Episode 115: How Smart Canadian Business Owners Make $1 Million Feel Like $2 Million

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Are you maximizing your corporate dollars to build wealth and minimize taxes, or are you leaving money on the table?
As a business owner or entrepreneur, you’re likely juggling countless strategies to grow your wealth while keeping your tax burden as low as possible. But navigating corporate retained earnings, investment options, and tax-efficient structures can feel like an uphill battle. The question isn’t just about building your assets—it’s about ensuring you keep more of what you’ve worked so hard to earn.

This episode dives into a powerful yet often misunderstood strategy: the pass-through structure using whole life insurance. Whether you’re focused on preserving wealth inside your corporation or seeking to move assets to personal hands efficiently, this conversation offers a blueprint for achieving financial security while minimizing tax liabilities.

1. Discover how leveraging a pass-through structure can help you grow your wealth while avoiding hefty tax penalties.
2. Learn how to integrate whole life insurance into your corporate strategy for enhanced asset growth and tax efficiency.
3. Gain clarity on how to create a sustainable, long-term plan for retaining wealth and preparing for estate transitions.

Don’t miss out—play this episode now to uncover how the pass-through structure can transform your financial future and give you the upper hand in tax-efficient wealth building!

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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.

Discover how to leverage the pass-through structure and whole life insurance to maximize tax efficiency and strategically grow your retained earnings. This episode unpacks powerful investment strategies for business owners, combining tools like infinite banking and participating whole life insurance to build wealth while minimizing corporate and income taxes. Learn how to use death benefits for estate planning, employ personal leverage to access tax-free income, and integrate corporate wealth management techniques for liability protection and smarter investing. Whether you’re exploring Canadian investing, universal life insurance, or ways to achieve low tax rates, this discussion provides actionable insights to secure your financial future.

Transcript:

Jon Orr: Okay, Kyle, we get asked many questions about the past through structure and thinking about, you know, thinking about our our business owners. Our entrepreneurs are incorporated business owners and thinking about, you know, using our past through structure and a whole life insurance policy as that pass through structure for buying assets. But also, for, you know, helping that those retained earnings get outside into personal hands, you know, in a tax efficient manner.

We get asked questions specifically about when they think about this structure and think about the, you know, the specifics of using it. They think, am I missing out on something else? Am I am I like if I use this, am I am I actually better off, using this particular pass structure compared to other, you know, assets and other investments, other opportunities?

And we’re going to go on, on, on the statement here and say, you can’t be better off. We’re going to, we’re going to use this time here to help convince you that you can’t be better off.

Kyle Pearce: Yeah, I love it, I love it. So, you know, on the screen, for those who are watching with us here today, you can see a typical structure. You’ve seen me draw this before. Those who are with us in our online course know this structure, they know this drawing. And ultimately we’re going to speak to those incorporated business owners.

Again, as you mentioned, John, however, much of what we’re going to describe here is actually still applicable at a personal level for those who are for employees or not incorporated, except the nuance, the we’ll call it the supercharging that this structure provides for our incorporated business owners. So as you see up here, we know that for those who are earning their first $500,000 of net operating income in a business inside a corporation, there is the small business tax credit that you will get to receive, which keeps your income tax level quite low.

We’re going to use Ontario’s rate of about 12.2%. And really the rule of thumb, as we’ve articulated time and time again, is how do we pay tax one time and how do we pay the lowest amount of it? Okay. That’s kind of the the name of the game here. Right? We need compliance. We need to make sure that we’re doing things above board and just simply following the rules and doing it in such a way so that we can pay as little as possible in terms of taxation.

So we know that 12.2% is getting paid inside the corporation. And one of the big challenges is that if you’re going to take out small amounts as a personal salary, your income each and every year in order to try to maintain that tax rate, you’re capping out pretty early in the journey, right? Like we’re not talking to much higher here than 40 or $50,000 at a personal level in order to try to maintain that tax rate.

So what people tend to do is they tend to allow money to build up as retained earnings inside this corporate structure. The problem is, is that if you do choose to take out a large amount in any given year, you’ll probably take it through a dividend and that dividend is going to be taxed pretty hefty, right? So round trip, you’re going to be losing around 40% of that money coming out.

And you can see that here. If we use the number 1 million we’ll use 1 million because it’s very scalable. You don’t have to have a retained earnings this large in order for this to be helpful for you, but we’ll use it just for simplicity sake. We put that million and we take it all out. In a given tax year, this shareholder is likely going to walk away with just north of $600,000.

Right? It doesn’t take a rocket scientist to figure out that I now have to almost double my money in order for me to get back to that $1 million mark. Now, here’s the fun part about doubling your money. If you do double your money and you’re doing it in unregistered accounts, you also get to get taxed on the upside again as well.

So you really need probably more than double here after tax in order for you to be whole again. So let’s talk about what business owners typically do as a reminder. Typically what they’ll do is they’ll take that money and they’ll put it into investments. Usually people are talking about capital gain bearing assets. So we’re talking about appreciating assets with the exception of real estate.

That has a lot of, you know, passive income coming off of it, but a lot of expenses to offset it. We’re dealing with, essentially a capital gain tax that will be paid on top of that money. So let’s look at this. We take a million, we invest it. And let’s say it does double after some time. We now have a wonderful capital gain tax that we get to pay.

So that’s going to be likely around a third of the capital gain based on new rules. Assuming they go through. But if we were to put it into a passive income type asset, we’d actually be giving away about 50% of the earnings each. And every year. So that’s why capital gain assets are sort of the way to go.

But here’s the problem, John. If we do this while that’s smart, you’re keeping your money whole and you’re growing your assets, your balance sheet of your corporation’s now growing, which means your personal net worth is growing. These are all great things. The problem is, is that if you ever want to utilize this money at a personal level, you still have the retained earnings that need to be taxed outside, which you can see on the diagram here, that you’ve got essentially that million dollars that we’ve invested is still going to have to come out and be taxed at a personal level.

Jon Orr: Yeah. So if I want like, like we think we’re solving this particular problem by keeping the money inside the corporation, but eventually it’s got to come out of there. Right. Like it’s it’s got to come out of there some form or the other. But you’re saying like, okay, I put it in this investment, let’s say, let’s say I buy a particular piece of real estate and you’re like, perfect.

I’m going to, you know, that doubles in value. I pull the equity from this real estate. It’s like, okay, now I have this chunk of of cash. Now I have to send it out of the corporation. And I’m in the exact same situation now, you know, provided I have an asset that I’ve bought with this, with this, you know, retained earnings.

I have this asset on my balance sheet. I it’s growing like you said. But if any time I want to pass money outside the corporation, it’s the personal side. You’ve got to pay that. You know you get you’ve got to pay the tax. So it doesn’t solve the tax problem of getting money outside the corporation. It grows inside.

And sometimes you have this mindset. It’s like, it doesn’t matter. I just I just created money that I didn’t have before inside the corporation. And I just keep doing that. I’d be okay with paying the tax. But I’ll tell you this. I’ll tell you this. You could work real hard and double your money and triple your money and go like, I’m just going to make more money.

And then the tax implication, it just won’t feel as bad. It’s going to feel bad when you see that you’re paying $390,000 in tax, overall between, say, corporate corporate tax and personal tax on that million dollars before you see it, it’s just going to hurt to say 390 just went away when if I could get you know, I could have that be a smaller amount and why wouldn’t I try to do something to create a smaller amount.

Kyle Pearce: Yeah for sure. And when we really think about it too, this is where that net worth we have an episode of our podcast where we talk about your true net worth isn’t what you think it is, because in this case, on the balance sheet, we have numbers that say a certain thing, and that means your personal net worth is going to be a certain amount of money.

And yet, if you were to take it all out and put it into your personal pocket, your net worth would be significantly reduced. So whether I kicked the can on this down the road, eventually someone will have to pay tax and will have to pay the piper. In this particular scenario. So what we’re going to talk about here and we’re going to reiterate, is the idea of utilizing a pass through structure.

Now typically we all use pass through structures. It’s a habit. My grandma, for example, hated the idea of the most commonly used pass through structure, which is known as the checking account. You know, she did not like putting her money into the bank. That felt very risky to her way back when, because usually you just shove it under the mattress, put it in the safe, bury it in the backyard.

But ultimately, at the end of the day, that’s the pass through structure that already exists. What we’re going to do is we’re actually going to introduce a secondary pass through structure. And in this particular case, it is going to be that permanent insurance policy. We’re going to use simplistic numbers here. We’re going to assume, let’s say there was $1 million of retained earnings each and every year.

And we’re putting this $1 million straight into this insurance policy, which is going to be the pass through structure. Why we say pass through is because it’s not necessarily there to keep the money there, unless you are a conservative investor. So if you already have a gics inside of this corporate structure, you’re losing half of your upside to passive income tax.

A better move would be just to fund into a policy and let that sit there. You’re going to be miles ahead. Plus you’re going to get all of the additional benefits that we’re unpacking here today. Now, why we call it a pass through, John, is because we’re not telling people not to invest in other assets. We’re actually telling them to do both.

So this pass through structure, we’ll put the money here first. It’s going to grow conservatively like a GIC. So nothing crazy here. It’s not about the returns that we’re after and we’re going to leverage against that bucket in order to make the same investment. Now, by doing so, a lot of people would say, well, that doesn’t seem all that benefits.

Well, it is actually beneficial because this bucket here also has a much larger associated death benefit with it, which we’re going to come back to very shortly because this death benefit is going to eventually pay out tax free to the corporation and then net death benefit. So that’s the death benefit minus the cost basis of paid premiums will get to come out through the capital dividend account down the road upon the death of the insured person, likely a key person in the business out to the shareholders.

So this is a massive, massive benefit. However, it can be easy to miss how beneficial it truly is versus say, just taking this money and either pulling it straight out. That’s the rip the Band-Aid off approach, or taking this money, putting it directly into investments and then getting tax later, or the final one is actually passing it through this pass through structure in order to help you resolve essentially all of these issues.

And we’re going to argue, because it’s a fact, that you’re going to be miles ahead by using this pass through structure in order to address these tax issues that will happen whether they’re now or in the future.

Jon Orr: Okay. So let’s say I use the pass through structure, and I now am going to leverage, against the, the, the cash value in say that whole life policy to now go buy, say my real estate property or put it in this asset here or buy this particular investment or, you know, invest in this business, whatever your asset class that you are choosing.

You know, if you’re looking at the diagram right now, we’re going to say borrow the million dollars. And let’s just be rough here for a moment. Just so you understand, the structure is like I borrow the million dollar value and I go buy the million dollar property. And all of a sudden now I have two assets, I have the I have the whole life policy asset which has those benefits you just described.

It’s also going to grow year to year, guaranteed, in value at that rate that you quoted as before. But now I have this asset over here. Now I am going to be paying interest on, say, that leveraged amount. But I have this asset growing over here. Let’s say it’s a real estate property. And now we’re in the same situation we started with, with going, I have this asset over here.

Let’s say it doubles in value over time. I’ve paid some interest off it with, say, our expenses that are coming back. And it’s like, you know, it helps us reduce our taxable income inside the corporation. We have all of those things because we’re using it to buy assets and and create income. And I’m now created this scenario where I have these two things, I have these two different assets, and I have this real estate asset or this particular asset that doubled in value.

And now I’m in this scenario where I’m like, okay, well, maybe I need to get the money. I’m the same problem is still here. How do we get money into our family’s hands, or how do we get it into our state’s hands? Or how do I get it into my personal hands at some point and solve this? Had it didn’t want to pay $390,000 in tax.

So Kyle Outline outlined the benefit here. Now that I have this, I set this up in and I’ve created this full diagram here. Talk to us about why this is better off.

Kyle Pearce: Yeah for sure. Well I’m going to talk about the simplistic case, which is let’s assume we did nothing from this point on. And we just let life play out. We were funneling money into this particular life insurance contract. We were leveraging it to make the investments that we were likely going to make anyway. And we didn’t need money at a personal level.

Maybe you were taking a small salary out each year, or you have enough personal assets that, hey, you don’t actually need this money in your personal pocket right now, and we just let this thing play out at some point down the road. Again, I always like to just remind people it’s not an if, it’s when we move on and we pass this death benefit, it’s going to pay out and it’s going to be a much larger amount then say simply paying out whatever this asset is.

Over here we have two buckets growing. But the difference is that this bucket over here, it’s worth the same amount this morning as it is later today. If I was to pass away. The difference, though, is that when we look at this bucket, this bucket has a value. This morning while I’m drinking my coffee and it has a very different value.

If I was to later in the day pass on. Right. So that part right here, this thing morphs into a much larger amount of money. And that’s going to be dictated by if and when we pass away. Not if, but when, but when we pass away. If we pass away earlier, the multiples are going to be quite significant.

As you can imagine. Not a good situation. And if we live longer, the multiples are going to be less, but still more significant than the money that we were passing through each and every year. So this bucket on your balance sheet is going to say one thing while you’re alive, and it’s going to say something very different, much larger when you move on.

So right there, that helps you to not only get a large chunk of money out to the estate without having to address all of the personal taxes that we were essentially trying to get away from without doing anything at all. However, a lot of people would say, you know what? At some point, maybe it’s now I want to have some cash flow at a personal level, at a personal level.

And that is where personal leverage strategies can fit into this picture. Now, a few people would say, well, I can leverage against any of my assets I have. I have personal assets, I have a home, I have maybe investment properties at a personal level. I have shares of this company that I can leverage against. I have assets inside the corporation that I could leverage against.

Why do I want to leverage against this particular thing? Or why do I want to create this bucket known as the insurance policy, instead of just simply leveraging against other assets? Well, once again, this one has a unique feature that it’s worth one thing right now while I’m alive, and it’s worth more when I’m gone. That is a unique feature that is going to be super helpful when we use personal leverage strategies that are conservative.

I like to be key here that it is conservative because imagine a world John Gay, you own rental properties, and I want you to picture that you had a fully paid off rental property. You don’t because we usually leverage to put into other investments as well. But when that property is fully paid off, and let’s say you were to start pulling, some cash flow from this policy or from this property through leverage.

Kyle Pearce The fact of the matter is, is that you’re likely going to be able to leverage up to potentially 80%, maybe less, depending on the rental income that it’s bringing in. But let’s pretend for a second that it is 80%, and you leverage this for some cash flow so that you can live life and do your thing.

Jon Orr: I got it, I might as well use it.

Kyle Pearce: When you pass away. Let’s assume that when you pass away, there was an 80% loan to value mortgage out against this property. Something that’s going to happen is, first of all, your estate is going to get to decide, do we want to keep the property or sell it? But something is going to happen. First off, if they keep the property, they can keep the mortgage and they can continue, funding that mortgage.

But there will be a capital gain and that capital gains amount will be based on the growth of that property’s value since you purchased it. Sure. That means that that property on your balance sheet, the morning, in the morning of the day, the last day you’re on this planet, you’re sipping your coffee. It’s worth one thing. And later that day it’s worth a lot less.

Now, if you took the same leverage but you did it against an asset.

Jon Orr: So it’s possible. What you’re saying is, because I used it for leverage, for personal income, which it was tax free personal income because I was using it as leverage and I was withdrawing its throw. You know, the last, let’s say, years of my life. And I got it to the 80% the day that I die. And now there’s a capital gains tax triggered because it’s passed to the, you know, the state now owns it, not say, me.

And now you’re saying it’s worth a lot less. And it’s possible that because I’ve leveraged so high on it to have tax free income in my in my years, or think of it like, think of it like a reverse mortgage rate, like I pulled the value from this home. It’s like, okay, but it’s worth less. Like it’s worth less than than what it was before.

Because this tax is now there and in actuality is like, how much was the tax compared to what the property’s now worth? So if I sell it, am I underwater?

Kyle Pearce: Right. Exactly. And a perfect example is imagine you bought this property for 100,000. And when you take this loan against this property, it’s worth $1 million. You have a $900,000 capital gain at death because it’s over $250,000. The capital gain. Right? And assuming the new rules do get passed, you’ll be losing about a third of that amount. So if you took 80% leverage, that’s an $800,000 mortgage.

And at death, the bill is $300,000 about in terms of capital gains. So you now are -$100,000 on that property because you chose to take leverage against this property instead of having a different asset that opens the door, it gives you options that will help you to deal with this. Now, something interesting to note here is you could still take that same leverage, but imagine on that property, John, that you had funneled money through a policy first before making the investment into that property.

I don’t care where the leverage is, right. It’s what’s going to take care of the leverage and the capital gains upon death.

Jon Orr: Sure. But the leverage the the leverage here is important because the leverage is actually solving might get my money out tax free. Right. Like that’s the reason it’s like, well, why would I leverage for personal income? Well, the leveraging for personal income was I’ve got these assets sitting in my corporation. They have equity in those assets. Why not why not pull say and leverage against them and pull that money?

Because it’s leverage and I’m using it personally. It’s it’s now in a way tax free. I don’t have to pay income. It’s not it’s not income generated. I’ve loaned against say the corporate assets to, to, you know, on a personal side and we can, you know, we can set that up and structure like this is a smart move to get your money out of a corporation tax free.

This is our original problem. And you can use this, you know, your assets to do that. In on the corporate balance sheet, however, you know, what you’re saying is like that assets going to all of a sudden be gone and it’s not going to, you know, change in value. Whereas if you have it through the past restructure, that asset actually explodes in value.

Then the day that I die versus not, you know, actually being less than what what it’s worth the day that I die.

Kyle Pearce: Exactly, exactly. And so if we come back to this example in our diagram, the idea here is that regardless of whatever happens to this investment, regardless of how much it grows and how big this tax bill becomes, because we were trying to get these retained earnings through the pass through structure, the death benefit and the associated cash value of this policy are going to continue to grow each and every year for the rest of our lives, and it’ll grow quite significant the longer we choose to fund, in this case, $1 million of premium through this structure before sending it off to the next asset.

It’s almost as if you are before it becomes a problem. You’re taking care of all the problems, right? Because now we have retained earnings which are going to go into this policy. And over time, the actual cost basis of those premiums are going to slowly decline and then more aggressively decline. And that’s the cost of insurance being essentially written off against the actual retained earnings inside of the policy.

So that’s a huge, huge benefit each and every year. Less and less of the retained earnings that you put into this policy are still due to be taxed. So if I live an average life, typically none of those retained earnings will be left to be taxed because the cost basis will get all the way down to zero on the premiums and therefore that that ever increasing death benefit is going to be there in order to address any and all of those tax problems down the road, as well as opening the door to more favorable personal leverage strategies at a personal level, because not only does it add another benefit and an asset to your balance

sheet of the corporation that you own, but it’s also literally a bucket of cash. So that cash value is a great asset. And typically lenders are very, very, open to lending against that particular bucket. And there are structures and strategies that we can have to actually leverage against that asset or other assets that might exist inside of your personal net worth world.

But ultimately, for today’s conversation, we just wanted to highlight, first of all, the structure, but then also essentially driving home the point that utilizing this passthrough structure, either at a personal or at a corporate level, is going to put you in a better spot both now and into the future. And it’s very, very difficult to find a world where you will find a place where this particular tool is not going to get you in a net better position from a personal net worth standpoint.

Jon Orr: All right. There you have it. We talked about how to think about, you know, using this particular pass through structure, to help make sure that you create a better, you know, a better future for yourself inside of a corporation or on your, you know, for your personal family. We we the original question that we often get asked is, can, you know, am I missing out or is is there a better way to say, use my corporate dollars or my personal dollars to create more wealth in a tax efficient way?

For my family? This particular strategy, the pass through structure here we’ve outlined, is, is highlighting that you can’t actually be better off with, with, you know, not using this particular structure. So we want you to like me, you might need to say, rewatch it again. If you were listening to this, on our podcast platforms, we encourage you to jump over to YouTube.

To watch, watch it through, as we use the diagram to highlight key pieces of the pass through structure and how to set them up for yourself.

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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