Episode 121: Navigating US and Canadian Tax Systems For Canadian Investors| Money Insights

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Are you curious about how high-income individuals can leverage investment optimization tools to build lasting wealth, even in complex tax environments?

In today’s intricate financial landscape, high-income earners face unique challenges when it comes to optimizing their investments and managing taxes. Our latest episode of Canadian Wealth Secrets dives deep into strategies that can help you navigate these complexities. 

We speak with Money Insights podcast co-host Rod Zabriskie and explore how life insurance can be more than just a safety net but a robust tool for wealth creation and investment optimization. 

Additionally, we discuss the nuances of the tax systems in both the US and Canada and how they impact your wealth-building efforts. 

Whether you’re a seasoned investor or just starting, understanding these strategies can help you achieve financial stability and ensure your investments are working as hard as you are.

You’ll learn:

• Discover how to utilize permanent life insurance to optimize your investments and create tax-free growth.
• Learn the differences between direct and non-direct recognition policies and which might be best for your situation.
• Understand the concept of infinite banking and how strategic use of insurance can significantly enhance your wealth management plan.

Resources:

• Money Insights Podcast
• 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. 

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 corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

Detailed Episode Summary 

High-Income Wealth Building Strategies

Kyle, Rod, and Jon discussed their observations about high-income individuals and their strategies for building wealth. They noted that their business originated from the life insurance industry, where they observed the potential of using life insurance as a tool for wealth creation. The team’s approach aims to help high-income professionals achieve financial stability that allows them to step away from work and enjoy the safety and cash flow of their built-up wealth. The team also discussed their shift from traditional wealth planning to using the investment optimizer tool to enhance returns on investments or business, and their niche in providing financial advice for business owners looking to optimize their investments. They explored the concept of using permanent insurance as a tool for investment optimization, a strategy they had previously discussed with their partner, Matt.

Comparing US and Canadian Tax Systems for Business Owners

Kyle and Rod discussed the differences between the US and Canadian tax systems, focusing on their implications for business owners. They explained various aspects such as the taxation of active income, the benefits of S-corporation structures in the US, and the tax advantages of owning policies either through a business structure or individually. They also highlighted the complexities of structuring businesses for tax efficiency and the nuances of differentiating between active and passive income. Their observations regarding the preference of clients to purchase their policies individually or via a trust for personal asset growth were also discussed.

Investment Optimizer, Real Estate, and Opportunity Funds

Jon, Rod, and Kyle discussed the use of the investment optimizer, particularly in relation to real estate. Rod explained that real estate was the most popular asset class among his clients, but the initial cost of setting up a life insurance policy was a significant barrier. They also discussed the concept of an opportunity fund, which is used to store money for real estate investments, comparing it to the startup cost of a business. The discussion further encompassed the strategy of infinite banking, which aims at wealth building through self-banking. The team emphasized the importance of flexibility in managing the opportunity fund, as future earnings and contributions are not guaranteed.

Infinite Banking Strategies and Challenges

Rod, Kyle, and Jon discussed the intricacies of infinite banking and the differences between direct and non-direct recognition policies. Rod explained that the goal of infinite banking is to create an interest rate arbitrage, but this strategy often doesn’t work as expected in practice. He emphasized that the key focus should be on finding the best-growing policy, regardless of whether it’s direct or non-direct. The team also discussed the challenges of relying solely on borrowing against a policy for income. They agreed that while they don’t entirely reject infinite banking, they have separate themselves from it and prioritize other financial strategies.

Strategic Use of Permanent Insurance for Wealth Creation

Kyle, Rod, and Jon discussed the strategic use of permanent insurance as a tool for wealth creation and tax management, particularly in the context of US and Canadian tax systems. They underscored the benefits of this approach, including the creation of an emergency fund, the potential for tax-free growth, and the ability to transfer wealth to future generations. The team stressed that this strategy is not suitable for everyone and should be carefully considered before implementation. They also discussed the use of alternative investments, the importance of utilizing leverage to create more value in the long run, and the concept of the ‘capital avalanche’ and premium finance. Lastly, they emphasized the need for seeking professional advice to determine the most beneficial tax-efficient strategies.

Transcript:

Jon Orr: Hey there, rod. Welcome to the Canadian Well Secrets podcast. I know that, both Kyle and I have listened to yours and Christian’s podcast. And, you know, we’re eager to you’re going to dive in here today to kind of, like, hash out some differences between, you know, wealth building in the United States and versus wealth building in Canada.

But, before we get to dig in, do us a favor and, you know, let our listeners know, you know, where where abouts are you coming from? And you know, what’s what’s going on in, you know, in wealth building in your area. Right now.

Rod Zabriskie: Happy to do it. Thanks so much for having me on. So again, Rod Zabriskie, Money Insights, is our company. And, we appreciate you guys reaching out and having us on. I say we because my my my partner Christian was, was planning to be on with us and wasn’t able to join us, but, but a shout out to him, I’m sure he’ll hear this.

And, and, there will be things he wished he could have contributed and, and, but anyway, long story short. We are located in Utah. We work across the United States. We’re licensed in all 50 states. And, so our clients, I’m often asked, well, how many have you clients are in Utah? And actually very few population wise.

It’s not a big state, not in a highly populated area. And so, you know, I would say the majority of our clients come from, you might guess them, the states, but Texas, Florida, Georgia, right on the big states. What’s funny is, is New York is not one. And that may or may not be surprising because we live in the alternative space. And and that’s where Wall Street is.

Jon Orr: That’s where. Right. Sure.

Rod Zabriskie: That whole thing is happening. And so, sometimes it surprises me. And then in other times I’m like, maybe it just all makes sense.

Kyle Pearce: Well, what I find interesting about that is, you know, I think, like, in New York is, fairly, you know, has high higher tax rates and say some other states, from what we understand, we’re, we’re Canadian. So, you know, we don’t know all the tax rules and all the states. But you would think that folks would be looking for some of that tax relief.

And I know that, you know, some of the strategies that you guys are doing, while different, there’s a lot of similarities and some of the tools that we often use. I’m sort of curious, though, before we kind of dig into sort of some of the secret sources here, both sides of the border. And I’m curious to know, how did you guys get started and sort of how did you target the group that you’re kind of working with because you’re definitely working with?

I love your tagline. This idea of taking people from high income to high net worth, which there is a difference. And I think sometimes people forget that that you know what? High income doesn’t necessarily mean that you have a high net worth, like your income does not factor. We just did an episode on, you know, your real net worth.

And some people factor income into that. And that’s actually not going to help. So tell us a little bit more like how did you guys land there? And it seems like you guys are very, you know, good business owners and you tend to serve business owners much like we do as well. So give us a little backstory on that.

Rod Zabriskie: Yeah. So what’s interesting is we come from the kind of the pure life insurance side of things. And I say that because I think there are a lot of people in this space that come from a different direction and then start to incorporate life insurance into it, and I just the learning curve is a little bit different, right?

I just I just find that using life insurance as a strategic tool to build wealth and, just bring it down to its core, its core and saying, well, how’s the best way to build a policy to do that? Well, that’s where we come from. That’s our background is in that world of using life insurance for a variety of different things.

And then, you know, as happens with a lot of businesses, you start to fall into a niche where you just do so much business in that area that it becomes your, your kind of core. And we have a couple of those pieces and we can we can get into that. But so that’s really what led us into what we do now, where we work with a lot of high income professionals, you know, doctors, attorneys, other, you know, business owners, really just, you know, high income people who are looking for ways to, to use that, you know, that money and build wealth.

But you’re right in the sense that having a high income, we see a lot of people who, well, they don’t turn that into wealth at all, right? They’re just use it. They’re just spending it.

And, but then those who who are determined to basically create a situation where they can call their own shots, I don’t know how it’s better to say it, but it’s not necessarily a way to say to retire completely, but they just want to be able to step away for, you know, maybe they work two days a week or maybe they, you know, take a safety sabbatical and it doesn’t matter because they have wealth and or cash flow built up that can take care of them, you know, cover their needs. And then everything’s on their own terms now, right?

Jon Orr: Yeah. No, I, I think I’m glad you you kind of pointed out the, you know, the origins of, of where, where you came from because I think, you know, we came from the other side, you know, like we came from, you know, having businesses and trying to figure out how to keep more of our, our, you know, our, our income and build our net worth.

And what are the best ways to do that. And that led us into different tools that could, you know, assist us along the way. And then, began narrowing down into a tool that, you know, becomes very, very efficient for what we were doing and then sharing that with, with others who don’t know about it. Right. Like, like it’s one of those like, hey, this tool you can continually, you know, figure out a way or different ways to utilize that tool when most people are thinking, you know, this, this life insurance, you know, as soon as they hear the term, it’s, it’s like, oh, that like I got life insurance or, you know, 

I’ve, I’ve already you know, I’m, I’m they’re like like, how did being in the life insurance you know field to begin with. How like how did that transition like in a language change for you over time into helping people kind of wrap their minds around like this? This is a tool for building wealth versus something to just cover when when you, you know, when when everyone thinks it’s like when you move on to the next life.

Rod Zabriskie: Yeah. You know, it’s interesting because for Christian and I, his starting point was more on the traditional, wealth planning kinds of, you know, stocks, bonds, mutual funds, world and then added life insurance. I started in the life in the health insurance space and wanted to expand and build into other things. And of course, you know, Obamacare came along and there were many reasons why it made sense to kind of shift out of that health insurance world.

But what’s interesting is, is that we, we we added that and that was one example of, just expanding our offering to our clients. So in other words, and this this is back when we were just meeting with people locally. Right. Our online business didn’t exist at the time. And it was just a matter of, you know, you connect with someone, you understand their needs.

What is it? Where can I provide value for you? And so we we became well versed in a lot of different things, because if I ran into a business owner, I needed to know how to help business owners, whether it be, you know, key person insurance or buy sell agreements that need insurance, you know, to to back that up or, or whatever it is just just pure, you know, term insurance, that’s all you need or estate planning needs or, charitable planning needs.

So we became well versed in a broad array of different ways, different strategic ways to use life insurance to make someone’s world better. And this what we’re doing now in terms of, of using we call it the investment optimizer to, to enhance the return people get in their investments or in their business, returns. This part of it was just one of many different things that we were could offer.

Right. Kind of the tool bag that we brought to the to the meeting, depending on the person’s needs and, and then it, it just kind of exploded from there because once we especially when we, we were able to start working across the country, virtually then that just opened it up. So you get into to communities that we found out that there are people, you know, locally that are in those communities, but we never would have found those communities in any other way.

Just there wasn’t a way to do that when you’re just bricks and mortar meeting with people face to face, you know, they’re coming into your office or you’re going into their home and, and that kind of thing. And so what it allowed us to do is get really narrow. And and again, we still have the expertise. We can still help people with all those other things as they have those needs come up disability insurance and whatever.

Right across the board, long term care. But but that was the thing that was speaking to people was saying, hey, I, I am investing, I own a business and, you know, whatever, this is the way I built, I’m, I’m building my wealth. What are the things that I can do to make that better? And so that’s kind of how we fell into that, that niche and that, that profile that, that kind of person that was looking for that help.

Kyle Pearce: I love it. Now, you know, something that, I mean, it’s so interesting because we’re using a lot of times we use permanent insurance for different reasons. And you mentioned the investment optimizer. So I want to, you know, kind of, you know, pick at that a little bit because, you know, John and I and, and we used to have another host, one of our partners, Matt, we own a lot of real estate.

And, you know, that investment optimizer idea of, you know, first trying to get money to hit a policy and then leveraging that to make your next investment. I kind of look at it as like, the win win is like as you add in that or as you add assets to your portfolio, as you add it to your net worth, you’re actually creating a bigger tax problem for yourself.

So like if you’re able to allow it to hit a policy first, that policy is going to grow, although very conservatively, like we’re not looking at that as the investment, but more or.

Can then leverage that cash value, make the next asset, which creates more tax issue, which is going to be remedied by the original tool that you’re leveraging. And you can kind of funnel it back into that investment or opportunity bucket. And the the part that I’m curious for you guys is like, do you find like where where we see this very, very helpful.

Like that same idea is really helpful for business owners here in Canada because our tax system, as you may have heard before, is very different than the US tax system. There’s a lot of things that are similar, but we have higher tax rates, especially on the personal side of things. So while a corporation can earn and you know, they they get taxed active income, gets taxed at a low rate, you still got to get it out.

And we’re able to do some pretty interesting things with this tool. And in the meantime, in the corporation you can leverage it and do like an investment optimizer sort of situation. So what we find is so many of our clients are like business owners with lots of retained earnings that are sort of what we call like stuck. However, I’m just curious on your end, like, do you find that that’s a similar challenge for business owners, or are they actually just looking for a way to kind of get that arbitrage or, you know, because I know the the corporate tax system is a little different there than it is here.

What would you say is sort of like your, your client’s biggest wealth pebble in their shoe on the, you know, the US side of things.

Rod Zabriskie: Yeah. Maybe I can clarify a little bit on on how the corporate side works. And again, I’m not an attorney. This is just, this is me, you know? Anyway, the basically there are two different ways you can build it. If you have what’s called a C corp, then your, your entity gets taxed at the corporate level. And then when you remove income distributions, you know, W2, whatever that is. Then it gets taxed again on the personal.

So for there are certain categories of businesses for which that is the right, structure, but not many, most people that we deal with small businesses are on what’s called an S Corp. And what that means is it’s what they call a pass through entity. So all the income that you earn on your business, all that passes through to the individual side, and so you get taxed on the individual.

Now you might say, well, gee, rod, wouldn’t I rather be taxed at the corporate level if it’s at 20, 25% versus the individual level? If that puts me at the depending on my income, you know, 35, 40%. And the answer is yes, except the, the the C Corp creates a dual tax. In other words, if I pay the whatever, 20%, 25% at the corporate level first, and then I pay myself and then I’m going to pay it again at the whatever tax rate I am. Right? Right.

Jon Orr: So go ahead.

Rod Zabriskie: Yeah. So that’s why, most of the people we work with are on that’s corp side.

Jon Orr: Right. So in the S Corp just just so I wrap my mind around it because it’s different here. But on the S Corp is it, is it basically like just a firewall for protection because you’re passing it through and there’s no like, actual like it’s almost like it sounds like the S Corp like is not actually an entity like a C corp or like a corporation.

It’s like a it’s not actually earning anything or it is. And it’s just being it like the rules just say, hey, send all the money over here. But so what is the what is the difference then I guess in saying if I’m earning something personally as a business versus owning an escort.

Rod Zabriskie: Yeah, it’s a great question. And I think a lot of it is the protection. So having that corporate shield right to, to, you know, for asset protection purposes and just personal protection. But there are also in the tax code a lot of different opportunities to create tax deductions in that business structure that you couldn’t get or couldn’t get as exactly.

Like if I’m just operating as a sole proprietor, then I’m still filing, you know, my income, I’m still and I can still put, have, deductions for expenses that I’m spending on my business or whatever. It just exists at a much better level at the s Corp type of thing. So, so now back to your question, Kyle.

For that reason, it’s not as it’s not as big of a deal for people to own the policies inside of their business that in some cases, it makes sense. If that’s where the money is flowing, then yes, you do that. But in most cases they’re owning it as an individual or maybe in a personal trust, something like that.

Because either way, the tax hits them the same way. Or in other words, to say it a different way. The tax advantages that they can create are the same, whether they do it within their business structure or whether they do it on the individual level.

Kyle Pearce: Got it, got it. And that is very different to how things work here. Now the government does all kinds of weird, you know, tricks and so forth in order to make this happen. But, you know, a corporation here in Canada, if it’s active income. So it’s not, you know, investment income, passive income, but it’s active. The first $500,000 of profit is going to be taxed at 12.2%, which is highly attractive to like all Canadians.

Right. Because yeah, if you’re our tax our graduated system on the personal side goes gets high, gets really high and it gets high fast. So that’s a great thing. But then it’s stuck in there. And then you have to take it out. And then you’re still going to get taxed at a personal level. Depending on how you take it.

There’s deduction to the corp or there’s, you know different tax rate. But they try to avoid double tax. But it’s still really problematic because you’re trying to somehow hold on to this low tax rate. So buying policies in a corporation is always like an instant no brainer. If the average, you know, Canadian, you know, income earners paying 30, 35, sometimes 40 or even 50% in taxes, you could buy an 88 cent dollar, you know, or buy a policy in a corporation with 88 cent dollars, with a tax free net death benefit coming out to shareholders.

Or you could buy it with 50 cent dollars personally. So this is like a massive difference. And then what it really comes down to is like how do we structure the different leveraging, right? So we’re doing the same things. We’re doing leverage. But how do we do it in a way that’s not only going to be tax efficient but also compliant.

Because now it comes down to the compliance aspect. And, you know, I’m happy that you shared some of the differences between a C Corp and an escort because, you know, John, Matt and myself have recently opened up a US entity. And for our Canadian friends, it’s a gong show what you’re a Canadian trying to open up D.

Jon Orr: Well, I think the way that we did it might be.

Kyle Pearce: Yeah, maybe the way we did it. But I will tell you this is that, you know, as a Canadian, we can’t have an S Corp and, you know, an LLC, for example, doesn’t it’s not recognized by the CRA here in Canada. Like there’s all kinds of nuances. So it’s great to hear you kind of explain at least the difference between the C Corp and the S Corp.

So it sounds like for you though, like it’s like this is where the OPP, the investment optimizer, it sounds like for the most part, your clients are going to be buying this policy, probably personally or in a trust, and then they’re going to be growing assets more on a personal level. Whereas on our end we sort of see things happening more so inside the corporation and using creative strategies on how you can grow wealth in the corporation, but then also use different strategies to leverage at a personal level.

Rod Zabriskie: Yeah. So I would say that’s true. And in addition to that, then when when you are going out and buying the piece of property or investing in the whatever, the real estate, a lot of that is done in a business structure. But again, because of the money flows and similar to what you said, there is a difference between active income versus passive income.

What can I deduct against passive income? Doesn’t necessarily mean I can deduct it against active income. There are ways you can create those thing, make those things happen. But but because of all of that, then owning the policy as an individual because, because I’m flowing money in, in and out of those LLC structures anyway, or I’m getting a loan and sometimes I can’t get the loan at the LLC where I own the business or the sorry, the piece of property I have to get the loan written either personally or through some other and, you know, entity that that then flows into the LLC.

So there’s all this money flowing in and out of the LLC. Anyway. And so for most people, it doesn’t create any difference just on the policy personally and flow it that way.

Jon Orr: Right, right. When we think of the investment optimizer and, and, you know, utilizing that, that leverage to or investments, the clients that you’re, you’re, you’re, you’re helping and consulting with and helping set up this like what where do you hearing, you know, like like I think our listeners always kind of lean in a little bit closer when you start to talk strategy on specific assets.

So it’s kind of like, wait, wait, like am I missing something here? Or like, how does that align with my strategy? This is the way I’m using things. So and like I think people kind of want to know like what? What is the guy next door doing as well. So it’s kind of like when you hear the guy next door or the, the guy down south, you know, what?

What choices do you hear most often when it’s like, I’m going to put this to use and I’m going to leverage and I’m going to go buy blank. Like, what asset class are you seeing most utilized with the investment optimizer?

Rod Zabriskie: Yeah, that one’s easy. And it’s real estate. And I would say that of when I’m, when I’m, you know, made privy to what what they’re investing in boy three quarters of the time or if not more. It’s, it’s real estate and.

And of that I would say, probably at least two thirds or more of those are investing in a syndication, some sort of pure, investment structure. And then the other would be personally owned, whether it be a rental property or whether it be, whatever a surgeon that owns the surgical center or the dentist that owns his practice or things like that got, So. Yeah. What?

Jon Orr: Like what? Hang like, what hang ups are you seeing? Like, are you how how much convincing. Because. Because a lot of times clients will come to us and say like I’m looking to in really they really looking to first and foremost save on how much tax they’re paying. It’s like, well, what structures can we do to utilize that.

And then usually that conversation steers to, you know, utilizing, you know, permanent, permanent life to use as a tool like the investment optimizer. So it’s kind of like sometimes it’s like soon as you start to talk about that, there’s that hang up of like, that’s not what I originally thought or I never really like. That’s a new idea for me.

I mean, I’m curious, like what what hangups people are having with going like, oh, I could use that tool, but I’m hesitant to use that to like, what are your most, you know, what are you hearing as the most common kind of pebbles or I guess not pebbles like barriers to kind of like utilizing this in a in a great way.

Rod Zabriskie: Yeah. I would say the number one barrier is just the cost. You know, you’re you’re setting up a life insurance policy and we’re, we’re doing it in a way where we want to minimize the cost. We want to get as much of that money going into the cash value that you can then be using, loan against it to go out and invest.

But the point, the fact is, is that there’s going to be right around maybe 75%, 70, 75% of the money you put in in that first year is going to land in your cash value, right? It gets better later, right? 85% in year to 95% in year three, etc.. But but especially the upfront cost is is the hardest thing for people.

Jon Orr: So you like mentally people are like I can’t borrow all of my money, even though later on it’s like it, you know, grossly outweighs, you know, that initial amount. It’s kind of like, hey, if I need all of it, like, is it, is it kind of like, why, why do I want to take the hit right away versus, you know, long term, why don’t I just dump it over here in the S&P.

Rod Zabriskie: Right. Yep. So I, I would say that’s because typically what we’re comparing it against because when we meet up with somebody and they’re out investing in the real estate or they’re a business owner, right. They have this money that’s flowing, but they’re flowing it through just a regular bank account, right. Savings account and money market account. That’s that’s their we call it the Opportunity fund.

That’s where they store that money until they’re ready to go out and invest with it. They invest it, create cash flow flow that back, bring it back to that opportunity fund, build it back up so they can go out and invest in something else. And so that’s that’s the inefficiency is of that. Long term compared with the upfront costs.

Take it on. I often kind of compare it to the startup cost of a business. Yeah, right. I’m willing to spend the money now because I’m, I’m looking to, to create large wealth later. Similar concept here. I’m, I’m willing to put to accept that cost now because long term I’m going to be in a much better place.

And people that catch that vision, they latch on to it because then what happens is they’re saying, okay, well, all of the money that I’m planning to put into my investments, it makes sense to put into my investment optimizer policy first. Right? Right. If the concept works for any dollars, then then the more of the money that I’m investing, I want to get into there, into the policy.

And then loan against it and make that value work for me as much as possible. And so, you know, depending on what that is, if it’s 50,000 a year or if it’s 500,000 a year that that they’re setting aside, whether it be from working income or from current investments, they’re kicking off some sort of return, whatever they’re capturing that we’re just going to build a policy around that.

So we’re going to optimize the policy for the numbers that they’re wanting to set aside. Right, right. Well, in flexibility, they’re not committing to again, that’s the $500,000 guy. He’s not saying, well, I’m committing to putting 500,000 a year into it. We’re going to create a structure where he can do roughly, you know, 100 to 500 a year or something like that, right?

Kyle Pearce: Yeah. That flexibility, I think, is so important when someone’s starting because they’re like, I’m not sure, you know, exactly what five years from now looks like. Right? So having that flexibility in the structure we find is really, really important for a lot of people. Unless we’re doing a very specific leveraging for income sort of structure, right, leveraging those corporate assets, things like that.

So yeah, yeah, sometimes it has to be a little bit more inflexible in that case. And in that case we have to make sure, hey, how consistent is that money coming into the corporation and so forth. And what does it look like in the future. But for investment 100% flexibility is key. And I, I think one of the biggest, you know, this is kind of almost answering John, your question to something we see a lot is people get stuck on the opportunity cost in that first year or second year.

But the question I usually ask people when I come back to them, as I said, is, would you put every dollar you have into whatever this other investment would be? Is it the S&P? Is it like, where are you putting this money? True. And you probably aren’t right like most.

Jon Orr: How much are you keeping back. Is that what you’re actually exactly.

Kyle Pearce: So like when people look at it it’s like sometimes they look at it and they think of it as like lost opportunity. But then you think to yourself, you’re like, but you weren’t going to put all of that money into the S&P, or you weren’t going to put all of the money you have into the next real estate deal.

You were likely going to keep some dry power, and if not, we’re going to encourage you to anyway. You know, like that’s a better.

Rod Zabriskie: Move thinking about that now.

Kyle Pearce: Right. So what what I find and I’m sure you guys see it a lot too, when you talk about the Opportunity fund. Right. And you think about creating that bucket, we like to get people thinking along this line and go, listen, why not start at small, start this opportunity fund and maybe consider it more like your emergency fund for the time being, get yourself started so that you understand how it works and you know how it feels, right?

Because like, you know, emotions take over. And then over time, as that grows, you’re going to notice that you’re already past the, you know, that opportunity, you know, fund or that not the opportunity cost section here with the start up cost of this sort of business. And, you know, that brings me to a question I’m curious about for you guys.

And, you know, I’m sure you guys are well aware of infinite banking and, you know, all all of the, the, work that’s out there specifically around Nelson Nash, and I feel like I don’t hear you guys talking about it a lot, and it makes me think that we probably have a similar mindset on things is that there’s a lot of really good things going on there.

But what we want to use that tool and that idea for is more around asset accumulation, wealth building. Like, tell us where are you at? On the whole, infinite banking approach, especially when it comes to someone who’s kind of like has this goal of building, you know, their own bank and trying to almost like get rid of all the banks in their lives.

Like, do you guys have a stance on that? Like, what does that look like and sound like? And, I’m just curious if if we’re on kind of a similar wavelength on that.

Rod Zabriskie: You know, it sounds like here’s initially we, we basically affiliated ourselves with Infinite Banking, like, hey, you know, this is infinite banking. We’re we’re doing this with it. The further we came down that path, the more we realized there are pitfalls there that you fall into. If you’re thinking of it in terms of infinite banking. And I’ll give you an example.

I don’t know how how this works in Canada, but there are kind of two camps. When you when you start a whole life policy, you have either, direct recognition policy or a non direct recognition and all that means is I have my cash value, have 100,000 of my cash value. I take a loan to say take $60,000 loan, go out and invest out the interest that I’m earning on the cash value is dependent on whether it’s direct versus non direct.

If I’m if it’s direct recognition, then the $60,000 I have sitting in the cash value that’s acting as collateral for that loan I just took, is earning an interest rate that is directly linked to the interest rate that I’m paying on the loan. Okay, so I’m paying 6% right now. Then they might be crediting me 6%. Or if there’s a delta, then if I’m paying 6%, they might pay me five and a half or something like that.

Right. But as linked as that interest rate changes on the loan, so does the interest rate that I’m earning on that portion of the cash value that’s collateralize in the loan okay. That’s direct recognition non direct recognition says my cash value grows the exact same way no matter what, whether I take a loan against it or not. It’s earning the guaranteed interest in the dividend.

Same ways as before. Right. So in the infinite banking world they say because our goal is to create an interest rate arbitrage. In other words, I always want to be creating more growth in my cash value than the interest that I’m paying on my loan. Then they say always without question, use non direct presenting it as if I will always create that interest rate arbitrage by using Andre.

And the challenges. That’s turned out not to be true recently. Right. So that’s one problem with that is it was a it was a false kind of premise to begin with. But then secondly, kind of getting back to what you said, instead of instead of just putting money into a policy and taking a loan for the sake of taking a loan.

So I can try to create this interest rate arbitrage. We’re talking about putting money into a policy and using a loan to go out and create value somewhere. And if I’m using that money to go create value somewhere, that’s a completely different proposition, because I’m not as worried about the interest rate arbitrage in even in that situation, like like I described, if I’m in a direct policy, direct recognition and I’m paying six, but I’m earning five and a half, you might say, well, man, you’re you’re underwater on that, right?

You’re earning less than what you’re paying. And that’s true in the first year. But when I make that payment I’m paying simple interest on the loan side, but I’m earning compound interest on the cash value side. So over time, just pure dollars and cents. I’m earning a lot more in the compounding side, but that doesn’t work unless I’m creating value with that money, right?

If I’m just counting on that interest rate arbitrage. And that’s an example of one of just these kind of rabbit holes that the infinite banking gets, gets into and, and it creates problems because going back to this whole direct versus non direct situation, I can’t get as strong of a policy on the non direct side. Those those companies just aren’t offering the same amount of growth the same IRR on my cash value as I can get with the direct companies right now.

That’s the case right now. That may change in the future. But our whole stance is, hey, let’s get the best growth policy available. We don’t care whether it’s director non direct. It matters to you what you’re able to generate the the return that you’re able to create the cash value that that translates from your dollars you put in into money available to go out and invest.

That matters much more than some of these little things that the banking world gets caught up in. So long story short, we have separated a created separation between us and the infinite banking world. We actually did on a podcast. We did, a podcast on, you know, why we hate Infinite Banking and, you know, so we’ve we’ve just we’ve just owned what it is.

What are we doing? Well, we’re not doing infinite banking. We’re not saying use it for everything. Right? We’re not we’re not saying, go on your vacations and, you know, buy your cars and do all this kind of stuff. And again, I’m not saying you can’t do those things. I personally, I’ve done it right. I bought a car because it was all about a comparison thing. I can go to the bank and like.

Jon Orr: Make the best.

Rod Zabriskie: Decision, right? Yeah, yeah. So do it. Or like, I’ve had situations where the tax bill was bigger than I thought it was going to be. So using a loan against my car that to your point or to your Kyle, that was my emergency fund right. Yep. Yeah. I keep that money in the bank in order to keep it in a place where it’s earning the 5%. Right.

Kyle Pearce: So 100%.

Rod Zabriskie: Anyway, I know I’m kind of going deep.

Kyle Pearce: Oh, you know what?

Rod Zabriskie: I think that that’s all comes back to your question.

Kyle Pearce: Yeah. No, I think I think we’re in line, with very similar things here because we feel the same now. Non direct and direct are not as big an issue here in Canada. Most companies vast majority all you’re you’re taking a loan against your policy. It doesn’t affect growth or anything. So we don’t have that same challenge. But we do have some of the other challenges that you run into, which is, you know, some like I was speaking with someone this as well before I began my journey, who said this?

When you when you get a policy and you do infinite banking, you should be always borrowing against your policy because you’re going to be paying yourself back the interest. And I’m like, it’s such a small amount of the dividends that are being paid back to policies that it was like it was really just not true. It was just, you know, not it was false.

And, you know, there’s there’s so many things kind of floating around. And our big piece here is, listen, you’re going to do it for that emergency fund creating an opportunity bucket. And then to build wealth and essentially create more of a tax problem and offset that tax problem at the same time. Right. So you just kind of like taking one to buy more, create more tax problem and then continue to solve the tax problem.

And then for our business owners, again, it’s it’s essentially a no brainer because you’re taking those retained earnings that you’d normally chop by 40% on the way out. You’re building the assets, building the growth. And then we have some structures and tools that we can put in place so that you don’t necessarily have to take personal income and lose that 40% on the way out.

So yeah, really it’s not infinite banking, but it’s like there’s so many fat like features there that I always like to, you know, pay pay respect to Nelson Nash for kind of like what he came up with. But at some of the other things that have sort of evolved over time that we we try to keep our, our distance from as well.

John, I can’t remember the episode name, but we released one recently. Like it was like, you know, the the untrue facts of, you know, in, you know, infinite banking or something like that. I feel like we’re better with the title than, than that. But yeah, I don’t think that’s it, I think so I know that Christian’s not here, but, you know, I appreciate you helping us to get some ideas around what’s going on in the U.S, what’s going on in Canada, because something we hear a lot is people saying like, does it work in Canada?

Like, I see it works in the US and so forth, or that permanent insurance is helpful here it is. It is helpful there. And what I’m hearing from you, and I’m hoping our audience can sort of understand both our U.S friends and our Canadian friends, is that permanent insurance is a really complex tool, but it’s an amazing tool to help you deal with different situations.

So what I’m hearing from the US side, so you have this opportunity to kind of not only mitigate some taxes with pretty safe growth in that policy, but then the real goal is that leverage ability to continue doing that, you know, sort of arbitrage here on the Canadian side, if you have a business or an a corporation, by putting a policy and having it owned in the corporation, you’re getting the same policy using less tax dollars, and you’re giving it an exit both while you’re alive and when you move on to come out of that structure.

So it sounds like in the US, getting it out of the structure upfront isn’t as big of an issue, but then you still have tax issues you need to deal with then. And whereas in Canada, it sounds like, you know what, let’s leave more money in that corporate structure. Let’s get these policies funded. Let’s grow wealth within your corporate structure.

And let’s make sure that we have now the tool in place that we can mitigate taxes moving forward. Am I missing anything on the US side where you’d say, you know, there’s this special case where I really think people should be thinking about permanent insurance outside of maybe some of the ideas that we shared here today.

Rod Zabriskie: But I think it’s you pretty much summed it up. The one thing that I think is really helpful, I think the people that this, this concept speaks to are the people who are already thinking about on the tax side. And on the one hand, you might say, well, who’s not right yet paying any taxes? People, everybody’s thinking about it. But but if they’re already.

Kyle Pearce: If they really have a tax problem, I always say, do you really have a tax problem or you just don’t like any taxes? Yeah, because there’s real problems. And then there’s like, it’s annoying problems on the task.

Rod Zabriskie: But if that’s driven them to where they’re looking for real tax solutions, and therefore that’s one of the reasons why real estate is a big piece on that side is because of the tax benefits that you can create by that. Right. And often so sometimes we get ourselves, you know, kind of talking in circles a little bit because we’ll talk about the tax benefits on the policy.

And it works like this I’m putting after tax money into the policy. It grows tax deferred, meaning I don’t get a 1099 at the end of each year, right, to to pay the tax on the growth. And then when I’m using that money, I’m able to take it out tax free to use it because I’m using it as loans.

They don’t don’t tax the loan. And then when I die, death benefit pays out income tax free. If there’s any loan outstanding it gets paid off from that income tax free dollars. So essentially I’ve put money in after tax and everything else came out tax free. Now the the pickle we get ourselves into sometimes as people hear that and they say, oh great.

So that means I have to have paid the tax on it before I put the money in. Right? Because that’s what I just said. Right? Well, in reality, what’s happening is they’re taking those after tax dollars, they’re putting it in the policy. They take a loan against it, they go out and create tax benefits by investing it in real estate or in their business or in these other things.

And so when you look at it over the tax year, then they actually even though it was again quote unquote after tax dollars, they created a huge tax benefit on it by what they invested in and created that tax savings. By, by doing that. And so again I think the main thing I again I think I’m just repeating some of the things you said, but, but the thing I want to latch on to is that the tax benefits that exist in the alternative investment space, right.

The non Wall Street space, basically puts it so that we’re speaking their language. Right. We’re speaking the same language when we talk about what the investment optimizer does. So when someone plugs into it they are understanding and accepting okay, I have these upfront costs. I have to understand that. But long term there’s a lot of benefit in it, and a lot of that benefit comes through the tax part of it because I’m already creating tax benefits anyway with the investments I’m doing.

And not only am I creating additional layer of of return on my investments by having what the growth in the policy, but I’m also creating an additional layer of tax benefit.

Jon Orr: Yeah. And I think it’s just another example of like the way I sometimes think about it is you just I think saying saying in articulating specifically like how how you get the tax benefit, but also you have this, you know, this other tax benefit that you’re planning for in the future. It’s it’s like the the thing that I think drew, Kyle and I to this tool as a really important wealth creator is like you’re getting multi use out of the same dollar in a in a way.

Right. So it’s kind of like that’s that’s one of the you know one of my big takeaways from the tool itself. And I think you’ve kind of shared how that happens in you know in the States versus, you know, in terms of real estate, maybe some of not all of those tax benefits on real estate, you know, exist here in our country.

But but I mean, like still that benefit of like two uses multi-use for the same dollar is is the huge kind of upside to that upfront cost that you might, you might think about in terms of, you know, creating almost like a business that kind of utilizes this tool, rod every, every guest, we ask the same question at the end, which is like what we say is like, what is your wealth building secret sauce?

So that is kind of like thinking about like, your tip, your the or the big idea. You want to leave with the listener or something. That’s really a created value in your world, in your maybe it’s your personal world. Maybe it’s your business world. Like, like we’ve been talking about the Wealth Optimizer here is probably is is a great, you know, secret sauce move.

But I mean, what other secret sauce move specifically do you want to leave with, you know, the listener here today?

Rod Zabriskie: Yeah. So I in the beginning, I mentioned there are two kind of core concepts. We have some awesome optimizers. One of those, the other one is what we call the capital avalanche. And and I don’t know if this is premium finance a thing in Canada.

Kyle Pearce: It is, it is I mean, we do it in a slightly, different way, but usually leveraging after the premium is put in and then re leveraging right away. Yeah for sure.

Rod Zabriskie: Yeah. And and that’s really the differentiator on, on our side between the capital avalanche. Because there are a lot of folks out there who are saying oh yeah from day one we’re going to start, we’re going to take loans to pay your premiums. Right. And in our case, we’re we’re saying, no, let’s as an individual, I’m going to put in the initial contribution, create this cash value of this asset, and then set up a line of credit against that and use the line of credit tip, then pay future premiums continue to build this asset.

But now by the end, the majority of it has been done using the leverage and someone I said, well, why would you do that? And the answer is the same as the reason we use leverage when we’re buying real estate or investing in a business or other things like that. It’s because I can create more value on the back end.

In this case, it’s in terms of tax free income and retirement and or death benefit for estate planning purposes. I just have a lot more coming out on at the end than I would have if I didn’t use the leverage. Right?

Kyle Pearce: Right. I was just on a call before we recorded this one with a client who has a property, a multifamily property, inside of a holding company and passive income inside a holding company is taxed at about 50%, which is high, like a lot. So, yeah, we are implementing a very similar strategy, except this is going to be money in the first couple of years.

The passive income is going to actually fund the policy. And we’re going to immediately leverage it though, so that he can then put it into whatever other investments he wants. And the reason we’re going to do this is to create the actual expense on the interest that he’s using to leverage in order to bring that passive income down.

So while it doesn’t address his passive income issue like in year one, it’s like every year it eats away at more and more. And then we also get to write off the cost of insurance and it just continues to grow, continues to grow, continues to grow. So again, he’s kind of getting we like to call it almost like a free insurance policy, but he’s also hacking away at this passive income issue that he has inside the corporation, which again, very different situation than what you’d run into in the U.S if, properties in an LLC or something along those lines.

But yeah, there’s so many creative ways that we can use this asset, which is such a strong asset class that banks are essentially lining up to lend on it. Right? Like they’re looking at it going, oh, it’s like you have an appraisal by the minute. You know how much this thing is worth. And we know fairly clearly where this thing’s going to go and they’re ready to to lend on it.

So there’s so many creative strategies and I’m going to share that is our secret sauce here, John, on on our behalf for our Canadian friends. So, you know, getting that policy inside the corporation, we can deal with the active income tax. We can also deal with the passive income tax in different ways. And really what it comes down to is having a chat.

So if you’re on the US side of the border talking with, you know, Rod and Christian and making sure that they’re there to help you figure out what makes most sense for you. And then, of course, if you’re on the Canadian side of the border, hey, let’s have a chat. We’ll try to figure out what would be the most reasonable, beneficial, and essentially tax efficient strategies that we might be able to employ with you.

Again, always from an education first perspective, which I know you guys are big on there, at money. I was going to call you wealth secrets. But my insights, in the US as well. So, rod, it’s been awesome to have you on the show. Send Christian our best. It’s too bad that he’s not feeling so hot.

And it happens to be his anniversary. You’re telling me so he’s got, you know, two things he’s missing. What I want you to ask him on our behalf is, was he more upset to miss the dinner tonight or this episode recording? I want you to remember.

Rod Zabriskie: It’s a tough one.

Jon Orr: Okay.

Kyle Pearce: Like, he’s not going to publicly announce it. You know, unless. Unless it was the dinner, so. That’s right. That’s right.

Jon Orr: Thanks a lot, rod.

Rod Zabriskie: Thank you.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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