Episode 117: Stock Trading in Corporations: The Tax Landmine You Need to Avoid

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Are you unintentionally giving half of your hard-earned money to taxes because of stock trading inside your corporation?

As a business owner or high-income earner in Canada, navigating corporate taxation and investment strategies can feel overwhelming. Passive income rules, grind-down thresholds, and tax penalties can eat away at your profits, leaving you wondering if you’re building wealth in the most efficient way possible. Without understanding the tax implications of stock trading and available strategies, you might be missing out on opportunities to grow your net worth while keeping more of what you earn.

This episode dives into the most common challenges faced by Canadian entrepreneurs and high-income earners as they work to optimize their wealth-building journey through stock trading. From understanding when and where to invest in personal versus corporate accounts to uncovering advanced strategies like corporate-owned life insurance, we explore how to maximize tax efficiency while setting yourself up for long-term financial success.

• Learn the key differences between personal and corporate investing and how to avoid tax landmines.
• Discover actionable strategies to navigate the grind-down rule and passive income taxes.
• Explore how corporate-owned life insurance can act as a powerful tool for tax-efficient growth, leveraging, and estate planning.

Unlock smarter wealth strategies by listening to this episode today—hit play now to start building your net worth more effectively!

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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!
• 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.
• 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.

 Achieving financial independence requires smart planning, especially when it comes to growing your net worth and generating passive income. For business owners, navigating the complexities of corporate structures, tax implications, and investment strategies can feel overwhelming. From understanding capital gains rules to leveraging life insurance for wealth optimization, the right approach can transform your financial future. By aligning your strategy with tax-efficient tools, you can unlock the full potential of your business and investments, ensuring sustainable growth and long-term independence.

Transcript:

Jon Orr: All right. So we get asked a bunch of questions about, you know, how how do you grow your net worth and like, what is the optimal way to grow? You know, your your nest egg or your net worth or your, your wealth? But let’s, you know, let’s kind of rewind here a little bit and think about maybe a journey, a pathway you may have been on.

And I think this is this is maybe something that we’ve heard from a few folks, as business owners, entrepreneurs, they either, you know, there could be, you know, these, these, folks that like yourself, you may be on the fire route. You’re looking to, you know, retire early. You’re looking to be financially independent. Maybe you’re doing this through, you know, a side hustle or maybe it’s your, your corporate incorporated business.

But any at any rate, you’re, you know, you’re gaining some success. You’re building your net worth, you’ve got revenue in terms of your business, your side hustle. And, you know, it’s you get to this point where you’re trying to achieve fire, trying to achieve like, where do I get my my expenses to be lower than my passive income, my income that I’m generating.

So if I’m you most business owners get to this point where we’re like, okay, I’ve got I’ve made too much money or I’ve made passive income enough to be like, I don’t need to take all of this money out for lifestyle expenses. I can, I can, I’ve got this extra money. So what do I do with my extra money?

And this is where you start to think about those, those passive income sources you’re starting to think like, okay, I’m going to start investing. I’m going to start buying real estate. I’m going to put it in the stock market and put it in gics. And then you also get to a point on your journey that you’re like, maybe I’m doing this personally, but if I incorporate, maybe I can save some taxes here because you usually see it’s like more tax efficient to incorporate in terms of your business.

So it’s like now all of a sudden you move some of those things into the, into the to your corporation. You’ve got retained earnings. You don’t need to pull out any more. So you’re like well I want to keep them in there because this is the point of me being incorporated that I don’t want to pay more tax than I have to.

I get to pay this like maybe I pay myself a little bit of a combo between a dividend a, you know, a salary. So I’m trying to be tax efficient that way. But then I’m growing my retained earnings by now, buying real estate, putting in the stock market. And I’ve got this now kind of retained earnings built up.

And it’s generating passive income. And maybe I’m now going that’s great. Like I got this passive income source happening over on the corporate side. But there’s sometimes some issues here. This is what we want to talk about here is that we have this strategy that we think this is the route that we should go in to build wealth, move from my personal side into a corporation, and then I do the same type of things in the corporation that I was doing on the personal side to achieve financial independence.

But I’ve now run into like if I have any sort of passive income source for my corporation, we got problems. I’ve got a little bit of problems because I even though I want to get it out. But any passive income source you generate in your corporate structure, you’re now taxed at 50%. You know, like, like like maybe I should have just kept it personally.

So in this episode, we want to talk about that particular problem and really answer the problem or answer the question of where should I be growing my net worth? Like, what should this look like? And and what is what is kind of the ultimate structure that I want to consider. And we’re kind of going to kind of navigate some landmines here for you.

Kyle Pearce: I love it, John. And you know, the first thing I’m going to say, and I know we say it at the end of the episode, I’m going to say it upfront that, you know, we are not your accountants. We are not, you know, CPAs or CCAs, but we do understand quite a bit about our income tax Act.

And that’s one thing that’s really important. Right. And having a great accountant, of course, your accounts are going to understand and know the Income Tax Act. They’re going to know some of these things. But remember they aren’t. Your tax planners like that is not what you hired your accountant to do. So that was a major misconception that I had in this journey.

Right. And in today’s conversation, too, we’re also going to take liable out of this conversation because there’s some reasons why you might incorporate, because of liability sake. Right. Like that. That is is something that makes sense. However, today we’re going to keep it strictly to just sort of like, where might I grow this worth, this net worth if I have the opportunity to?

And how can I do it most efficiently? And I think a good place for us to start is kind of a rule of thumb. And like any rule of thumb, it’s sort of a starting point. So we’re not saying this applies to everyone or that you want to blindly follow this rule. But typically, if you’re earning the money personally through a T4 or, or you’re you’re earning it through any other type of, we’ll call it forced income, where you’re not the owner of the company, you can’t control the flow of the money.

We would say that you probably want to keep it invested at a personal level, right? Like that would make sense. Like a lot of people ask, should I open a corporation? Because I heard tax rates are better? Well, when it comes to investing, other than, again, liability reasons, you’re actually likely going to be better off at a personal level to do those investments at a personal level rather than, say, opening a corporation and then sort of building all of this net worth over there.

Because here’s the crazy part inside the corporation. And depending on the type of income, whether it’s active, meaning you have a business where there’s active income going on you, you’re manufacturing something, you’re consulting, you’re doing something like that. You have definitely an advantage to having a corporation, and that’s that flow of money that you want to be able to kind of control a little bit.

And as to when it pays out, if it pays out and how we get it to your personal pockets. Whereas if you’re just investing inside of a corporation, you know, this could be real estate, it could be stocks and bonds, it could be any other type of investment that you’re doing inside the corporation. And if that money is earned outside and you’re sort of lending the money to the corporation to start it, and liability is not a concern for you.

And we’re looking only at a taxation perspective, you may actually be putting yourself in a sort of worse spot from a financial perspective because of how punitive the passive income taxes are inside the corporation. And now, John, as we have all likely heard by now in, you know, this past year, in 2024, we had some changes to even the capital gains rules.

And if you’re getting a capital gain of any amount, it doesn’t matter whether it was $100, 100,000 or $1 million capital gain, you’re actually going to have what they call the two thirds inclusion, meaning two thirds of that capital gain is going to be taxed. Whereas at a personal level, if it’s under $250,000, you’ll actually still only have 50% of that capital gain taxed.

So these are things that we have to be thinking about when it comes to where we’re going to grow our worth, where we’re going to grow our wealth, whether it’s at a personal level, at a corporate level. And again, rule of thumb as a starting point for today’s conversation is, hey, if I’m earning the money in a corporation actively, I’m going to try to make sure I get myself organized and planned and make sure I understand all the landmines, as we like to call them, that are set for us to grow that worth inside of your corporation.

But if that money was earned from a T4 that from a company you do not own or any other type of income at a personal level, you’re probably going to want to start growing your wealth at a personal level. And there are some nuances to sort of the strategies and structures we might explore, depending on where that money was earned and then what the next step is as to what type of investments we might be considering.

Jon Orr: Yeah, that makes that makes sense. Like when you think about having, you know, having these kind of two separate entities and, and growing money where it was earned. But I think I also like the fact that, you know, you’re because you’re growing it into separate entities or, you know, on your personal side, maybe in your business or your corporate side is you’re you’re also kind of optimizing the tax thresholds at these different levels.

So it’s like, well, how much how much money have I made personally. Let’s make sure that we’re, you know, optimizing that. And then all of a sudden, if I am making money in my corporation, you know, let’s let’s let that grow. And we’re starting to kind of optimize. What’s the best move for for myself based on these two things.

And I think most business owners do that and are trying to make sure that they’re optimizing in those ways. So let’s move into like, okay, let’s think about I’m a business owner now, and I am growing my money inside my corporation. And because I think, I think a long time ago we had this thought too. It’s like, okay, we don’t need to pull all that money out.

Let’s, let’s compound it. Let’s compound this money inside the corporation. Let’s put it into these different investment vehicles, these investment buckets. And that will compound our growth, which will be awesome. And then maybe we can, you know, all of a sudden use say, the, you know, the the passive income over there to, like, all of a sudden kind of pad other things all of a sudden, maybe I can send that out when I need to.

It’s like we wanted, I think for a long time our dream was like creating a machine that every dollar I put in, it made more dollars, and then I could take those dollars out. And it was like this machine was about creating this passive income source that, you know, allowed us to kind of like, hey, we if we wanted to stop our operating company, then this machine continues and that would be amazing.

I think we ran into some hiccups along the way and thinking about what landmines should we really navigate in that land? Because if that’s your plan, that it’s like, if I create a machine and a system over inside my corporation, whether it’s, you know, at your operating core where it’s at your holdco level, and then you’re like, if my operating core just goes away, then this machine keeps going.

Well, we want to kind of walk through the that those landmines with you.

Kyle Pearce: Yeah, absolutely. And you know, if we start with well we’ll start with the idea of this passive income. So I think when people think about passive income, they’re thinking, hey I want money to continually be generated by this investment. Right. That might be, you know, interest, it might be dividends, it might be rental income. Right. Coming off of maybe real estate.

And if we look at it at a basic level, what the government has done is they’re basically creating a lot of rules inside your corporation and your corporate structure, as we like to call it, because you might have a holding company associated any of these associated companies, they’re basically putting you in a spot where they’re really trying to promote the idea of business owners taking any additional money out of their corporate structure, paying tax like any other high income earner in Canada.

Right. So if you imagine if you’re a T4 employee of a public company, for example, and you’re earning 500,000, that person doesn’t have the choice. Like they have to take that money. They can’t say to the company, hey, like, do me a favor. You know, like, yeah, now, mind you, there might be a pension plan or there might, you know, there might be some of these incentives they’ve tried to help out with, but they don’t actually have the opportunity to say, listen, all I really need right now in this year is like $100,000.

And I, you know, and I want to invest the other 400. Well, what they end up getting is this $500,000 in their personal pocket, except most likely as well, if it’s a T4, the taxes withheld. So they’re going to walk away with around 250 out of that 500 in the T4. Now, some people say, well, that’s where an RSP kind of steps up to the plate 100%.

You want to optimize that and use that RSP. The problem, though, is that it’s 18% of your income, up to a maximum of 30 ish thousand dollars. $30,000 is not enough room for someone earning that sort of T4 income in order to be able to be tax efficient, right? So that’s a really, really hard thing. Whereas if you’re a business owner, you actually have the opportunity to say, listen, if I had $500,000 of what we call retained earnings, meaning profit after paying active income tax on it, the first 500,000 per year for small businesses is in Ontario anyway, about 12.2%.

It’s varies at different provinces, but around that number, well, that’s a great move because then they go, wow, I’ve only paid like 12% on this. And then now I’ve got this large amount I don’t want to take it all out and then force a high tax bracket on myself. So what do we do? Well, we’re going to invest that money.

But the problem is, is the government says I dare you go for it. But if you earn passive income inside this corporate structure, we’re going to take that passive income and we’re going to tax it at around 50%. Now in Ontario, it’s actually over 50%. It’s slightly over that amount. And a lot of people would say like that.

That is horrible. But basically what the government is saying is, listen, the poor guy who had the T4 income over there and couldn’t actually do anything about it, he had to pay over 50% on his T4 income, not just on any other investments that he might make with that money. So why should you get a free lunch inside this corporation?

Right. So when we think of it this way, you go, okay, I think I understand it. It just means we just live in a really high tax bracket system. Now, the nuance, though, is if we can take these rules and if we know them well enough, we can be smart and strategic about the types of investments that we might make or what we might do in order to try to avoid having to say, take it all out in what I call rip the Band-Aid off.

Because that’s sort of the approach. If you were to just pull the 500 out now, you’re sort of in the same boat as our friend, the T4 income earner. We don’t want to do that. But we also don’t want that 500,000, say, just, you know, earning, let’s say 5%, you know, in a gig, but only keeping 2.5%, even for our private lender people out there.

Right. There’s people that do private lending. You can private lend inside your corporation with those retained earnings. The problem, though, is that you’re taking on a big amount of risk to get that ten, 11, 12% return, but you only get to keep 4 or 5, 6% of it because of passive income tax. And that’s obviously a big risk for what seems like a really low reward.

Jon Orr: What now? What do you think about, you know, when you think about that and think about, like these, these structures that are, that are, you know, existing in place? Well, like what what do you recommend? Like what what are some of the, the moves, you know, the choices that we could make, that kind of help, help navigate you know, deciding like is because, you know, you’re saying like, hey, I can take out the 500,000 if it’s like, but I mean, get dinged the same way with tax.

And probably I get double ding because I own the corporation. So I’m going to be paying tax there. I’m going to bring it out here, I’m going to pay tax there. Like what do you say to the person that’s like, you know what? I’m just going to make like I make enough, like I don’t care. You know, that I, that I have to pay these double taxes or this much tax.

Like is it is it is it that big of a deal? I’ll just make more money anyway. And I have to. I have a lot anyway. You know, like like there’s sometimes that mindset floating around, it’s like. But then when you, when you make more and all of a sudden you’re paying more, it hurts to see the money go out the door when it’s like it could have been used somewhere else.

Kyle Pearce: Oh, yeah. Well, I mean, when you think about think about, you know, how important compound interest is. And I don’t think we have to sort of, you know, explain that to anyone listening to this show. Right. We know the power of compound interest. It’s so important. And basically what you’re doing, if you say, do what we call rip the Band-Aid off, which is like, pull it all out and sort of lose essentially half of it.

Now, if you take it as a dividend, it’s probably going to be a little less than half. It’s going to be more like 39%, 40%. But think about that for a second. It’s the opposite of compound interest. We’re actually losing half of our money, which means we now need to almost double the money in order to get to break even, just to get to breakeven.

So that means you need like a 100% return in order to get yourself to a place that you already were with that money inside, say, the corporation. Now, if we look at it on that hand, we go, okay, well, then I don’t want to rip the Band-Aid off, because ripping the band aid off is, you know, that that hurts that, you know, I don’t like that idea.

Well, what could I do instead? Well, one thought is we can try to avoid taking that money and putting it into interest bearing type assets or even dividend paying type assets like, say, you know, stocks that have dividends. Now there is a, a refund or a rebate on some of Canadian dividends. So if it’s a Canadian public company, it’s not as painful, but it’s still painful.

You’re still losing tax. And you know, there’s some implications there as well. What we could do is we can start looking. Now here’s the other thing, John, before I tell you where we might put this money. The other thing to note, too, is that if you earn too much passive income inside of your corporation, they have what they call like a grind down rule, which basically what it is, is it’s a nickname for essentially the penalty that you end up paying.

And it’s not a penalty. You just sort of lose your active business, small business credit. Right. So we are saying the first $500,000 of active income, you get favorable tax treatment. Any earnings above 500,000 in a Canadian corporation are going to be taxed at a higher rate. Here in Ontario, about 26.5% is what you will pay on any active income above $500,000.

Like that is a massive benefit on that 500. But your problem is, if you earn more than $50,000 of passive income inside your corporate structure within a given year, they start to actually grind away at your small business tax credit, which means what they’re doing is they’re basically saying, listen, for every dollar that you earn above 50,000 in passive income inside this corporate structure, we’re going to take $5 of that active business tax credit away from your corporation, which means if you earn $150,000 of passive income in a given year, you completely have grind down or ground, grinded, grinded away.

I don’t even know. Straight away you have essentially you cross, you have ground away. I’m not sure what it is, but that the grind down rule is essentially taking that entire tax credit away from your active income, which is essentially the rules are saying like, listen, we’re trying to make it where we’re promoting you to rip the Band-Aid off.

So the question then becomes is like, well, what could I do that’s better? And I think where a lot of business owners lean on as they go to capital gains types, assets, right, right. So we buy stocks that are going to appreciate. Or we might even buy real estate because a real estate, you picture in your mind that it’s going to appreciate over time, even though real estate has passive income associated.

Typically if you have a mortgage on it, there’s enough expenses to kind of offset that. You know, that passive income. So we’re talking about putting it into these assets. But the the challenge is, is that we still have to get this money out at some point down the road to a personal hand, if you want to spend it at a personal level, instead of just seeing number go up on a balance sheet.

Jon Orr: Yeah, yeah. And before when you were kind of saying, like the government because they’re taxing so heavily on passive income, and especially, you know, the grind down rule is basically, you know, just pushing you to say, dude, you should be you should be just taking this money out and investing it on the personal side, like, because if I feel like if I’m going to pay, you know, if eventually if I have too much passive income and I’m going to pay all of it at the higher, higher tax rate, or I’m going to pay 50% of it, you know, in passive income, it’s like, take it out, pay, pay the tax it, invest it on

the personal side. And then and then, you know, if you’re going to pull passive income from that point on the personal side, if you play your cards right, then maybe, you know, balancing a little bit about like where your, your how much income you withdraw, you might only pay 30% on that instead of, say, 50% on that same passive income.

It’s like it’s like, let’s let’s shoot it like, are you saying the better move for a person right now? Is send it out and and invest it personally, and maybe you’ll be better off?

Kyle Pearce: Yeah, it’s a great question. I would say personally, my answer is no. Like personally, I don’t like the rip the Band-Aid off approach because it in some ways it almost I think, you know, mentally that could be really challenging psychologically to go. I got to like do a lot of like I gotta have a lot of growth here just to kind of get back to where I was like earlier this morning before I took this money out, you know, so I would much rather see it inside a corporation, what a lot of people do, which is a good start.

I’m going to say it’s a good start. It’s not the most optimal or the most efficient, but what a lot of people will do is inside their corporate structure, they’ll actually take those retained earnings and they’ll they’ll start buying these capital gain type assets because capital gains aren’t taxed as punitively. There’s still taxation on it, right? So if I take $1 million inside the corporate structure and we grow it to $2 million and it’s a 2 million or, $1 million capital gain, so a million that we put in, that’s your cost basis and then $1 million of gain to get 2 million in total over time.

It doesn’t have to happen right away. Two things are happening. First of all, there’s no tax while it’s growing, right? So unlike, say, a GI c or a passive income where you’re getting this income every year and you’re getting taxed every year, which means you can’t even really like compound that money at the regular tax rate or our at the regular earning rate because they’re taking the money and then you’re trying to compound it from there.

So that’s problematic from a compound interest growth perspective. But with a capital gain asset until you sell it, there is no actual tax that will be realized on that capital gain. So when I sell now there’s $1 million capital gain. And now with the new rules, assuming they all go through and, you know, and so forth, you’re going to be paying tax on two thirds of that capital gains.

So on $667,000 of that million, there’s going to be tax. Now you’re not losing $667,000. You’re just paying tax on that amount. Which means a third of that amount is like off the hook, which is great. So that part’s like tax free. That’s awesome. That’s going to be a credit to your capital dividend account. But this other $67,000 or $667,000 is going to be taxed.

Now, what does it really all come out in the wash to be? It comes out just north of 30% of the entire capital gain. Okay. So it comes out to be about 30, you know, low 30% range on the entire capital gain versus 50% right now. A lot of people are like, well, I still don’t like that. And I get it, I like it.

But if you had a pers, if you had a personal capital gain of $1 million, you’re paying the same tax rate, right? So like you’re not ahead, you’re not, you know, worse. And you didn’t have to start with half the money in your personal pocket to get this money out. So I like this strategy. But the challenge still remains that the initial 1 million that you use to make this capital gain is still stuck in the corporation as retained earnings, which you will have to take out at some point as a salary or dividend in order to use it at a personal level.

So it’s still a challenge, but at least you’re getting the growth that you were after and you’re not getting penalized further on that growth now.

Jon Orr: Yeah, that’s so that in terms of passive income versus capital capital assets, it’s it it seems like the better move to go that route Kyle. What is there anything else that you’d recommend for say that entrepreneur or a business owner. You know, who’s who’s kind of going okay, I realize that maybe some of the passive income sources that I have when my mom and I want to watch that land mine, and that’s all we’re really saying, right?

It’s like just just going to say no where these things are so that when you do some planning, you know, you can just make some, some decisions based off the information that you have at your fingertips. Any other info you want to kind of point people to as a, as a potential good move here.

Kyle Pearce: Yeah. You had mentioned to you said like anything I can recommend and the only recommendation I’ll give on this entire episode is to make sure that you do your research and learn, but make sure you’re working with your accountant on any ideas that you do come back with. So that’s the only real recommendation. Everything else is pointing you towards ideas, right?

To think about and learn about, because the better you understand the rules. Like imagine playing a sport where you didn’t understand all the rules like it. It makes it really hard to become really good at that sport, right? Like you’re in and this is the world we live in, sadly, is like, if we don’t fully understand the rules ourselves, and there’s always something to learn.

Of course, then, you know, you’re, you’re kind of you’re, you’re, you’re sailing a rudderless ship, you know, and you have no idea where you’re going to end up. So the other thing that I would say is that, hey, while capital gain assets are definitely a better move inside the corporation than, say, just passive income type assets, what I will say is that we definitely, promote the idea of trying to supercharge this whole process.

And by supercharging what we are talking about is our pass through structure that has massive benefits inside the corporation and still some great benefits at a personal level for these high T4 income earners that are out of RSP room and, and tax free savings account room is getting money to touch a policy, a life insurance in this case we’re going to talk specifically about corporate owned life insurance because it has unique features that no other asset class has that can be super helpful for those with active income inside the corporation.

And what ends ends up becoming retained earnings. And by funding one of these policies, you’re going to get sort of a trifecta of things happening. First of all, it is going to grow the cash value while you’re living the value of this policy. Each and every time you put premium into it is going to have a cash value associated with it.

We’re going to design it so that we have the highest cash value we possibly can have, so that it’s leverage able at the corporate level, right from the insurance company, or opening the door to third party lending strategies, which can be helpful both personally and corporately. Now this is going to grow tax free. And I say like a GIC typically now I say that is, you know, rates of return for your cash value over the life of the policy can be around 4 to 5%.

When we design it in this way. And that is going to grow for the life of the policy for. So for our conservative investors out there, those who had GIC sitting inside their corporation or they have an emergency fund, I call it like putting the money under the corporate mattress, just in case that money could be sitting in a policy growing tax free just in and of itself.

Now, while I’m not a huge, you know, advocate for just leaving money there endlessly, that’s not really the goal here because we put this money through this policy, and then we have access to leverage against this policy for additional assets. We can kind of hit two birds with one stone. We can still buy the capital, gain growth assets that we were going to buy anyway.

Except now we have our money working in two places at once and down the road. The associated death benefit of that participating whole life insurance policy is going to pay out through the capital dividend account in a tax free manner. So the net death benefit comes out tax free, which essentially means that you’re going to have more money coming out that used to be considered retained earnings, but is now a much larger amount coming out tax free to shareholders to wind up the entire process, noting that we still have access to leverage strategies in between while we’re living, so that we can potentially have some benefit there as well, and that we’re not just setting

up the next generation. Right. Although, hey, if I can set up the next generation at the same time, of course, that’s a nice byproduct to have at the same time.

Jon Orr: Yeah, that’s like a cherry on top. Now, before you said that, it grows like, you know, the premium and you’re going to, you know, it’s designed to have a high cash value. It’s a designed to go up in value every year. Those that cash value is going to go up in value. You know, it’s in a way you said that kind of grows like a guy.

See like almost like similar rates. You said it was tax free. So you’re saying like it’s it’s a avoids the passive income tax rule that the other investments were, you know, indicating.

Kyle Pearce: Yeah. Yeah. Exactly. Basically what’s going to happen each and every year we’re going to pay premium into this policy. And we can do that for I always say a nice ten year runway’s a good goal. Although that goal you can pay for the rest of your life if you choose. But we usually say to have like a ten year ish goal to continue funding premium into this policy and at the same time there’s guarantees associated with it.

One’s a death benefit and the other one is a cash value, and that growth is going to move upwards at a minimum amount or better. So there is a guarantee that it will only go up. It can’t go backwards. But each and every year these companies that are doing this are actually paying a dividend. Now they can change the dividend rate.

And technically they could even not pay a dividend. Just like a dividend paying stock. Right. Could change that. However, the companies here in Canada that we work with have never missed a dividend payment, which is really important because that dividend is then going to be used inside the policy to buy more death benefit, which in turn gives you more cash value.

So this compound effect will create this massive policy over time that you were still able to leverage against the cash value for corporate purchases. You can leverage against it for other aspects in your life as well. And the death benefit down the road is going to pay out. And again, the net death benefit. So as the premium amount grinds away from the cost of insurance in the background, if you live a nice long life, it’s highly likely that none of the premium you had put into the policy is still due to be taxed on the way out through the death benefit, so these policies are designed to create and we call it a pass through

structure because it has so many benefits to it. And we certainly don’t want to leave that policy. They’re just doing nothing unless that was your plan anyway. If your plan was to invest in Gics anyway, then you’re going to get a very similar return. Except it’s going to be tax free, which can have a massive impact over the long run.

But what we typically see people doing is they go, you know what? I’m going to put, we’ll start it as our emergency fund. You know, we’ll put a good chunk in there so that that cash value, I’m not going to touch it because it’s sort of my just in case one for the company. But then as they’re ready to buy assets, they can lean on this bucket in order to leverage to buy those capital, gain assets inside the corporation if they want to get creative.

There’s other creative leverage strategies that can help them get assets at a personal level. Smith maneuver style, so to speak. There are so many different ways that we can leverage this particular tool in order to give us what we like to call is optionality, right? So you have option cards. You’ve not only sort of what we’ll call cleaned the retained earnings of that tax target off their back, but you’ve also opened the door to so many other opportunities to not only grow your net worth while you’re living, be able to spend the money that you want at a personal level as well, but then also set up your estate for something that you would

never even imagine is possible. All because we’re trying to understand and navigate the Income Tax Act to our advantage as an incorporated business owner.

Jon Orr: Yeah. So when you think about, you know, what we chatted about here in this in this episode is we’re looking at, say, just understanding, you know, what the tax implications are on while you’re trying to build your net worth. You know, we we thought about the journey of going, hey, I’ve, I have say active corporate income. I’ve got an active income.

I want to think about how do I balance between having personal, investments versus corporate investments. But I do need to understand that if I am investing heavily in the on the corporate side, that I do need to know what the passive income rules are. I need to know what the grind down rule is. I need to be able to navigate that and have a plan for, you know, using and using those tools inside the corporation to achieve the goals that I want.

And I have to think about those, and I just have to know those. And a lot of times we think that our accountant is going to just figure that out for us. And that is not is not always the case. It’s sometimes the case that your accountant might say after the fact, you may have reconsidered this, or you should have done it this way.

And then now, you know, but like what we want to do and what we want to help you with is no upfront know when and where to use some of these tools and these resources.

Kyle Pearce: I love it, I love it. So, friends, if you’re listening to this episode and you’ve learned something, hopefully you’ll leave us a rating and review on your favorite podcast platform. And hey, if some of the conversation here has, sort of spoken to you and, you know, you’re an incorporated business owner, or maybe you’re a high tech four income earner and you want to talk about some of this tax strategies, some of these structures, some of the ideas that we can help you along with.

Definitely consider reaching out to us over at Canadian Wealth secrets.com/discovery, where we do focus on incorporated business owners. Here in Canada, helping you out with optimizing your wealth plan. But again, those T for income earners as well. Happy to help you along the process because there’s some great strategies that you can use and leverage, very similar to what we’ve been chatting about here at the corporate level.

Jon Orr: Also, if you are wanting wanting to take a deep dive in, you know how to how to say, get cash flow on the personal side from your corporation. And then we encourage you to enroll for free. In our masterclass, we have a masterclass on unlocking corporate wealth. You can register right now over at, Keating. Well secrets.com/masterclass. That’s Canadian while secrets.com/masterclass.

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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