Episode 172: Is Your Retirement Plan Tax-Inefficient? Mistakes Even Smart Canadian Business Owners Make | A Case Study

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Are you missing out on a hidden tax-free opportunity inside your corporation?

If you’ve sold a Canadian business or a corporate-held property and now face the question of where to grow your money — inside your corp or in your personal name — this episode is essential listening. Many Canadian incorporated professionals overlook critical tax planning tools that could massively boost their personal wealth and estate efficiency.

In this episode, you’ll discover:

• How to use the Capital Dividend Account (CDA) to move money out of your corp tax-free — and when it’s the smartest move.
• Why holding low-yield investments like T-bills inside your corporation could be costing you more than you think.
• How permanent life insurance — even on your children — can become a powerful estate and tax optimization tool.

Hit play now to learn how to turn overlooked tax strategies into serious long-term wealth advantages.

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.

For Canadian entrepreneurs focused on financial freedom and long-term wealth building, understanding how to integrate personal and corporate finance is essential. Leveraging tools like the capital dividend account and strategies such as salary vs dividends Canada, capital gains planning, and corporate structure optimization can significantly boost tax efficiency and retirement planning outcomes. Through a well-structured corporate wealth blueprint, young entrepreneurs and seasoned business owners alike can align financial systems with investment strategies, using personal financial buckets and RRSP optimization to build and protect assets. Canadian wealth secrets lie in mastering the nuances of incorporation, real estate, and small business financial planning—especially when scaling businesses or planning legacy transfers. With the right financial strategies, including Smith Maneuver Canada and corporate investment strategies, entrepreneurs can unlock business owner tax savings and achieve wealth optimization across both personal and business domains.

Transcript:

Kyle Pearce: All right there, Canadian wealth secret seekers. Today we are going to be digging into a case study that’s based on a call I had with a wonderful couple. They are from Ontario here, Greater Toronto area, as many people are when they do call in. And we want to go down the rabbit hole here because there were some things that they were doing really well. And there were some things that they can tighten up for.

more tax efficiency and essentially to keep more cashflow in their pocket as well as to pass along to their estate and their legacy. So let’s not waste any time. We’re gonna dig in and chat about Vijay and Kirthi.

Jon Orr: Yeah, let’s dig in here because they have some specific and unique properties that I think you listening right now also would have. They’ve built up, a successful business. They incorporated that business. now they’re looking to go, I’ve got a significant amount of retained earnings in the business. How do I get that out? I want that now to come into our personal.

personal side, or maybe I should be growing it inside the business. And they’re trying to decide on those types of questions. Now, specifically that is unique to them. They’ve sold their business, and they’ve sold this, you know, and taken, you know, the cash and a certain amount of cash, which was a significant amount cash, but then they also freed up because of the sale, the capital, the capital allowance that now they all of a sudden have inside the corporation.

has credited to their capital dividend account. And now it’s like their question was like, okay, now, should I grow and leave all the retained earnings and leave this kind of amount that’s sitting in my corporation to grow that to add to my retirement lifestyle? They’re nearing their retirement or in retirement stages. And they’re wondering like, do I grow it there? Or do I grow it at the personal level? And if I do grow it in either place,

where do I grow that and how do I structure that? And that was the real big question that they came to us. And while we unpack that here today, we’re gonna look at specifics around the capital dividend account and when and when not to say move money from the corporation through the capital dividend account out to your personal side. Because it’s possible that maybe you’ve overlooked that part. Maybe you’ve overlooked that there is some transition there that actually can make your life easier on your personal side. when you thought everything was stuck in the corporation.

Kyle Pearce: Yeah. And you know, this is a great example because they are, you know, we’ll call them experienced here on the planet. you know, they are in their seventies and early eighties. And what I want people to think about here, we’re going to talk about things that we could do early things that we could do, you know, kind of we’ll call it midway through the game. And then things that we should still be doing as we get a little bit older or closer or in those golden years, so to speak. So

They’ve got a lot of great things going on. They were great at investing in the things that they knew. So, in particular, one of the two spouses was a doctor and they had a medical corporation and MPC as it’s known as, and they also had a separate corporation for holding assets. They also purchased the building that the medical practice had been operating out of. So while

a medical practitioner can’t necessarily sell their MPC, they can sell the assets in that business. And in this case, they did sell their building. So this introduces some opportunities that they may not have had on their radar while they were working and while they were growing their wealth. And there’s some things that we should definitely be considering here. And in particular, I do want to say is that they definitely want

less risk. And this really highlights, John, we talk about it a lot, like whether we like it or not. I’m 42. As we record this, John, you’re 46 ish, I think five. I was like, couldn’t remember. I might look like I’m 50 whatever because of my hairline here. But, you know, we are already in our minds starting to recognize probably through all the conversations we have with clients at various ages at various stages in the game, that risk is

you know, naturally something we’re willing to take on earlier in our journey, specifically because the numbers are smaller, the absolute number is smaller, as your pile grows. And as you age, there’s two things happening. First of all, you have more at risk. And you also have sort of this less risk on sort of appetite. And, know, an example I like to use is, you know,

why all the time when there’s someone on the road, we always sort of blame someone being maybe an old driver or a Sunday driver, right? And you’re behind them, and you’re going, I’m in a rush. I got to get somewhere. And yet, they’re just kind of taking their time. They could get there faster. They could optimize this drive by simply pushing down harder on the gas pedal. But they don’t have that risk on sort of appetite. They don’t want to take on a more dangerous situation.

just to get there a little bit sooner, even though it’s very, very unlikely that they’re going to crash and it’s not going to work out, they still take a little bit less risk. And in this particular case, they want to get risk off the table and they already have, they’ve sold the building, right? And now they have a lot of investments in T bills or treasuries, or, you know, you can consider it here in Canada is like GICs, right?

but they’re government issued. these have the, we’ll call them the lowest returns possible, but they’re considered to be some of the safest assets, right? Because they are government backed. So today we’re going to be talking about where those investments are happening, how we can do things a little bit better. And actually, John, we noticed that there were some other nice optimization opportunities available to them, like sitting on a platter that they didn’t really recognize they could utilize.

Jon Orr: Let’s actually start there because I think unpacking, you know, the use of their capital dividend account and thinking about the sale of that building and basically selling that building created the 50%, I guess, I’m going to say credit to their capital dividend account. So they sold their building, 50 % of that is credited to the capital dividend account, which is now a tax-free account that we can then send out by dividend to shareholders.

And that was like where that part that they were thinking is like, do I use that or do I not use that to start to invest or like, do I keep it in T-bills inside the corp or do I bring it out? So let’s unpack the capital dividend account for listeners, some nuances around that and what that really means.

Kyle Pearce: Yeah, so the capital dividend account, it’s sort of like this very like airy idea, you know, it’s like retained earnings, you know, I can have a number on a paper on my financial statement at the end of the year. This is for incorporated business owners, by the way. So you’re incorporated in Canada, and you look and you see this retained earnings number, that number is on the page. And it does not necessarily mean that money is in your bank account.

Right? Those dollars could have already been shifted into other assets. It could have been used for other things. Well, something very similar here with the capital dividend account is that really it’s just a ledger. It’s just keeping track of all the tax free dividend that you can take out as shareholders. So when they sell, like right now, they said their capital dividend account has a credit of about $1.2 million. What that says to me, assuming they have never

taken any dividends from this account, meaning they have not actually used it. This balance is 1.2 million. I can back map and make some assumptions here. We should never assume, but I can make the assumption that if all of that capital dividend account credit came from the sale of this building, I can tell you that they had about a $2.4 million capital gain, right? Because 50 % of the capital gain

That means they bought the building for one number. They sold it for a much higher number. That much higher number is $4.2 million more than what they had bought the building for whenever that was. All right. Nice number. Now people start to panic because they’re like, Oh my gosh, I’m gonna have to pay a lot of tax. Well, half of that gain is tax exempt. It’s tax free. We get to not pay any tax on the $1.2 million. Now,

the $1.2 million does not go anywhere from your bank account like it’s there you get to do whatever you want with it within the corporation but on the balance sheet and in your books your accountant will say hey there’s this $1.2 million capital dividend account credit sitting there which basically gives you the opportunity if money still sits in your checking account of the business right if there’s money there that’s liquid

you can do a tax-free distribution of dividends utilizing that credit. So if they had 1.2 million sitting, they could send that 1.2 out to shareholders and they would not have to pay any tax at a corporate or personal level on those dollars.

Jon Orr: Mm. That’s what I was gonna clarify. So like, let’s reverse back up here. It’s like, we sold a property. We have a capital gain of 2.4 million, let’s say. 50 % of that. So 1.2 million is going to be taxable on the capital gain. So I’m gonna have to pay tax, whatever my corporate tax rate is, whether I’m under 500 or more than 500 in terms of like, let’s…

Kyle Pearce: Well, and that’s a myth there, or not a myth, but a misconception, because it’s not active income. we’re not going to have, you know, we’re not going to get that small business tax credit or, you know, over 500,000 or not. None of that stuff’s going to matter here. You’re basically going to lose about 50 % of this capital gain portion that’s taxable.

Jon Orr: which is kind of like thinking of 25 % of the actual capital gain is now gone to tax. So the other 25 % ish is now somewhat, it’s still in your court, but now 50 % of that is credited to the capital gain. So 1.2 million is like, let’s imagine it slid over here, even though it’s not. You’re saying is the business doesn’t pay tax on that 50%, so that 1.2 million, so there’s no tax coming off that chunk.

of the capital gain, but then what you’re saying is that money can then be released in dividends to the shareholders and it’s not taxed at the corporate level and the shareholders pay no personal tax on that, is that right?

Kyle Pearce: That is accurate. That is correct, which is great, which is like

Jon Orr: So now he’s got 1.2 million. He could slide out and say, I now have 1.2 million in my personal name that I do not have to pay tax on at all.

Kyle Pearce: Yes, exactly. And the beauty is too, is like, and I think worth noting is that if they owned this building personally, the same result would be true, right? Like you would get the same 1.2 million. There’s no capital dividend account, but you don’t have to pay any tax on it. It just sits in your bank account. There’s no reason to have this capital dividend account because it doesn’t need to flow out to shareholders in a similar manner. basically what we need is this capital dividend account allows

for your bookkeeping purposes and for your accounting purposes, when you submit your tax returns to go, okay, that money, that money is okay. We don’t need to tax them on that. That’s got a free card here. Okay, we can get that money out.

Jon Orr: Right, got it, got it. Okay, so now if we think about their situation is that they were still wondering that should I, and I think their original question in the call was, and they were on the assumption that I should keep my money inside my corp because it’s more tax advantageous to do that and grow my value inside the corp at the corp level because we’ve all been told that that’s…

That’s the optimal way to grow, you know, the balance sheet is to keep it inside there. And then when you need it, you pull it out later. But because of this in a way, it’s there thinking, okay, I could keep it there and I could grow it. So I could buy more assets or I could invest it in, I could buy more T bills or I can invest it in this or let’s say they want to be safe. They want risk off. So it will grow on that side. And that now creates new capital gains on new assets you’re buying.

inside the business, but because there’s no tax, why not slide it out and now go, what on the personal side have we not yet optimized? Because that’s the extra benefit here, right? If you’ve got room in your tax-free savings account, either in both of their names, putting it in sliding and investment on the tax-free savings account container can now allow that growth to actually happen tax-free versus

keeping it inside the corp and growing it and then you’re still gonna pay tax on the growth on that side of things. So in a way it’s like if you have not yet optimized personal things in utilizing your capital dividend account credits, that’s a great strategy to start implementing.

Kyle Pearce: 100%. And this is one of the reasons too, I don’t want to go too far down this rabbit hole and distract, but you know, we’ll have some calls with some individuals and you know, I’ll advocate, hey, listen, if you’re if you’re paying yourself, you know, a salary or a dividend, just annually, you know, there’s a good argument to be made for at least a good chunk of what you’re paying yourself to be, you know,

really up to even $180,000 to pay yourself through a T4. Now some people argue, you know, there’s a lack of efficiency and having to pay CPP and I could do better with the money than the CPP, you know, P is going to do blah, blah, blah. Some people even say CPP won’t be here in 10, 20 years. That’s actually a hundred percent fictitious. That’s social security in the U S and very, very easy to confuse the two. not going to talk about that today, but

to me, it’s like having that extra RSP room, even though I don’t advocate that you every year take more money out of your company, then you need to fund your RSP. Having the room is really advantageous because when you have the room, and there’s other income coming into your world, whether something that you’re asking for from your company, let’s say, or that you’re taking on income in other ways.

being able to take a portion, a big chunk like this when we sell a property, for example, or we sell an asset like with a big capital gain, and we’re able to dump some of this money into our RSP to help us with other income, employment income, that could be really helpful in one year or in multiple years as you just slowly claw back some of the tax that I like to say it’s like, I like using the RSP mostly

for clawing back tax that I couldn’t have avoided paying at the time. So for example, my spouse, when she earns her income, it’s a T4 from a public sector. So she can’t hold off on taking that. She has to pay the tax. So if we get this big windfall through a capital gain of some type, selling a building in a lot of cases would be the case for us, we would potentially use some of that money to

throw at her RRSP, assuming that T four is, you know, a high enough T four that it really makes sense to claw some of that back. So in their particular case here, here’s what was happening though, john, I don’t think you referenced it yet, is that they were not only like they were aware of the capital dividend account, but I feel like they weren’t exactly sure what the right move was. So what they were doing in the interim is they took most of their liquid capital in the corporation.

and they were buying T bills with it. And this is a real like loss. You know, this is a real, you know, we’ll call it like there’s a leakage effect happening here today to the profitability of the investment that you’re making because inside the corporation. So it was more than 1.2 million. It was closer to 2 million, I believe in T bills that they had those 2 million and T bills are producing them probably somewhere around three or 4%.

not a whole lot, and they’re paying 50 % passive income tax on it, right? When they had a free ticket to take 1.2 million of that, take it out to their personal hands, as you already mentioned, if there’s tax-free savings room, stuff that. If there is our RSP room, you could stuff that. However, given their ages, not really something that they’ll be able to do. They’re already in the RIF territory, right?

Jon Orr: Passive income, yeah. Right. Yeah. yeah, they’ll max that tax free out. Yeah, they’re gonna max that tax free out pretty quickly with that sum. then if they’re not, you’re right, with the ages, it’s like we’re not putting in an RSP. So now what do we do?

Kyle Pearce: Yep, max attacks. Yep. So even if, like even if they wanted to go, and I’m not advocating T-bills as the way to go, I think there’s some other aspects that we can look at and other assets that we might consider in their case as well. But if they wanted T-bills and they were like dead set on T-bills, they could purchase those T-bills personally, at least the $1.2 million worth of them, get the same risk, because it’s the same exact investment that they’re making.

And the $48,000, I think I used 4 % as an example, like $48,000 of interest that they’re earning could potentially be all the income that they were taking themselves in order to put them in a fairly low tax bracket compared to what we were earning in the corporation. Now, their lifestyle is fairly, I would say, reasonable. Conservative is probably the right word. So they aren’t huge spenders.

They do spend more than $48,000 a year, but just to give like an apples to apples, that $48,000 turns into $24,000 after passive income taxes in the corporation. Now we can talk about how you can claw some of that back if you do immediately withdraw it as a dividend. However, why not just take it personally and then on that $48,000, you’re now claiming $48,000 of income if that was their only income that they were receiving.

they’re gonna be in a very, very low tax bracket, specifically a low marginal tax bracket, and therefore they’re gonna have a whole lot more efficiency just in that one move, even though there could be some better options than say T-bills while keeping that risk profile quite, quite conservative.

Jon Orr: Right, so I guess if I’ve got say some of that capital available to go out through the capital living account and I’m not, like, because here’s a nuance is like if I’m already at personally the highest tax bracket, then 50 % one way or the other, I’m gonna pay 50 % passive income if I keep it in the corporation and grow it there, if I pass it out tax free now at my personal level, any income I make on that investment. is going to be taxed at 50 % anyway. So, so, right.

Kyle Pearce: Yeah, exactly. So you’re not going to be more efficient if you’re already in the highest tax bracket. But even if, let’s say, it’s a tie, I like having it in my personal name than in the corporation. Now, some people might argue, well, what if you got sued? Well, that could be a consideration, right? Like, if you do get sued, having less in your personal hands is not a good move. However, the worst case scenario in this case is that you’re going to pay the same amount in tax.

as the corporation was. So in my world, I like to get that into my personal hands. Now this introduces like if liabilities a concern or as for this particular couple here, their pile is at a point where they are not concerned about ever running out of money, which is why they’re conservative. They’re like, we’ve already hit this number and we don’t care if that number turns into double, triple, or if it just stays the same.

They just want to make sure that they can wake up every morning and not have to actually check anything or worry or be concerned or anything like that. So I totally get it. But since legacy is a concern for them, they do have opportunities to do things like permanent insurance would be a super conservative asset. Even if they don’t intend to leverage it for anything, they’re going to probably get a better return and a very similar, we’ll call it a safety aspect in terms of the risk tolerance piece.

and risk capacity side of things. Now the problem for this couple though, they do already have a lot of permanent insurance in the corporation, which is fantastic. So they get like A pluses all around on that. So that’ll help them with the company. And when they do move on to the next place, getting a bunch of more money through what account? The capital dividend account. That’s where the net death benefit will come out completely tax free, not 50 % of it.

the net death benefit, which oftentimes by the ages they’re already at, the adjusted cost basis is already down at zero on those policies. And therefore all of the death benefit would be coming out tax free to the estate or to the next shareholders, which is great. They could also consider opening up policies for others. They do have children. They could open up policies with the children as the actual insured people.

They could continue to hold the policies as the owners. Now, when they move on, they could have a contingent owner and a contingent beneficiary, even if they’d like, where they pass those policies on or gift those policies on tax free outside of probate, right? These things can all happen ahead of time for a state planning, getting the same. in really in this case, if they’re not utilizing the income on the T-bells, they’re going to get a better

compounding rate of return in doing so through a well-designed, high early cash value policy on the lives of their children in order to be able to pass those policies on. Now, it’s not gonna pay out when this couple passes on, it will pay out when the insured person passes on. But think of the family legacy that you’re able to achieve when you do so. And here’s the key piece that I think’s really important, especially if…

maybe it’s someone who’s getting a little older or in their retirement years is listening and they’re going, I don’t like the idea of like losing the ownership of the policy. You can still be the owner of the policy and actually have the policy insured on the children. And you can have it designed and set up so that when you do pass on that the policy changes ownership automatically to that particular individual or really any individual you choose. So

This is a really, really important part of planning. Here there’s inefficiencies. So first of all, T-bill in the corp, not a good move, especially when we’ve got a nice, easy chunk of money in the capital dividend account from a credit that we can take out. We can do the T-bills personally, but once again, still gonna get taxed on the returns there. So unless it’s used for income every year,

We might pick a different asset class like a permanent insurance policy, regardless of what your actual age is, there are still strategies we can utilize in order to benefit from this very conservative and very flexible planning tool.

Jon Orr: Yeah. So in this kind of this case study, we hope we kind of unpacked and gave you some epiphanies specifically on how to think about your money sitting inside your corporation with especially if you sold say an asset and now have access to you know, using that money and transferring that money through the capital divot getting into your personal name, but you’ve not yet maximized your personal registered accounts. That is a really great optimal move. It’s a it’s

wealth secret that you might want to be putting into place as when you can and when those opportunities arrive. So getting ready for, you know, securing financial futures, you know, and then building your wealth. We talked about some elements of our wealth planning, financial plan here with those four stages that we often talk about vision, establishing corporate or personal wealth reservoirs, optimizing structures.

and also a state plan. And we talked a little bit about all four of these here today. If you want to kind of get your assessment on those four stages, head on over to CanadianWellSecrets.com forward slash pathways. That’s CanadianWellSecrets.com forward slash pathways. Fill out the assessment. You’ll be mailed a report or emailed a report that gives you your overall assessment on all four and some next steps to take some action to grow and strengthen. those those steps in your wealth planning journey.

Kyle Pearce: Just as a reminder, this is not investment advice or accounting, legal tax, financial or any other type of advice. This content is for informational purposes only, and you should not construe any as advice. Please seek a professional. And Kyle is a licensed life and accident and sickness insurance agent and the president of Canadian wealth secrets incorporated. We’ll see you soon.

Jon Orr: Kyle has a license life in accident and sickness insurance agent and the president of corporate wealth management at Canadian wealth secrets.

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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