Episode 105: Why RRSPs Are Right For Only Some Canadian Business Owners

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Are you confused about whether to keep contributing to your RRSPs or shift your focus to other wealth-building strategies? 

In this episode, we dive deep into the ongoing debate between RRSP contributions and alternative investment strategies. Many Canadians, especially business owners and T4 employees, find themselves torn between the seemingly conflicting advice on how to plan for retirement and reduce taxes. Balancing between these financial tools can be overwhelming, especially when each expert seems to have a different opinion.

The truth is, every financial plan is unique, and your strategy should align with your specific goals, lifestyle, and income structure. This episode is designed to help you understand when RRSPs make sense and when they may not be the best fit, ensuring that you can make informed decisions to protect and grow your wealth.

• Learn how to strategically use RRSPs to maximize tax savings without locking yourself into rigid financial options.
• Discover how a combination of RRSPs, whole life insurance, and other tools can give you flexibility in both your personal and business finances.
• Understand key factors in deciding whether to focus on RRSPs or other wealth-building strategies, depending on your income and retirement plans.

Don’t wait—listen to the episode now and gain the clarity you need to make the best financial decisions for your future!

Resources:

• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.  
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

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

Are you working toward retirement or aiming to retire early with a solid pension plan or RRSP strategy? In this episode, we break down how to achieve financial independence and financial freedom, whether you’re following the FIRE movement or exploring Canadian investing options like infinite banking or participating whole life insurance. We’ll discuss how to bank on yourself using permanent or universal life insurance while minimizing income taxes and planning your estate. Whether you’re a fan of Dave Ramsey or prefer a customized approach, this episode will help you build a smart, tax-efficient wealth plan!

Watch Now!

Transcript:

Jon Orr: All right, Kyle, let’s get into this one. I think, you know, I think we’ve got like a conundrum here. know, people are listening to various wealth building podcast episodes, I’m sure. And I think the average actually is the average person listens to five podcasts on a regular basis, like five fit in your daily or your weekly. Hey, they’re listening right now. So we wanna make that true.

But you might be hearing competing ideas. This is true. You get this sense in many different arenas. It’s almost like this pendulum swing or this like all this way or all that way. We cannot have any in between. In this particular episode, we wanna talk about RRSPs or RSPs in particular because I think if you say listening to the, you know, almost like the infinite banking practitioners. you’re thinking about, you’re thinking about the, the tool that we’ve been talking about a lot here on this podcast, which is whole life or permanent life insurance as a tool for wealth creation, a tool for wealth building in, let’s say you’re a business owner or let’s say you’re a T4 employee and you’re like, wait a minute, but I have all these RSPs. Like, am I supposed to continue contributing to RSPs or do I, yeah, do I, did I, do I, do I need to stop contributing to those RSPs? 

Kyle Pearce: Did I make a wrong move?

Jon Orr: Like, wait a minute, what happens when I retire? I’m gonna have more income probably, hopefully than when I have now. So like, think we start to going like, well, I need to stop. I need to like completely switch and do no RSPs and go completely over to this side of the pendulum. And other people are like, no, go back to the, max out your RSPs and don’t even touch permanent life insurance. It’s not even a tool worth considering. there are just pendulum swings happening right here.

What we want to talk about here specifically is about balance and when is actually the right time to, you know, think about RSPs and build it into your strategy and your portfolio strategy and like why or what case makes sense here.

Kyle Pearce: Yeah, I love it. I love it. we try to expose on this show, again, it’s Canadian wealth secrets. We try to bring up these secrets that a lot of people sort of miss when we hear general and generic advice. And I think I’m going to let the cat out of the bag here, John, that everybody’s situation is different. And it really does need to be analyzed for.

anyone to really make any sort of important decision like this one. today we want to set the record straight that we are definitely not anti RRS PS. We are anti RRS PS for the people that it makes sense to be anti RRS PS for right. And that’s what we’re going to talk about here today because there’s some people that actually are a perfect fit and are in a situation where I would even argue it’s almost like you’re you’re almost crazy not to utilize the RRSP. And today we’re going to dig into a case study and we’re going to look at a client that I’ve been working with and and it is a couple other here in Ontario. So we’re to talk in Ontario terms and use some of the tax rates here. You know, however, you know, things are not that different all over the place, right? In different provinces and territories. But you can definitely look those things up. But today we’re going to be talking about a specific client. And this person is interesting because they’re in a household where one of the two spouses is a business owner and the other spouse is a T4 earner not related to the business. So yeah, very, very common, which means like those two individuals are in incredibly different spots. And in this case, we’re going to talk about the T4 employee here.

And we’re gonna start there and then we’re gonna talk about why it may not be the best move for say the spouse that has the business. So today we’re gonna be talking about this particular client. And you know, there’s some questions that you have to ask yourself when you’re analyzing like whether our RRSPs are the right move for you. Like some of the obvious ones are if this dollar I put into the RRSP, like when do I anticipate needing that dollar, right? Like that’s an easy one.

right away if I need that dollar in the next couple of years unless in the next couple of years I plan to go quote unquote and retire, it’s probably not a good move for you even if you’re gonna get some tax back, right? Like if you’re gonna put dollars in there that you need back immediately or in the near term, probably not a good move. But if this is a true dollar that you’re gonna put into this bucket and the intent for that dollar is to help you when you stop.

taking a regular income in this particular individual’s case, a salary from their career, then it may make sense. But there’s some other questions that we have to ask. One of these questions that we’ll dig into here is how much do you make now? And then a critical question that’s a follow up and really it’s connected to this question is how much do you intend to be pulling as income in retirement?

Jon Orr: Okay. You know, like this, these are common questions. think we ask ourselves anytime we consider our retirement planning or our, you know, RSP contribution and going like, how much, how much am I making now? And can I, you know, what is the right proportion to put into our SPs? What is the cap that I have, you know, that I, that I can, can max out or not max out or get up to what, you know, and then also how much do I want to make later? Like the

Do I want to continue my lifestyle later? Like these are, these are, I think the normal question. So specifically if we consider the normal questions, Kyle, what, when does it make sense then to like, it’s not use RSPs? Cause we’ve talked about that here on this show before on, on RSPs saying like, let’s, let’s move away from that to go into this bucket because we, we’ve used the term like your dollars are locked up. You know, like you said, like if you don’t want to put it over there and you need that money now,

you can put it over in this bucket and that dollars aren’t locked up, but it’s also acts in a very, very similar fashion. so tell me like right now, before we kind of dig, dig further is like, when does it not make sense to use an RSP?

Kyle Pearce: Yeah, like right away, mean, without even looking and considering income, if you plan to go down the real estate route, it may, and again, it doesn’t mean you can’t have RSPs as an investor, but you just have to know that the dollars you’re putting over there are gonna be harder to access if you want to put them into something like real estate or other alternative investments, right? If you wanna do private lending, there are opportunities for you to.

actually utilize through a trust and you can set up all these things. You can get creative and do it. But for those people that are planning to take this money and put it into something and real estate is the easy one because it’s most popular, especially of listeners of this show, that right there sort of puts you in a tougher spot because you know, if you’re waiting for an opportunity in real estate, let’s say putting that money and having it wait in an opportunity bucket known as the RSP, our argue, it’s not a great opportunity bucket, right? It’s actually, it’s a great opportunity bucket for later in retirement when you wanna pull income from that bucket, but it’s not a great place for it to stay. If you’re not considering real estate or you’re not considering other, you know, alternative asset classes, right? Where you wanna go out and…

you know, maybe do private lending yourself or anything like that. If you’re just thinking about, I want to do a traditional sort of retirement plan or strategy. Even if you have a low income right now, it’s like you’re not going to get hurt by using an RSP, right? Because it is tax deferred. Like that is helpful. Keeping more money in your pocket now is really helpful as long as you’re doing something with that money that you got back.

And I mean doing something positively or productively, right? So if I’m going to put in and let’s say I’m earning, you know, $100,000 a year, well, in retirement, unless I’m earning, unless I’m pulling less than $50,000 a year, I’m going to be in a similar tax bracket, right? Like I’m not going to have a huge tax bracket savings. But what I will have is I will have an investment that’s been growing tax free inside the RSP bucket, which is positive.

but I could also have another investment if I use that tax refund for investment purposes. So if I took it and I put it in the tax free savings account, for example, or even better, I don’t wanna get too crazy here, but like imagine you got that refund and you took the refund and you put it on your mortgage to open up that home equity line of credit room, and then you pulled the Smith maneuver and put that into some investments. Like you can see that,

you can get pretty creative with utilizing this bucket. So by all means, we don’t want to shy people away from considering our RRSPs. It’s just how much of your funds do you want to put in there? And does it make more sense for some than others? And I’ll argue that there’s some people like this case study we’re talking about here today that I would argue is almost a necessity for them to use. And I’m going to introduce the T4 side of this household.

This particular individual is earning right now about $220,000 of T4 income. Now, the first thing you have to do when we’re chatting and you have to ask yourself this is you have to ask and say, how much of that money after tax do you need for your lifestyle? Right. And with a lot of clients are like they lifestyle creep has taken over, right? And they’re like, well, actually, like, I kind of use it all. Well, that puts you in a tough spot because

you don’t really have any availability to take that money and fill up the RRSP. However, if it’s a client who says, you know what, I do have available capital for investments and they’re just trying to figure out, it be the RRSP? Should it be tax-free saving? Should it be something else? I say with those clients, with clients that are earning quite a bit,

unless they plan to be earning that same 220,000 in retirement, like literally pulling it right and having to get taxed. There’s other tax free ways to pull income in retirement as well right to maybe have the same outcome after tax without pulling such a big tax bill. I’m telling them right away saying listen, if you take as much as you can, like tell me how much you can take and you can put into your RSP for someone who earns 220 a year, they’re getting about, you know, the maximum amount of RSP room available to them, which is around 40 ish thousand dollars, we’ll say it’s, you know, it’s, it’s not exact, but let’s let’s use 40,000 as the number that 40,000. If he puts that into the RSP, his his income has now dropped from 220 to 180. And the tax savings that he’s going to receive because of the tax bracket he’s in in Ontario anyway,

that marginal tax rate he’s in is 43%. So he’s gonna get a good chunk of that money back. He’s gonna get almost, you know, 16, 18 ish thousand dollars coming back to him. And then he can actually take that money and either continue using it for lifestyle, right? If he needs it, if he didn’t quite have 40,000 to contribute here, he knows that this 15, 16, 17, 18, thousands coming back to him, he could then make up the difference that way or

even better if that 40,000 was available to them, they can actually take that money, put it in the RSP, take that refund, and then maybe fill up the tax free savings buckets, or maybe they want to contemplate real estate and they have more money to invest. They might consider moving something into say, a participating whole life policy or some other strategies. So the big key here with this particular case study is that

if there’s money available and if you are in a very high tax bracket, the RSP is quite a helpful tool. The part that’s hard is that you might wanna put more into that RSP than you have room for. Now this individual stopped doing RSPs for some time and they actually have additional space. So now think of the impact if they have $100,000 of RSP room.

in that tax year and they dump 100,000 into that policy. They now drop that income. I said policy into the RSP. They now drop that income down from 220 all the way down to 120 and they’re going to be saving a significant amount of tax along the way. So for certain clients, the RSP is actually a really important tool specifically for our T4 friends because guess what?

The T4 employees that are not business owners, they don’t get to ask the employee to pay them, you know, slower or do any of those things. They take the money as it comes and they’re getting taxed along the way. So this is an opportunity for them to at least hack that tax down.

Jon Orr: Would you say like, this is a good move because he’s forced to take the income because he’s a T4 employee. He’s just getting the money from his employer. And they have the flexibility of the spouse being the business owner. And then that allows them to have that flexibility of like how much to pay themselves out from the business, to make their ends meet, to make, you know, their lifestyle, to make their investments. Like, is it because she has say that is, is that business owner can say pay dividends when they need to, like they have more flexibility there. Is, that what makes this case a no brainer to max out or use as much RSP room as possible? Or, or is it, is there something else here that say we need to know?

Kyle Pearce: Well, you know what? mean, having the business owner there, what it really did for them is it gave them some flexibility. So for example, this T4 employee, we’re focusing on the income that’s being forced upon him. And we get to go, OK, where should you be putting those dollars? For the business owner, we get to then look at that bucket and say, OK, how much could you pull to keep your tax rate somewhat similar to what it would be if you were getting taxed in the business or not? Meaning,

If you can take less out of the business and still sustain lifestyle and have sort of a net zero tax implication there, or maybe slightly higher on the personal side, that’s fine too. That actually just gives the family more opportunity. And the part I actually love for those who are, you know, one half is a business owner. The other half is a T4 employee is that you’re kind of, it’s like having a built-in pension where you’re like, you know what? I like having a pension.

I know that the money that’s going into the pension, it may be better served doing some other type of investment, but I like the certainty of it. The same is true in a household where you have a T4 employee and you also have a business owner. You now get to kind of get the best of both worlds. Now it’s like you’re getting forced into having assets outside of the company. And in the business, we can say, hey, listen, let’s be smarter about the money that’s coming in here. The after-tax.

dollars that you have in there that have been taxed at a low rate. Let’s take that money. Let’s use that retained earnings to be smarter about how and when we pull this money out. And that’s where for that individual family, a permanent policy was placed in the corporation to help them. Now inside the R. P. The tax free savings, any unregistered buckets they have outside the corporation, they can be more aggressive on those, meaning more equity focused.

more capital gain focused, which again, capital gains at the end of the day in an RSP isn’t as favorable as, know, as let’s say if you just had the same capital gain that you let ride in an unregistered account. But guess what? The tax benefit is pretty important and pretty substantial given the income that this particular individual is receiving. Now inside the corporation, that’s where they have sort of their safety net.

that policies in there to take up that fixed income and that conservative portion of the portfolio while they can still be aggressive with some of these other investments out here. Plus they’ve managed to minimize taxes in both cases. So the spouse with the T4 employee has reduced their tax that they were forced to pay through taking the T4. The business owner has kept their tax rate down because they’ve optionally kept from pulling out too much money too soon or in every single given year. And we’ve managed to put it into a tax free or a tax efficient bucket growing inside the corporation.

Jon Orr: Yeah. Yeah. See what I love about this, right? Like this is the secret sauce is that we aren’t saying, do you know, you’re not, you’re not ruling out tools that you’re like, that’s, that’s not what business owners do, or that’s not what this group of people are doing. You’re actually going, what tools do I have available at my disposal? Like RSPs.

you know, registered tax deferrals, registered tax accounts. We have these things at our fingertips. We also, if I’m a business owner, I own shares in a corporation, then I have tools over there as well. And it’s about deciding what’s the right move for your, family or yourself, and how can I use each tool to do the job.

I also have to have the outcome like what do I want to have now? What do I want to have later? I like that you helped structure this family so that we minimized the tax burden on the family now, which puts more money in their pocket for investments, which but then also on the business side, safety net safety netted the family using the tools available over there. Like it’s a it’s a it’s a smart effect because it’s smart, a smart option because now he’s like, you’re right, like all of sudden, it’s like,

We’ve rebuilt this pension idea where I have like complete safety over here because the whole life policy itself is like the safety net, the emergency fund, the future fund, the retirement fund. It’s like built to make, right? It does all of those things, right? But it’s so safe. All of a sudden you’ve got like this great move over here and then you’re right, it can…

Kyle Pearce: The opportunity bucket if you do decide to do something alternative or real estate, absolutely.

Jon Orr: then on the personal side, you can be a little bit more resilient. If not, then don’t, but at least maximize or minimize the taxes that you’re paying over there. Like I like that the combination is the important part, which is the secret sauce is deciding how to utilize the tools you have. I think that’s the important part of like where you want to go, because it’s not about all or nothing. It’s not one or the other. It’s about what can I do to make sure that I get to where I want to

Kyle Pearce: Right, well imagine you hired somebody to come work on your house and they showed up with a tool belt that just had a hammer and that was it and they came with nothing else, right? The same is true here when we’re planning for financial futures. It really comes down to knowledge, right? And you and I being former educators and loving the idea of education and teaching.

this is what it’s all about. We have to understand what’s out there so that we can actually put a plan together that makes sense. And I think in a perfect world, we wouldn’t have to do that. We would just have this one thing that’s gonna fix everything. But everyone is so different that every strategy really has to be, you know, thought through. And we also remember on this show, we talk a lot about what’s rational and what’s emotional.

And the emotional side is one of the most important sides. Like you have to be okay with it and you have to be feeling good about what it is you’re doing. And one of the best ways that we can sort of reduce any sort of the emotional triggers specifically when it comes to finance and wealth building is understanding, right? If I don’t have understanding, it’s the unknown that makes you feel like maybe something’s wrong. That makes you feel nervous. That makes you feel uncertain.

And that’s the key piece here. There’s going to be nothing certain here, but what we can do is we can at least know if we know that we put a plan in place that’s conservative in how it’s structured so that our outcomes are likely going to be better than those conservative estimates, we can sleep soundly at night knowing that, our financial foundation is taken care of.

And there is opportunities for even more. Cause I think as humans, that’s what we’re after. Like nobody wants to go through life just sort of knowing exactly how it’s going to play out. Like you do want a little bit of surprises. We just want surprises in the positive direction, right? We want to make sure that, you know, at the end of the day, it’s like, Hey, listen, things worked out better than planned rather than going the other way. And guess what? Having no plan is the worst thing you could possibly do. You don’t have to stress about the plan.

But guess what? You might have to stress later in wondering, hey, how am I going to sustain this lifestyle? Am I going to have to work, you know, as a Walmart greeter for the rest of my life? Like we don’t want any of those things going through people’s minds. So the key is coming down to education, understanding. And like you saw in this particular case study, maybe you’re resonating with that case study because maybe that’s you. But here’s the other thing, most likely.

your scenario is actually quite different and you’re probably wondering like does that make sense for me? So if you’re wondering about what plan makes the most sense for me, how do I diversify my asset classes to make sure that I have enough growth? But I also have enough financial foundation there, right? Something that’s gonna protect me. If that’s something that you’re interested in exploring, definitely reach out to us over at CanadianWealthSecrets.com.

forward slash discovery a couple questions that will ask you about your situation to point you in the right direction including booking a discovery call so head on over to canadianwealthsecrets.com forward slash discovery and we look forward to chatting with you soon.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance. The show also digs into the underutilized corporate owned life insurance as a wealth building and Canadian tax planning tool through the use of participating whole life insurance that can not only resolve the issue of removing the income tax target from the back of your corporations retained earnings and put more money in your personal pocket both now and in the future.

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