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Description:
What should you actually do with $100,000 in retained earnings when your business expenses are covered and you don’t want that cash sitting idle?
For incorporated Canadian business owners, excess cash creates both an opportunity and a challenge: where should it live, how accessible should it remain, and how does it fit into your overall wealth strategy? In this episode, Jon and Kyle break down why the answer goes beyond simply choosing an investment—and why looking at your RRSP, TFSA, corporate investments, cash reserves, and insurance strategies as one connected system can give you more flexibility over the long term.
You’ll discover:
- How to think about using retained earnings across personal registered accounts and corporate investments instead of treating each bucket in isolation.
- Why your true asset allocation may be much more conservative than you think once cash, emergency reserves, and opportunity funds are included.
- How corporate-owned insurance may fit into a broader strategy for liquidity, fixed-income-style allocation, tax efficiency, leverage, and long-term estate planning.
Press play now to learn how to put excess corporate cash to work with a strategy built around flexibility, tax efficiency, and your bigger financial picture.
Next Steps:
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Canadian Wealth Secrets Show Notes Page:
Consider reaching out to Kyle if you’ve been…
- …taking a salary with a goal of stuffing RRSPs;
- …investing inside your corporation without a passive income tax minimization strategy;
- …letting a large sum of liquid assets sit in low interest earning savings accounts;
- …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
- …wondering whether your current corporate wealth management strategy is optimal for your specific situation.
For Canadian business owners, effective financial planning means looking beyond retained earnings and building a coordinated Canadian wealth plan that connects personal and corporate decisions. From RSP and RRSP optimization, optimizing RRSP room, and tax-free savings to asset allocation, financial buckets, and an investment bucket strategy, the goal is to create an investment strategy that supports financial independence Canada, financial freedom Canada, and building long-term wealth Canada. A strong approach to corporate wealth planning may include corporation investment strategies, tax-efficient investing, business owner tax savings, personal vs corporate tax planning, salary vs dividends Canada considerations, insurance, passive income planning, capital gains strategy, and financial diversification Canada. For entrepreneurs balancing liquidity with long-term growth, broader wealth building strategies Canada can also involve real estate investing Canada, legacy planning Canada, estate planning Canada, retirement planning tools, corporate structure optimization, and financial systems for entrepreneurs. Whether the long-term vision includes an early retirement strategy, modest lifestyle wealth, or simply greater flexibility, thoughtful wealth management helps Canadian entrepreneur finance decisions work together as part of a more intentional financial vision setting process rather than relying on isolated accounts or investments. While choices such as real estate vs renting depend on individual circumstances, the central principle remains the same: use Canadian tax strategies, appropriate asset allocation, and a coordinated investment strategy to build a more flexible and sustainable path toward long-term wealth.
Detailed Episode Summary
Luck, Volume, and Planning for Success
Jon and Kyle discussed the role of luck in business success and how to increase opportunities for success through volume. They believed that luck is not negated by volume but instead increases with each opportunity, much like rolling a dice repeatedly. They also stressed the importance of preparation, hard work, and planning in defining luck and achieving success. They encouraged individuals to take control of their wealth building journey by creating their own volume and investing time in clear planning. Lastly, Kyle mentioned the release of the fourth weekly episode of ‘Secret Sauce’ and asked for feedback on the initiative.
Transcript:
Jon Orr: Okay, so we just got off a call and to be honest, this is a common I probably say this a lot, I feel like I do, but it’s a common question we get in our calls. This one is specifically a Canadian business owner, but this common question is look, guys, the end of the year or when say all things are all tied up bookkeeping wise, I have let’s let in the number varies, but it’s like I have let’s make it easy, a hundred thousand dollars of retained earnings that I need to do something with. And I don’t want it to just sit there because I’ve already, you know, here’s some assumptions from this business like I’ve already got, you know, my salaries taken care of, expenses are taken care of. There’s money, you know, over back in the business, in the operating business saying like, hey, I’ve got three to six months worth of operating expenses ready to go just in case I need to invest here or or or like replace equipment. Like let’s assume that that part is handled and this person said that it was, but I have excess that still inside my corporation. What do I do with that hundred K so that I have minimized some of the taxes that I’m paying. Like what can I do, guys? Like tell me what I should be doing with this hundred thousand dollars, knowing that pretty much every year I have that in that and should I just keep investing it, you know, in high, high growth or how should I think about that hundred grand? Okay, that’s what we want to kind of talk about here today. We had that conversation with the client. Let’s now have it again here so that you can all benefit.
Kyle Pearce: Yeah. Well, let’s start first at, you know, let’s talk about the what ifs, because this is the hardest part. With this particular individual, they weren’t big spenders. So they had this extra hundred thousand dollars after all was said and done that was there as retained earnings. So tax has been paid, as you mentioned. They’ve got enough of an operational budget or buffer there in a cash account inside the business. I would argue it’s probably more than they need, but we understand how that is. Like in business, there’s so much uncertainty that you tend to want to hold on to a little extra because you just never know what’s around the corner.
This individual was taking less than $100,000 in salary, but let’s assume it’s $100,000 in salary. The big questions we start having to ask ourselves is first of all, is that $100,000 that they’re taking? In this case, they were taking it all as a T4. Is there enough in that 100,000 where they’re actually utilizing their RSP and or their tax-free savings account? Now, some people would say, you know what, at $100,000, maybe the RSP isn’t as valuable, but do keep in mind, it’s like if he did want to maximize the RSP use, he’s getting $18,000 of contribution room on that hundred thousand. And that would reduce his taxable income at a personal level down by $18,000. So down to $82,000. So there is some tax savings there. We can fully defer tax on that $18,000. So some might say, is it worthwhile to do? Maybe, maybe not.
I would also say, is there an opportunity for us to take a little extra out in order to utilize the tax-free savings account? Again, this is different depending on the tax bracket that you are in. The lower you take for lifestyle, the more important it is, in my opinion, to use some of that extra capital as income or sorry, as personal income so that we can fill the tax-free savings account. That’s a huge, huge benefit.
Now, if you’re in a really high tax bracket, maybe you’re in the highest tax bracket at a personal level. We may not want to take additional money out of the corporation to fill the tax-free savings account. So if I’m getting taxed 40 cents on every dollar. Now I have 60 cents left to fill up that bucket. Like maybe we look to other strategies, refinance time on the home, like whatever it might mean. So it really will depend.
But for this lean business owner, when you have $100,000 left over, it may make sense for them to take a good little chunk, less than 20% of that $100,000, and fully utilize the RSP because now you have a partial tax deferral on $82,000 that’s sitting in the corporation. And we’re assuming, you know, we’re not worrying about the tax, how much really hits your account and this and that and the next thing. But at the end of the day, you’ve got like 80% of that amount is now going to remain in the corporation for a corporate investment strategy. And the other 20-ish percent, 18 to be exact, can go into the RSP and fully tax deferred down the road. And now we’ve utilized two of our buckets. We’ve utilized the corporation, we’ve utilized the RSP. And again, maybe there’s some room there to take that extra $7,000 out for the RSP. $100,000 salary is not a massive tax hit for a business owner. So that’s a really important aspect for us to consider.
So I think utilizing some of those retained earnings for these other buckets, which are really helpful buckets for most Canadians, is probably a good move. And it doesn’t like hinder your corporate wealth management strategy, you still have a good chunk of capital there. And if this is repeatable every year, then of course you’re going to be growing in all these different buckets so that we have more optionality down the road.
Jon Orr: Yeah. Yeah. And to be transparent and honest here is this is a strategy we use ourselves. Like we pay ourselves, we know that we have retained earnings inside of our businesses, across the spectrum to pay ourselves more salary than we actually need to make utilize this. Like we take those retained earnings, repurpose them to salary so that we can top off the RSP, top off the tax-free savings account. Okay.
So let’s say you did that. Then let’s say you got like twenty percent went over there and then you have the rest. But let’s rewind because also it’s like that’s kind of a low hanging fruit. The other let’s say someone already did that. They’re like us. Like we already do that and I still have this 100K sitting there. So let’s rewind back to the 100K so that the numbers are easy to keep kind of thinking about strategies. So one strategy is let’s look at our registered accounts on the personal side. Let’s make sure we’re utilizing those. So like we talked about that. So let’s back it up. We got 100,000. We already did that. Now what do I do with either the leftover or if I had a hundred thousand now to do, like where do I put that hundred thousand knowing that my registered accounts are all good to go?
Kyle Pearce: Right. And you know, this is a great question because like now you have to start doing a little bit of soul searching yourself to try to figure out is like how long off into the future am I willing to allow these dollars to be pushed off? And why I say that is because that’s gonna depend on, you know, is there like I’ll call it like zero percent chance is obviously impossible, but you know, is that percentage chance that I need this money in the next few years really, really low? Is it maybe like 50-50? Like I maybe I need some of this money for my business at some point if I want to scale up the business. What is it that I want to these dollars to be going into?
If you’re planning to do real estate, I was chatting with a different client yesterday about this very thing where they’re going, I want to continue buying one property a year. Well, where’s that capital going to go? And like that’s going to in like sort of challenge us to try to determine where should these dollars sit? And then what assets should they be sitting in? The thing we don’t want to do is have them sitting and checking or even savings accounts for too long. Even if it’s like a high yield savings account, I’ll call out well simple. It’s great. Well simple will give you 2.25% on sitting capital. That’s awesome for you know money that’s sitting there. But if that’s money that could be utilized somewhere else, we want to definitely get it into the right buckets, but then also into the right assets.
So, from a business owner’s perspective, when I look at the board and I think to myself, and we go, okay, how much of an investor am I in terms of equities? Like how aggressive do I want to be? How risk on do I wanna be? And then how risk off do I wanna be? But here’s the part that I find people really struggle with. It’s really easy to listen to a podcast. We listen to, you know, we love Rational Reminder. We love some of these other shows that are out there that have some great ideas, great research-backed information. The problem is what I find people do, this is non-incorporated individuals, but specifically incorporated individuals as well, they tend to classify themselves as riskier than they really are.
And when they talk about their portfolio mix, when we talk about risk on, that’s traditionally equities, and risk off is like fixed income, like bonds and such. When we look at that mix, most people think that they are like 100% equities, 90% equities, like really high up. But then they selectively choose what accounts they’re referring to. Meaning, if you actually take all of their liquid capital and you kind of pushed it onto the table and you look at the balance sheet, oftentimes this is specifically true for business owners, they have way more fixed income, things that are doing little things like bonds that are still volatile but producing a low amount of income. High yield savings, cash accounts, these types of things. If you actually factor those dollars in, their split is way less than 90, 10, or even 80, 20, oftentimes to get closer to like that traditional 60-40 split, right? 60% equities and 40% fixed income.
And when we analyze this, we really need to be honest with ourselves to figure out which buckets make sense to be in what assets. In my opinion, I look if I am utilizing an RSP or if you do have a LIRA, a LIRA we can’t touch that commuted pension until age 55 or later. In those buckets, we want to be strategic about more equities because there’s more time for growth and we aren’t going to go to those buckets first to pull back from. However, in my corporate accounts and my corporate investments, that might look very different. So while my RSP might be 100% equities, my corporate accounts may actually have a very different ratio. And I would argue they should have a different ratio.
We don’t want all of our buckets to have the same ratio, whether it’s 75, 25, and I look at each one: 75, 25, 75, 25, 75, 25. We want to look at the whole picture, determine what’s the overall mix that makes sense or the actual diet, the actual asset allocation that you have for all of your assets, personal and corporate. And then individual buckets can actually have very different mixes. Some are going to be 100% equities, some are going to be full cap gains, some might produce higher dividends. And RSPs are a great place for that. US dividends, there is no tax holdback or withholding tax inside the RSP. So depending on where these assets are, we’re going to try to look at different assets in order to maximize your opportunity for those dollars and specifically for those buckets.
Jon Orr: Now you said something interesting that I’m curious about ’cause it’s you what you said is like saying like when people, when business owners specifically look at their asset mix and they think they’re ninety ten and you’re saying they’re not really when you consider looking at all the accounts. What do you mean? Like are they not looking in the like where are they not considering? Are they like ’cause I think we said like is it we’re just like, hey, I’ve got cash sitting here for a rainy day or like a are we looking back to the like what we were just talking about when we first started, we made the assumption that we’ve got six months of cash sitting there just in case. Like are you factoring that in? Like where does this ninety ten like where does this miss like ’cause if I’m sitting here going, like, wait a minute, I thought I was at this mix, Kyle, where should I be like where am I missing here in terms of like understanding what you’re saying here?
Kyle Pearce: Yeah, well, it’s funny because we can get through midway through a call and you know, the person saying, I’m a a hundred percent equity investor. And I’m like, okay, like, wow, this person’s, you know, pretty risk on, comfortable with risk, comfortable with and has that risk capacity and risk tolerance. Those are two different things. But then they tell me that they’ve got a hundred thousand dollars sitting in cash in a, you know, in a high yield savings account.
And I’m like, okay, is that your emergency fund? Like, maybe that’s why we’re not talking about and they’re like, Well, we’re just not sure what we’re gonna do with it yet. And I’m like, Well, what that really is, is that’s you potentially keeping some of that bucket there for just in case. And that’s really what a lot of investment accounts are doing as well. Like, I you know, in a RRSP, you know, very rarely do I see a case where it makes sense for someone to be, let’s say, a true 60-40 split, unless they are risk adverse.
However, there’s a lot of people that think that they’re at 90, 100% equity. And really, they have a lot of capital sitting and doing little to nothing, really, that could be utilized in a much more solid strategy. So, what I like to see is I like to look at it as a whole. And for business owners, we can utilize also some of that capital that you know you need to have on hand and we can get going with better strategies and structures.
So specifically for you and I. When we look at our businesses, we know and we try to keep cash on hand for about two to three months. So almost a full quarter. But as we build up our corporate-owned insurance policies, that is factoring in. That is part of our liquid capital that we can dip into. And I’ll be honest and say it takes a long time for you to sort of get comfortable and build the mindset around that, that those dollars there, are there? They would, if they weren’t there, they would be in this cash account sitting there doing nothing, right?
If I know that I want to push them off to the long term, we’re going to put them in our corporate account that is equities. It’s going to go and it’s going to be long term. If you want to go even longer term and even less liquid, maybe we’re looking at private equity, right? Someone recently said, I want to stay liquid, but I’m really interested in private equity, like with the PE gate guys. I’m like, Well, that is like oil and water. That those are not liquid. Those are illiquid investments. So we want to make sure it’s the right dollars going into the right buckets and the right investments.
So for you and I, we typically look at a certain amount of capital and we try to have a high investment rate, but we also don’t want to put ourselves up against the rope. What happens with most individuals, this happens at a personal level too, even if you’re a T4 employee is we do less investing than we could do because we’re concerned we may need the money. And that’s where, for me, that’s where insurance can be the middle ground where I put money there to do something tax-free. And if my thoughts change, meaning if I need to pull money back because I need it for emergency fund, I need it for you know, to make ends meet in the business, whatever it might be, I can do so.
And then here’s the other caveat. Let’s say that bucket gets bigger than I wanted it to be. I start to look at my balance sheet and I say, well, if insurance falls under the fixed income like asset, with if that number gets too large relative to my risk on assets, I use leverage to invest in more risk-on assets. So there’s really very little of an issue for us when we go, listen. We don’t have to worry about funding too much insurance, or I’ll be honest and say sometimes you worry that you’re funding too little because you want to have access to that opportunity. But we want to make sure that as we look at the entire picture, are we getting close to that asset allocation, to that asset mix that we’re after that fits our own risk tolerance, our risk capacity, and more specifically, our actual financial freedom meltdown strategy that we want to put in force down the road when we’re ready to maybe slow down and start actually living off of some of these dollars that we’ve been pushing off and investing.
Jon Orr: Yeah, yeah. You unpacked a lot of nuggets in there. So let’s say I rewind just for a moment here and say, look, I’ve got my extra hundred thousand dollars in my business. We talked about first looking at your RSP, your registered accounts, your RSPs, your tax-free savings. Can I top any of that up? Because that’s a good move if I haven’t yet started to do that.
Let’s say you did that or you’ve allocated some. The rest or the whole is now go. I think what I heard you say is what we need to look at is where’s our asset mix currently? And it sounds like we’re saying is a lot of people have emergency funds on top of like their hey, my operating business has its own thing going on with its own emergency fund or its own cash flow. And now inside my holding company, I’ve got my it might you might not call it the emergency fund because I think you also didn’t say these words, but basically you’re saying like a lot of people have opportunity funds. I didn’t, I got a hundred K sitting there, but I don’t know what I’m gonna do with it, but I know I’m gonna do something with it. So it’s like it sits there. And it’s in cash or it’s like in really very liquid so that I can pull it out to go buy that real estate property, or I could pull it out and invest in this deal that’s coming up, or maybe I need to pay an emergency, emergency that I need to send money back to the holding company. And so there’s thinking about your emergency fund is important to do with your hundred K, right?
But what you’re saying, I think what you’re saying is is that that part acts as because it’s liquid and it’s safe and more or more safe than say your growth assets, if you think you’re a very growth-oriented investor and you have not yet considered that, make sure you factor that in in terms of your asset portfolio mix.
Kyle Pearce: Hundred percent.
Jon Orr: Okay. Now, so that’s important to consider. But you also said around that chunk is that what we do and what we would think lean on you to do or lean on you to consider is that chunk is sitting there to it may not be earning anything, it may be earning a little bit, but if it’s there to do its job, which is be an opportunity fund or emergency fund, there are better places to put that. Like what there are better assets to put that so that it acts and it performs the same operation that it’s doing now, but it’s better long term for you and you have more flexibility. You have more opportunity.
So you used what we used, you said what you said, we use a corporate owned whole life insurance policy or policies to act, which means like if if I’m keeping, let’s say, twenty percent or thirty percent of my hundred K, I’m now gonna take thirty grand and every year I’m going to use that as the premium for the whole life policy, and that will grow like fixed income type investments inside the policy. But we know that it’s going to be an emergency fund or an opportunity fund because that asset we can borrow against to invest for future growth, or I can borrow it against to put over inside of my actual growth accounts. But it creates exactly what we’re doing, which is like almost like a fixed income portion, and also allows us to be flexible when we want to be flexible. This is how we use that part of the fund. So that’s like important to consider.
Now, if you zoom back out to the whole, it’s like if you take care of that, or if that becomes a portion of your fixed income, you now have to go, like, am I a 60-40 investor? And therefore, did I use only 20 or 30%? Do I want to have more policies to act like that in the same regard? Is that because it could be a fixed income portion replacement inside your corporation, I could put the rest of the 60% in growth assets and know that those are gonna be long term. I’ve got a lot of liquidity over here when needed and I’m making sure that I’m optimizing in that way. That’s what I think what you just said. I tried to clarify.
Kyle Pearce: That’s a hundred percent it. And I think one of the key pieces is when we look at it from an overall rate of return perspective, like if you can imagine, like we’re not gonna spreadsheet it out here today, but if you can imagine that if the fixed income portion of your portfolio, specifically for our incorporated business owners, where fixed income is actually taxed punitively inside the corporation as well. So, like without even considering the tax consequence, what you’re looking at is at at least base case, if those dollars were earning fixed income like returns anyway.
Imagine a world where you were able to flow those through another tool, which is accessible like a cash account would be through just simple policy loans. Or if you want to set up an IFA or an immediate financing arrangement with a third-party bank, these are also options as well. Those dollars are there. They’re liquid, they are available. There is a small opportunity cost in the early years because the insurance company won’t let you take a hundred percent of the premium right away, right? They want to make sure you got a little skin in the game. But again, if a lot of these dollars are sitting there just in case or for the next opportunity, it’s unlikely you’re gonna take a hundred percent of those dollars and go right down to zero anyway.
So the idea here is you’re building yourself a nice system and the reality is that your overall net return is actually going to be likely greater due to the fact that it does grow tax-free. So we’re not actually triggering any of that passive income. We’re not working or contributing towards grinding down against the small business deduction. And down the road, notice how like we talked about insurances, but we’re not like here buying these policies just because we want a death benefit. But that is a massive, massive incentive down the road that a larger sum than what it’s worth while we’re living will pay out to the corporation if it’s corporate-owned and flow out through the capital dividend account tax-free to the shareholders at that time.
So as you pass shares on through to spouses, children, others. They will have this opportunity to get money out of the corporation in a tax-efficient manner. All the while, the larger these policies become, the more flexibility we have to add in other meltdown strategies. You know, we’ve talked a lot recently about our RSP meltdown strategies would require leveraged investing in order to write off tax-deductible interest against the income we’re generating off of our RSP. Or maybe off of income we’re generating from pulling dividends out of our corporation.
And this is really an opportunity for us to kind of get the win-win Smith maneuver style, if you want to think of it that way, inside a corporation. Whereas with a home, when we pass away, one benefit with the primary residence is there is no capital gains tax. That’s a massive benefit for Canadians. Well, imagine a world where now we have this thing that’s going to actually be worth more than it was when we were alive and using it for leverage. And it’s going to pay out tax-free. That’s better than the lifetime, not the lifetime capital gains exemption, but the primary home capital gains exemption that we have here in Canada.
So when we’re talking with most of the individuals that we work with and we strategize with, ideally we’re looking for people that have more complex situations. Right. If you’re earning a T4 income, you earn $90,000 a year and you’re just straight up RSP and tax-free savings account investing. This may not fit for you unless you do have that opportunity fund sitting there or that emergency fund sitting there. And you’re going, you know, I would love that emergency fund to do more than it’s doing right now while it sits and waits.
What you’re not going to hear from us or anyone on our team is encouraging you to take money out of your tax-free savings account to fund a policy or take money out of your RSP to fund a policy for a retirement strategy. You know, like those are all very, very, you know, we are anti those moves. We want to make sure that you’ve got money in the right buckets. You have the optionality across these buckets. And ideally, the clients we’re working with are dealing with much more complex situations. So high tax situation, either high income earners or incorporated business owners, where you have more to think about.
But you also have more opportunity. And I say this all the time. I find myself saying it on almost every call, is that what we want as individuals, as Canadians, is a simple fix to a complex problem. The problem is that there isn’t one. So if you think there is one, it’s unlikely going to do what you think it will. But if you want to solve your complex problem, we do have to do some learning together. We have to do some strategizing. But as long as you’re willing to do some of that work, we’ll do all that heavy lifting with you so that you learn and understand and you ask those questions. You need to understand how this all connects so that we can accurately create a system that not only are you confident in, but you know, understand, and you can trust as you move forward. And that’s ultimately what our clients will receive.
So just a quick reminder for those who are listening, if that sounds like you, it sounds like your scenario is a little bit more complex than most, you should be reaching out to us for a discovery call. It is completely free. We educate free. We do all the planning with you for free. And if and when there’s an opportunity to help you implement, we’re here to help you. But there is no obligation to actually follow through on any of those strategies with us. So you should be clicking that link somewhere around this podcast episode or YouTube video or wherever you’re seeing this. And you should grab yourself a spot so we can have a conversation today.
Jon Orr: Just a reminder, the content you heard here today is for informational purposes only. Should not construe this information as legal tax investment or financial advice. Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.
