is really acting more like two percent and it’s giving him income that he actually doesn’t need when in reality what we see is a big tax bomb in two major places, which is the holding company as well as the riff.

If he passes earlier that death benefit, which is going to obviously be a much larger number than the cash value even right off at the onset, it might be 500,000 of death benefit. The first time he puts $35,000 in there, that is going to help to offset because that death benefit is going to pay out tax free.

It’ll help to offset some of the capital gains that were due to pay and over time, we’ve still got to pay some on the riff unless he chooses leveraged investing and he’s still going to have to pay some capital gains tax on these other two buckets. We might as well at least take the safe assets that we have in our lifestyle and we might as well commit some of those safe assets to another equally safe asset, maybe even more safe asset that has a tax shelter on it.

You’re creating essentially a tax-free savings account through this policy for these GICs. Now I’m not gonna argue it’s a tax-free savings account for… equities and the RSP or the tax free savings account. Why? Because the returns are significantly different. We’re not going to get eight or even 6 % in a policy.

We’re aiming to get GIC like returns on the cash value. But if you pass early, you get more than equity returns on the death benefit. I don’t want that to happen, by the way, but that’s what happens if it were to take place.

Jon Orr: Well, this is money he’s not using. Like we’ve already determined that he doesn’t need that $350,000 sitting in that account. So he needs to account for that. fast, rewind 15 years as well. It’s like you could be using the excess. If each year you’re determining you have too much already in your personal accounts, you could be building.

towards that personal policy or lending that money on a regular basis back to the corporation for them to purchase the policy. And then you now are building up that liability to the business, but asset loan to the company to then distribute funds back. they’re thinking about this person scenario. They’re in that great problem to have.

There’s too much income. There’s too much capital here to know what to do with. We had identified some tax drags when we think back to the riff, we’ve got too much income at that point, we strategy either 15 years ago or even today is to think about creating debt to offset some of that income, to write off against that income.

Whether you’re thinking about doing the Smith maneuver style against your primary residence, using your HELOC, you can be building that debt over time to write off. income that you’re not necessarily needing for lifestyle. We talked about specifically how to think about his tax-free savings account as a growth fund for topping up amounts, but also redistributing into other assets.

We talked about that non-registered GIC sitting there and maybe using a policy back to the company or loan back to the company so that you’re not getting taxable income in your personal self, but also creating almost like a a wedge for yourself that you could be leveraging against or using for growth because the company owes you this money and be passing that money back to you personally. We talked about the million dollars of retained earnings inside the corporation that he admits that he does not need.

He’s probably never going to need, and we could structure around that million dollars thinking about the capital dividend account, thinking about the capital gains tax and structuring a corporate owned life policy. a whole life policy to mitigate that, also create an opportunity fund when needed. And then now all of a sudden you can be passing some funds back through that other $350,000.

So complex situations, but also good problems to have. This was a call we had with a potential client. We talk with people all the time about their financial situations. on analyze them, we talk about strategies, we look for holes, we look for gains that could be made. If you want to also have us look at your financial situation to discuss some possible moves, you can reach out to us over at CanadianWealthSecrets.com forward slash discovery.

And if you’re looking to get started on identifying some pathways, some strategies, know, building your four, you know, the four pillars of a healthy financial wealth building system, head on over to CanadianWealthSecrets.com forward slash pathways and fill out our assessment there. We’ll see you in the next episode.

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. Carol Pierce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management at Canadian Wealth Secrets.

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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