Episode 158: When to Fund the RRSP Over Using the Smith Maneuver – A Blueprint for Canadian Business Owners

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Are you a Canadian business owner wondering whether to keep investing through your corporation, maximize your RRSP, or leverage the Smith Maneuver — and how each choice could impact your long-term wealth?

Optimizing how you move money between your corporation and personal hands isn’t just about saving tax today — it’s about setting up the right structures to grow your wealth tomorrow. If you’ve been wrestling with whether to scrap corporate RRSP contributions, pay yourself a bigger salary, or dive deeper into leveraging debt for investments, this episode cuts through the confusion. You’ll discover why the “obvious” move isn’t always the optimal one and how small shifts in strategy can create massive future flexibility.

In this episode, you’ll learn:

• Why taking extra salary to fund a Smith Maneuver could cost more in taxes than it saves.
• How blending corporate retained earnings with personal investments creates powerful, diversified wealth “buckets.”
• The hidden advantage of keeping flexibility with RRSP room for unexpected future tax planning opportunities.

Hit play now to get clear on how to optimize your financial strategy and make smarter moves for your personal and corporate wealth growth!

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!
• Discover which phase of wealth creation you are in. Take our quick assessment and you’ll receive a custom wealth-building pathway that matches your phase and learn our CRA compliant tax optimized strategies. Take that assessment here.
• 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 cordporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

Are you taking full advantage of your corporate and personal wealth-building strategies? In this episode, we dive deep into whether business owners should prioritize funding their RRSP or using the Smith Maneuver to maximize tax efficiency, grow retained earnings, and create long-term financial flexibility. Learn how to optimize your financial structure, protect corporate assets, and leverage smart salary planning to minimize taxes and build wealth faster. Whether you’re focused on asset accumulation, retirement planning, or optimizing your investment buckets for financial independence, this blueprint is essential for Canadian entrepreneurs and incorporated professionals. Hit play and design a smarter, more resilient financial future.

Transcript:

Jon Orr: Hey there, Canadian Well Secrets seekers. Welcome to another Friday Secret Sauce episode. And today we have another question from, you know, one of the clients that we meet with on a regular basis when we’re trying to, you know, this business owner, this entrepreneur is navigating the complex world of optimizing their financial strategy when they pay themselves. And when you think about, say, some of the optimization structures that we want to think about,

This is an important aspect to consider because optimizing for structure, for tax purposes, for optimization, for building your wealth is an essential component of any healthy financial system. And here’s the question from, say, this business owner. And this business owner pays themselves basically as an employee, so they issue themselves a T4.

They currently have an RSP match program. he’s sending some money down through his T4, but then at the corporate level is matching that RSP contribution. Now his question is, if I’m trying to optimize for building my buckets and should I scrap my, like, is it better to like do what I’m doing?

Or is it better to say, you know what, I could scrap my corporate contribution of the RRSP to me specifically, not necessarily my other employees, but to me specifically. So instead of matching that RRSP, just pay myself more salary. And then once that extra, say income is in my bucket, my personal bucket, I could put it on the RRSP then, or

is it better to do the Smith maneuver? Because he’s heard us talk about the Smith maneuver as a great plan for say, building those personal buckets up in terms of optimization. So there’s a complex kind of understanding here from this Canadian business owner, but also trying to figure out what is the best move. And this is, think you got to agree to this Cal, is that

this is one of those cases, it’s like I’m hearing about different moves. I’m hearing about things I’m hearing about structures and like, which one is the best for me, which is really about the optimization stage of a financial plan is like you have to know about these things to figure out what is the best move for you. But also, I think and then what we’ll talk about here today is, isn’t some moves aren’t always the best for you. And that’s why he was reaching out is he was actually asking for some guidance around this so that he can structure the optimization of his plan. So

What do we think? RSP passed down personally? Should we stick it back in, you know, this extra salary, should we stick it in RSP or should we move it over to the Smith maneuver?

Kyle Pearce: Yeah, you know what, there’s this is really interesting. Recently, we had an episode where we talked about, you know, a scenario where the Smith maneuver likely doesn’t make a ton of sense. And that is when we take extra money at a personal level as a business owner in order to intentionally use the Smith maneuver. So I’m like taking this extra ten thousand dollars or whatever it is, paying a large amount of tax on it likely in order to put it on my mortgage and then save a little bit on

the tax on the tax deductible interest that I’ve created, right? So, you know, that flow, okay, of that 10,000 coming out, let’s say, you know, you’re paying 40 % on that 10,000 that you’re gonna be utilizing here, you’re left with six, I take 6,000, I put it on the mortgage, yay, that’s a win, but I already lost four. And then you basically have now the opportunity to pull 6,000 on that home equity line of credit.

which is really a small amount of interest, which is therefore a small amount of tax savings. So right at the onset, if we’re taking extra money out of the corporation in order to do the Smith maneuver, I’m gonna say I’m not a huge fan of it, right? Because we’re paying a lot of money upfront on tax in order to start the Smith maneuver process. Now, someone like that may use the Smith maneuver more in a, what we’ll call like a natural form, which is,

you have a re-advanceable line of credit and that line of credit is growing its balance, its available balance, just by making regular mortgage payments, right? Some goes to interest every month in your mortgage payment and some goes to principal. So you could still do the Smith maneuver by simply borrowing the principal that you are naturally paying down.

So it’s not like Smith maneuver is not a good move for business owners. It’s just, wouldn’t recommend taking more money out, getting taxed hard on it in order to make that happen. In this case, what this business owner is already doing is they’re taking money out of the corporation to put it into the RRSP. So what ends up happening is the corporation’s not taxed at the corporate level, because it’s coming out through a salary. The

person, the T4 individual, this is the business owner is taking that chunk of money, putting it on the RSP. So now they are getting a tax deduction or they’re going to get some tax refund back at the end of the year because we are not going to pay any tax on the money we put into an RSP. So that part there, I like better.

However, what we do need to consider, and some of you, your ears may have perked up that they have a match program, like business owners out there might be like, ooh, maybe I should be doing that. Like that must be like a ninja move, right? Like if I do a match program, it’s like, I’m only gonna pay half of the money into my RSP and my company can pay the other half. Well, the reality is, is you’re sort of at the same spot anyway, right? The company’s gonna write off whatever amount they pay you to T4 or,

whatever they’re putting into this match program. at the end of the day, it doesn’t really matter whether you’re doing this match or not. Now, the nuance here that I want people to think about is whether moving money from the corporation to the R.S.P. is in their best interest. Now, at the onset, the unknown piece of information that we don’t have so far in this episode is how much leftover money

Jon Orr: Right, it’s the same right after them.

Kyle Pearce: what we call retained earnings are left in the company after doing so. So in this case, this person is taking about $30,000 each year and they’re putting it into the RSP. Now, some of you right away might say, I don’t like that because I’m taking it from one jail and I’m putting it in another. And I’m like, at the onset, I’m not a huge fan of it unless you have a very intentional reason for doing so. I would rather grow my assets inside the corporation. However,

with this specific client, they have about 150 to $250,000 of retained earnings each year. So let’s say it’s $200,000 after paying themselves and paying into this RSP. So what I’m gonna say is I actually like it as a diversification play of buckets, not necessarily of assets, but the fact, so that $30,000 ish dollars

Jon Orr: Hmm. Tell me more. Tell me more.

Kyle Pearce: whether they keep that 30,000 in the corporation or whether they take it out is not a huge amount comparative to the other 200,000 that’s sitting there. Right? So we’re looking at what 15 % of of that total amount that we’re taking out. We’re taking a very small chunk out in order to diversify where my assets are. And anyone who’s been on a discovery call with us will know that we’re huge fans of having

assets on both sides of what we call the corporate border. Okay, so a lot of people call and they you know, they say I want to move my primary or sorry, my my investment property that I own personally, into my corporation, like everyone’s eager to get things into a corporation. And I’m usually like assuming that liability is not an issue or concern for them. From a from an actual investment and taxation standpoint.

I’m actually more in favor of having a little bit of those assets outside and we keep a major amount inside the corporation. And basically wherever that money is earned, I typically like to see my investments happening where it was originated. So if I earn the money as a corporation, as an operating company where I’m paying a low interest or a low tax rate for the first $500,000 and a higher tax rate after I want to be

trying to keep that money in there and growing as best as possible. However, in this case, maximizing the RRSP is such a small portion of those retained earnings that I’m actually not, you know, I’m not pushing back against it because I think having that extra bucket is just, again, giving them more options as they move forward. And let’s be honest, 10 years from now, John, do you know what CRA changes are gonna be made or what type of tax changes are gonna be made? I don’t.

And therefore I don’t want to necessarily just go all in or be all out on anyone’s strategy, especially when I don’t actually think that 30,000 for this particular business owner is going to make a big difference, regardless of which side of the coin or the border that he puts those funds.

.

Jon Orr: So what I’m hearing is that he’s already, say, doing the match program. That amount is not a significant portion of his retained earnings. Let’s talk about that part in a sec. But let’s clear up the idea of that RRSP match program. So in a way, you’re saying it doesn’t really matter whether the company’s not going to gain an advantage by matching it or

or paying him more salary and not matching it and then him taking that that salary and then then personally contributing it to the RSP at that level. There’s no there’s no benefit there one way or the other is what I think I hearing you’re saying.

Kyle Pearce: Right, and let’s be clear, it’s because he owns the company, right? Like if you’re working as a T4 employee for someone else’s company, free money, all in, exactly, up to the match, you wanna definitely be doing that. But in this case,

Jon Orr: Right, right, yeah, yeah. for sure, you’re getting free money. It’s part of your benefits package, right? So that makes sense. But the caveat, right, you’re here is to say like, and I think this is where people I think think this way too, is that you wanna, or maybe they wanna transfer, like how do I get all my money out of my corporation, into my personal hands? And if all of a sudden,

let’s say the 30,000 or the $36,000 that was going into the RSP to match was all of your retained earnings or a good chunk of it, then you’re saying, well, I would then keep it in say the corporate level unless you really needed it on the personal side to like, but if you’re matching, you’re probably not really needing it. You’re putting it away for the future anyway. So tell me the reason of keeping it there then.

Kyle Pearce: Yeah, well, let’s put it this way. Like one negative, major negative, we talked about this before with the RSP. I love the fact that it can grow tax free. And it’s actually not going to grow tax free forever. You will get to a point, age 71, where you’re going to have to start taking it out once it’s converted to a riff. You will have to start taking it out. One major negative that happens is that where we have in an unregistered account or in a corporate account where

50 % of the capital gains are taxed and the other 50 % are not. That means like half of the upside on your investment inside this corporation, if you’re doing growth type investing, okay, not interest investing, not dividend investing, but growth type investing, 50 % of it is gonna be tax free, which is really awesome. Now,

If you’re buying and holding, a lot of people are just gonna buy and hold. You know, we talk a lot about risk management here. So that’s, you know, gonna obviously alter things a little bit. If you ever follow the risk management process that we try to follow ourselves, if you’re buying and holding, you’re not paying any tax on that growth either inside your corporation or inside an unregistered account. It’s only when you sell a portion or all of the assets that you have.

where that actual capital gain is going to be realized. They call it crystallizing the capital gain. And when that happens, you get taxed on half of it, which is kind of like thinking you’re getting taxed at half your income tax rate, if you really think about it. Whereas in an RRSP, you get all of that growth tax free, just like you do in an unregistered account until you sell. But the difference is when I pull money out of the RRSP, I get to pay tax on 100 % of it.

So there is a very important nuance here when we’re comparing an RSP with a business owner who is able to control how much money they’re taking out of the corporation by setting their own salary, for example, or dividends. Salaries will open up that RSP room and dividends will not. So if they’re pulling money out and the only intent is to go into the RSP and it’s all of the money out of their court, meaning there’s no more retained earnings,

I might want them to maybe reconsider. Maybe they do half into the RSP, the other half stays in retained earnings. In this case, it’s such a small percentage that I actually, I’m okay with the idea because it’s nice to see different buckets in different places that they can utilize different strategies with. So that part is really key. The one nuance here in this particular case is that I am also a fan though of keeping some RRSP room open.

for what we call those opportunities or those scenarios where you can’t really control your income. For example, if you are holding a personal rental property and you do sell that personal rental property, that year is going to be a big tax year for you, whether you like it or not, unless you consider maybe seller financing and, know, drain and spreading it out over five years or some of the other tricks of the trade that we’re gonna get into on some future episodes.

The reality is I like knowing that there’s this like bucket available to me when I’m getting more money than I actually anticipated and I couldn’t really control. And in this case, if we’re maxing it out every single year, we’re not going to have that opportunity. Again, don’t see it as a major concern for this business owner, but I do see this as a scenario where sometimes strategies get us thinking in the wrong places and almost distracted. So

the Smith maneuver, if he wants to do that on the available equity on his home equity line of credit, I say go for it. I wouldn’t put any additional money onto the mortgage. I would just take whatever’s there and you can do that routinely, monthly, quarterly, yearly, whatever you wanna do with that. Still a great move, but you know what’s a bigger or a greater move is what they do with the retained earnings, right? If I’m releasing $20,000 of

equity in my home equity line of credit a year, I can take 20 grand, invest it right off the interest on 20 grand. Great. It’s a benefit. It’s worth doing, but there’s a lot of work to do in order to get that really small benefit, especially at the beginning. Whereas over inside that corporation, he’s got 150 to $250,000 per year that’s there and getting a plan for those retained earnings is really important. And for a lot of business owners,

It means a diversification play between long-term assets, i.e. equities, real estate, something along those lines. But then also, what percentage do I want to keep in more liquid assets? Assets that are not volatile. So for some, it’s cash equivalents, it’s money market. For us, it’s high early cash value permanent life insurance. And for a lot of business owners, when they actually look at it in their corporate accounts,

They recognize that usually the split is somewhere between 40 and 50 % cash or cash equivalents or fixed income and 50 to 60 % equities. And that’s not a bad thing because you have a business to run and you need to make sure that that cashflow is there and available for you at all times. So the question is where are you putting it and how are you going to manage that moving forward? And I would say that’s going to be the big play for this particular client.

Jon Orr: Right, right. And that’s one of the moves that he’s exploring as we speak. Now, with the other part that I find that, you know, that that tool, so the high cash value life insurance at the corporate level does is actually satisfies one of the other components of, you know, the wealth planning system for business owners, which is creating that opportunity or that wealth, we call it the wealth reservoir, which is

which is allowing you to keep that 40 % or whatever that percentage app happens to be so that you do have access to liquid funds, but also grow those funds at the same time. And having you say that reservoir at the corporate level allows you to invest in your business or all of a sudden solve a problem that you need to solve. it’s in a way your corporate emergency fund, but why we like that tool for the wealth reservoir

at the corporate level is it’s your emergency fund, but it’s growing at the same time, which means there’s two uses for the same dollar. I think that’s, in our opinion, the one essential component of any healthy financial system for business owners.

Kyle Pearce: Yeah. you know, the part that I think is really important to note as well as when we think about, you know, we’re talking about the R.S.P. and thinking about how do we get the money out and what happens when we take the money out? OK, we’re fully taxed at that time. Again, not saying don’t do an R.S.P. John, you and I actually just started slowly funding our R.S.P.s, right? We are we had some big gaps again, you know, back. You used to have a pension going on there and no longer do anymore. So.

We do take a very small amount of the, we’ll call it net operating income of our business. And we do contribute to our RSP because we have a significant amount of retained earnings left over. So we do a little bit of this diversification play ourselves. However, when we look inside the corporation, we have to think about how is this money going to come out down the road?

Now for someone who’s like, I’m gonna put everything into equities 100%. I’ve never met a business owner that takes 100 % of retained earnings every year and puts it into 100 % equities or all into real estate or all into any other of the assets that are volatile or illiquid. So again, it’s more of a 50-50 split. And many times the 50 % cash is literally sitting in cash. Sometimes it’s short term or high year old savings accounts.

and they’re giving away half of the upside to passive income taxes anyway. GICs, one year, two year, three year, they’re giving away half to passive income. What I like about the diversification play of going portion of your portfolio, we’re gonna call it 50 % today, 50 % is gonna go into equities. This money though, you can’t do 50 % if you think you need that money in the next two, three, four, even five years. You want it to be 10 years or longer and the longer the better.

So that 50%, you have to be thinking like, I’m not touching that money. It’s going into equities and it’s gonna go do its thing. Most people would say, wouldn’t it be better to have equities than a permanent life insurance policy? And the answer is 100 % yes, if the money’s sitting there for 20 plus years and is there to grow, that’s gonna be great. But for that other bucket, having it in permanent insurance gives you some benefits, because down the road, two things are gonna happen. One is with equities.

Over time, I can slowly sell some of the equities inside my corporation, and I’m going to get a capital gain, sorry, a capital dividend account credit. Half of my upside will get credited to the capital dividend account. So if I sell $100,000 and it was a capital gain, $100,000 of growth, I get $50,000 that gets to come out as a tax-free dividend to shareholders.

amazing for down the road, right? On the other hand, I have the leverage opportunity against my policy, I could be leveraging inside the corporation, we could look and explore other leverage opportunities at a personal level. And down the road, the death benefit is going to pay out to the corporation. And it’s going to give a massive capital capital dividend account credit, which will get a ton of money out of the corporation tax free through the very same

account structure that your growth assets are going to be helping you with. So now we talked about diversification of buckets. The same can be true in the shorter term. We have our cash flow play so that I have my business emergency fund or growth fund or scaling fund or the just in case fund as it grows over time. I have the opportunity to leverage.

into more growth assets if I want that could be real estate or it could be into the markets if that’s the play you want to make whatever it is you want to do with that extra capital and then eventually we’re going to have two options for some money to come out only half of the money on the capital gain assets are going to be able to come out in a tax efficient manner pretty much all I say pretty much the net death benefit will come out tax free through the capital dividend account down the road

And this gives us such an opportunity as business owners to be able to not only grow growth assets, but also be growing our safety assets at the very same time. And of course, your 50-50 split could shift over time. Some people will eventually go 60-40 on the equity fixed income split. And maybe you’ll work your way up to 80-20. What we see happening most often is the opposite.

right, is that people over time actually want more risk off, especially once they’ve hit their financial goal that they are after. When you hit that goal, you get to a place where you can finally make the choice to say, I actually don’t need 10 % returns. What I want is less volatility, right? And over time, that shift typically happens and having those tools set up in that way is gonna set you up so that you can get there sooner and more confident.

Jon Orr: In this episode or this secret sauce episode, we were answering this question from a fellow Canadian business owner, entrepreneur and investor. you know, we talked about this really optimizing the structures of our financial planning system, which is one of the components of a healthy financial planning system is optimizing the structures and protecting your assets. And specifically, we were looking at, you know,

passing that money from the corporate level into the personal hands, maybe through RRSP, maybe not through RRSP’s and trying to optimize those structures. we helped say maybe navigate it specifically around that question, but then zooming out bigger questions around what are we doing with our retained earnings and what are we doing to make sure we optimize those corporate buckets and personal buckets, which is the bigger issue around that optimization structure for your financial system.

So if you’re looking to say, have someone take a peek at your financial system currently, reach out to us over at CanadianWellSecrets.com forward slash discovery. That’s CanadianWellSecrets.com forward slash discovery.

Kyle Pearce: And just as a reminder, my friends, this is not investment advice. This is for entertainment and education purposes only. So you should not construe any such information or other material as legal tax investment, financial accounting, or other advice. And I am Kyle Pierce and I’m licensed life and accident and sickness insurance agent and the VP of corporate wealth management with corporate advisors.

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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