Episode 189: The Smith Maneuver–Style Strategy for Incorporated Business Owners

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What would you do if your business was sitting on millions in retained earnings — pay off your mortgage or put that money to work?

Many successful business owners eventually face this dilemma: the company is thriving, personal income needs are covered, and now a mountain of cash is piling up. Do you clear the debt for peace of mind, or invest more strategically for long-term wealth? The emotional pull of eliminating a $10,000 monthly mortgage payment is strong, but the tax implications and opportunity costs can make that choice far from optimal. This episode breaks down how to weigh those options with both the numbers and your personal comfort in mind.

In this conversation, you’ll discover:

• Why paying off your mortgage outright might actually shrink your wealth instead of growing it.
  
  
• How a capital dividend account can unlock tax-free cash you didn’t realize was available.
  
  
• A powerful “Smith Maneuver–style” strategy using whole life insurance that creates personal liquidity, preserves corporate assets, and builds your estate value.
  

Press play now to learn how to turn retained earnings into lasting wealth without falling into costly traps.

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.

Building long-term wealth in Canada requires more than just saving — it’s about designing a Canadian wealth plan that blends smart wealth management with proven financial strategies. For Canadian entrepreneurs, understanding how to leverage corporate assets, balance salary vs dividends, and use corporate wealth planning tools like the Smith Maneuver or life insurance can unlock powerful tax-efficient investing opportunities. Whether you’re focused on retained earnings, capital gains strategy, or RRSP optimization, the right mix of financial buckets ensures both short-term flexibility and lasting security. From real estate investing Canada to retirement planning tools, effective debt management, and estate planning Canada, the goal is clear: achieve financial independence Canada and even pursue an early retirement strategy — without sacrificing a modest lifestyle wealth. With the right corporation investment strategies, personal vs corporate tax planning, and financial systems for entrepreneurs, you can create a roadmap to financial freedom, protect your legacy, and build resilient, diversified wealth for the future.

Transcript:

Kyle Pearce: In this episode, we’re gonna be diving into a real life strategy session with a successful 38 year old Canadian entrepreneur who’s built a thriving digital advertising business, but now faces the question many dream of, what should I actually do with all of this cash? What a great problem to have. We always talk about, you know, taxes and deciding what we should do and what we should be wealth planning for.

These are really good problems to have, but they are problems nonetheless. With over $4.5 million in corporate retained earnings and a $3.5 million primary residence, he’s torn between paying off his mortgage or putting his corporate capital to more efficient use. We explore how tax planning, dividend strategies from his company and…

A high early cash value participating whole life insurance policy could create the flexibility today that he’s after and long-term wealth later. If you’re a business owner sitting on cash and unsure of your next move, this one is for you.

Jon Orr: You know, this is a great problem to have, is to think, okay, my business has a good amount of retained earnings sitting there. I’m not sure exactly what to do with it. The growth of my business is still growing without that money. I don’t have to reinvest it in my business. My personal, I’m paying myself enough. Personally, I don’t need to rely on this type of money.

These are the questions that we get all the time. It’s like, what do I do with my retained earnings now that I have some and it’s built up? And it’s not gonna go away because I’ve got the data, I’ve got my scorecard, tell me so. All the indicators are saying we’re gonna continue to do business at this level and now we’re unsure of what to do. And I get this, the natural inclination, the natural wonder or move is to go like, well, what debts can I pay?

Right, so it’s like, I’ve got mortgage debt. And I would love to not have this $10,000 a month payment on my mortgage. Personally, maybe I can just shift this money over personally, hit the tax button, and have to pay the tax, but I know that my mortgage will be wiped away, and I don’t have that 10,000, so now I’m freed up $10,000 a month. But then it’s like, whoa, do I wanna pay a tax bill?

on that type of money. this is why this person reaches out to us and people like this reach out to us. like, there’s got to be a better way. And there are some great moves that this person can make, but I totally get the whole, like, I’ve got a ton of cash, I wanna pay this off. And I want that mortgage to just disappear.

Kyle Pearce: Yeah, and I think, know, what I’m envisioning as you’re saying all of those things, John, is like understanding what you’re up against, like all of the options you have is the most important part, right? Like you just have to understand the differences between the choices you make. And the reality is, is the vast majority of the clients that we work with don’t pick the optimal one on paper.

Right. And this is really important, I think, for all of us to understand. Like we’re constantly talking about optimizing, but it’s more to educate yourself so you understand what does that look like or sound like. However, emotionally, a lot of times it can be really difficult in order to actually do those things. Right.

Jon Orr: Yeah, for sure, for sure. Like talk to me, like let’s talk about optimization for just a second here as we dig into this case study. Because you’re saying like we always talk about optimal choices and when we think about that, my default is to think what assets do I have? Like what makes paying, like what is the, because you’re saying like I wanna pay off my mortgage because it feels right, but it’s not optimal.

So tell, let’s make sure we clearly define like, why is not paying off your mortgage in this case? Like not the optimal move.

Kyle Pearce: Right, right. Well, and just to kind of like highlight and before we dig into the mortgage too, I just want to reiterate things like there’s optimizing, for example, your portfolio, the data says if your portfolio and you have a long time horizon, you should be 100 % equities. The vast majority of people don’t do that. Why? Because it’s hard to do it. It’s hard to do it. It’s emotionally hard. The same thing’s true with like every time you can refinance your primary residence.

it makes sense to do it. Why? Because the debt’s usually a lot cheaper than debt against other assets. You should take that money and then reinvest in other things. Why don’t we do it? Because we don’t like the feeling of debt, especially on our primary residence, the thing that we love, you know, it’s like your sacred place, right? There’s so many other examples of this. And this example with the mortgage is another one because the simple answer is, is that this individual should

Probably be taking this mortgage. They have it stretched over 25 year amortization. They’ve had it for a while So there’s probably 20 years ish left they should next time they can renew should go to 30 years and they should pay even less of it off over time and like people like I don’t want to actually do that and I totally get it, know, like so it doesn’t make people bad for not taking the optimal route, but it’s important to know

What are we leaving on the table? like, am I okay with leaving certain things on the table? Right?

Jon Orr: Well…Right, because it comes down to like, what are going to use that for? you’re, if you, this is, this is the thing that he’s up against right now. It’s like, I have retained earnings and he’s indicated to us that that retainer isn’t just sitting in a bank account. Like it’s, it’s invested, it’s making money. Right? So it’s like, he’s got, he’s got an income producing asset or a growth asset.

Happening right there and he’s saying you know what I want to trade my income producing if it’s let’s say it’s producing income Let’s say it’s not let’s just say it’s growth. I my growth producing asset. I want to trade that for this other asset over here, which technically is kind of a growth a growth Asset because the appreciation but I also have to pay more money out of every month and on expenses and you know Keep this up Kate upkeep, but it’s probably likely that your growth asset

in the retained earnings structure is growing higher than your home is growing. So it’s like, I’m gonna switch my, it’s like saying like, hey, I go to the bank and the bank’s like, hey, I know that you’re in this like 7 % mutual fund right now, would you really like to switch to a 3 % mutual fund? I think you should take all your money and put it in a 3 % mutual fund. Do you think you should do that? And you’re like, no, why would I do that? But that’s what you’re saying because you’re saying emotionally it feels right, but. theoretically doesn’t sound right.

Kyle Pearce: Right, and here’s something that’s really interesting as well. If you look at the data and you actually analyze things a little bit, when someone buys a primary residence, your best return on that primary residence is typically in the first handful of years of owning it. Why? Because you are so indebted and you’ve leveraged that small down payment and you’re getting the full appreciation of the entire asset. Million dollar home, you put down 200,000, you put 200,000 down and that

home is growing by $30,000 a year on the full million. Well, as I pay that thing down, my rate of return is actually going backwards. Like it’s actually getting worse and worse to a point where all of a sudden now you’re like, shoot, because I paid off the whole mortgage, my return on my primary residence actually isn’t all that great, right? And that’s why we say dead equity, right? Having all this money sort of stuck in the home and not doing something efficiently with it. However,

The reality is, that looking at debt against your primary home is not a fun thing. Like we’ve been trained not to like it. I don’t like it. I’m telling you. And I’m not fully indebted on my primary home. Like this is really important for people to understand is like we talk about optimizing and I still like somewhere in the middle, right? And again, the same’s for equities. I don’t have my stock portfolio is not a hundred percent equities, right? I have quite a bit of high early cash value permanent insurance that takes my fixed

income portion of my portfolio. And it really makes like my portfolio mix more like 50 50, you know, like it’s not. And actually, I would say it’s even a little less than 50 50. Why? Because I’m a business owner and I need access to capital. So these things are really important aspects when we’re looking at generate or deciding on whether we’re going to try to focus on generating the greatest returns, saving the most amount of tax.

and just satisfying like our emotional need to feel comfortable and confident. So let’s look at this particular home. The home’s worth about $3 million. There’s about $1.7 million mortgage on it. As you referenced earlier, there’s about a $10,000 per month payment. Nobody likes to see that leave your bank account every month, right? So we could do a couple things here. Now we could take $1.7 million out of the corporation, pay tax on it,

in order to pay down portion or maybe the whole mortgage here. The problem though is when we take that 1.7 out, we’re actually only going to get to keep around 60 % of it, right? As a business owner, you’re probably take it out as a dividend. You get to keep 60%. So that means you’re not taking 1.7 out in order to wipe out this mortgage, taking out a much higher amount, right? Almost double that 1.7, closer to $3 million in order to wipe out this $1.7 million mortgage.

So right there, we go, that’s a hefty price to pay in order for me to go, I don’t like to see the $10,000 leave in my bank account every single month. However, we’re not suggesting that you just ride it out. Maybe you put a little bit extra on it. However, we need to look at the whole financial picture. And as we dug deeper with this individual, the beautiful part that we noticed on their balance sheet is that they actually have a capital dividend account credit.

of about a million dollars sitting there. So as we’ve discussed on the podcast before, but just to refresh everyone’s memory, this capital dividend account is basically a tracking ledger that says you as the shareholder of this business can take out up to, in his case, a million dollars as a non-taxable dividend. So he could take it out tax-free. Why? Because he had sold some sort

of appreciating capital or a capital gain asset or combination of assets at some point in the past. And therefore that 50 % credit, that 50 % tax-free portion gets to flow out to you as the shareholder. Like right there you go, you got a million in your corporation sitting there when it doesn’t need to be. Let’s get it out. It’s got to get out of jail free card. So let’s take that million out, but John, as usual, we’re not actually gonna just flop it down on the mortgage. We got a better idea here.

Jon Orr: Now, right, right, because now, well, that’s partly, so now I’m trading assets again, so it’s like I gotta get a jail-free card for taxes, so that’s amazing, but should I just plop that on the mortgage? And this is the hard part. So if I plop that on the mortgage, how much does that reduce my mortgage payment? Can I put it all on the mortgage, you know, and probably knowing that there’s some stipulations towards how much you can prepay each year into your mortgage when,

and the rules that the banks are gonna set up for you on that particular mortgage, but what you’re doing is you’re just trading that asset at that point for a lower, say, growth asset. I would like to, like, just surface level right there, if we didn’t use any other tools, I would like to see that transfer into, your investment portfolio on your personal side. So let’s not go and throw it down on the mortgage.

Maybe you wanna put a sum down on the mortgage, like you were saying, a little mix could be useful because it’s like I really don’t want that $10,000 a month payment there. don’t know, maybe reduce that for the next time I refinance. part of, as I say that, part of it is like you’re paying interest there, but you’re losing more interest by not investing it, right? So it’s like, that’s that whole thing about like I don’t want this payment. And you’re like, well, what you’re doing is you’re saying I don’t want that personal payment now to pay this loan off.

but you’re giving up the gain that you could get by investing it. that’s why we would rather see this invested long term than pay these amounts down. Because we’ve talked about this on the podcast too, is that debt doesn’t appreciate, right? It doesn’t go up. Your debt actually gets less and less value over time because of inflation. So the more debt, when you have debt now, it’s like 20 years from now, and that debt’s gonna seem like nothing because inflation happened and the debt didn’t change value.

the cash changed value. So that part should go, okay, it’s $10,000 now. Everyone has this. like when you buy your first home, you’re like, oh my God, that was so much of my income at the time, and we were trying to scrap around and make ends meet. Yeah, and 15 years later, you feel pretty good and you’re thinking, I feel pretty good with my cash flow situation. It took me till I’m 40 to figure this out. You’re like, no, actually, inflation helped you there.

Kyle Pearce: I think it was like $700 for a mortgage payment. like, my God.

Jon Orr: and your debt didn’t change because it’s the same house. you got, inflation gave you a break. So I’d rather them see the, like let that ride over there and take that money and invest it if we weren’t gonna use any other structure.

Kyle Pearce: Right, and honestly, you could have even like a conservative portfolio, right? Like a conservative indexed portfolio, even if you don’t wanna go 100 % equities or whatever, and you’re probably gonna beat 4 % a year, you know? Like, let’s be honest. Sure, there’s downturns, there’s all these things that can happen in the interim, but like the numbers suggest historically, you’re gonna do better, and therefore that might be a better move. So that one million, like here’s something interesting that we have to understand too. A lot of people,

forget that the vast majority of fixed rate mortgages. So sometimes variable can be a little different, but like on a fixed rate mortgage, which this one is a 4 % fixed rate, if it’s a five year term, and let’s say you just got into the term, so you got five years ahead and you don’t wanna refinance, because you don’t wanna pay the penalty or whatever. Like if you just follow the rules, usually there’s a prepayment privilege and a lot of times it’s like 20%.

So even if he wants to come and flop a million dollars down all at once, basically what you’re doing is you’re saying, I’m gonna have to refinance this thing, which means I’m gonna have to pay a penalty, gonna have to do all that stuff. And again, if you’re willing to pay almost 40 % in tax to pull money out of your corporation, maybe you’re willing to pay the early prepayment penalty. But let’s assume they don’t. What people forget is if you put the 20 % down all at once, the actual payment doesn’t change.

So you like, you’re gonna play out that term. What it’s gonna do is at the end of the term, it just means you owe a whole lot less and therefore you paid less interest on it over that term. But it’s not like your payment got cut in half. If let’s say you cut the balance in half or it didn’t go down by 20%. Like you’re gonna keep paying that payment. It’s just gonna knock down the principal a whole lot faster, which does save interest. But it actually doesn’t allow this individual to see the $10,000 payment go away.

all at once unless they’re willing to completely refinance at this time, which sometimes makes sense. But what you’re suggesting, John, and I like it a lot is, you you take this million dollars capital dividend account credit, get out of jail free card, you take that, put it into your personal hands, put it into an unregistered account, likely is probably where you’d go. But hey, if you’ve got RSP room, might make sense to put some in there and tax free savings, of course, all that fun stuff.

but this money, this million dollars is now in your personal hands, you can then invest it. And even if let’s say you’re earning ish 7 % on this money, you’re gonna get around $70,000 extra in your personal hands per year that you didn’t have before. Now it’s $10,000 a month for this mortgage. So that’s 120. So it’s not like gonna cover the whole thing. But one thought is that you could keep paying the 10,000 in the same manner you have been, but take that extra.

seven-ish thousand a month or so, or whatever it is, or $6,000 that this investment’s taking in order to take advantage of some of this 20 % prepayment privilege. And then it kind of allows you to get the best of both worlds, right? Like you get to see your mortgage going down more aggressively, like that might make you feel good, right? Like you go, wow, I love seeing the number go down. That might actually be more fulfilling than the number going away all at once, right? Like you go, oh, I don’t pay 10,000 a month anymore.

That feels good for a couple of days. And then, you know, you’re back to it. And who knows that 10,000 is probably going to something else in your life that, you know, you never really wanted or needed, but now it’s sticking around because you didn’t adjust your salary or dividend from the company and yada, yada, yada. And here we are back in, you know, humans making silly moves like we always do. So that’s a great way to take what’s sitting right in front of them going.

Holy smokes, didn’t realize it. I’ve got four and a half million dollars in the corporation invested in a portfolio and at mostly growth from everything we know, which is great. But why have 4.5 in there when you could have 3.5 in there? You could have a million over here in your personal hands. And the other challenge that we run into when we just invest inside the corporation is that we continue to perpetuate the retained earnings problem.

Right, so all of this money that’s in there is retained earnings now. And if we pull it all out, large sums, we’re gonna pay close to 40 % round trip on it. That’s not a fun thing. That’s where you go, okay, if I rethink this, I can take some of that money and I can start strategizing with high early cash value policies inside my corporation. I don’t have to lose on the growth of these assets, but rather I get to sort of

deal with the retained issue now and even open a, we’ll call it back doors, maybe a little bit, you know, wrong because it’s completely appropriate, but we can open the door towards like a Smith maneuver style leverage strategy against your, your corporate owned policies so that you can continue to grow more and more personal assets, which can then help you continue to pay down this mortgage more quickly, aggressively while writing off investment loan interest at the same time.

Jon Orr: You know, I’m gonna like any sort of suggestion where we’re buying or obtaining more assets or not eliminating assets. And the idea of taking that million, investing it, and then taking, the skimming off the top there to then put it on your mortgage, great idea. We can have our cake and eat it too by slowly chipping away at the mortgage, but also making sure that, you know.

We’re invested so we might not be growing that investment. We’re just taking the actual interest in switching it You know putting it over here, but but that million capital dividend account allowed us to take some of that money out, right? You’re right like okay, so now we’ve got we’ve got the rest stuck in there and next year you’re gonna produce another million and the next year you’re gonna produce another million and your next year gonna produce another millions all stuck in there you said a great strategy for this individual because they’ve got that retained earnings model where we’ve got

constant income coming in was to obtain and invest or obtain a high cash value life insurance policy, a whole life insurance policy. You know if you’ve listened to our episodes before that we view this tool, this asset as kind of like a golden ticket. There’s many different properties, many different pieces. But talk to me about what you just said. You said something very interesting I think we should all kind of.

listen closely right now to is, because you said like, we could do a Smith maneuver like style move where I use my asset like the home asset. So in the Smith maneuver, let’s just quick recap. The Smith maneuver is we’ve got a home, our mortgage we’re paying every month. The interest that you pay every month is not tax deductible on your primary residence here in Canada. But a Smith maneuver allows you to say,

pay, use your home equity line of credit, borrow against that equity line of credit and continually pay that portion and reinvest it, instead of, putting it on your mortgage, you put it there, instead, all of a sudden, you now are creating a tax-deductible interest that you can write off. And so, many folks are using this tool, this maneuver, to be able to get some tax deductions on their primary residence interest by using a maneuver like

like that, okay. Talk to me how we’re doing, we could do that with another asset that’s not your home, but it’s now your whole life policy, and at the corporate level. Like you could probably do this at the personal level too, but at the corporate level, this sounds like what you’re saying, well, sounds like what you’re saying, this is a strategy, a maneuver to almost like take the corporate.

Kyle Pearce: It’s like supercharged at the corporate level, you know?

Jon Orr: retained earnings in a way and then transfer those retainings into your personal funds, tax free.

Kyle Pearce: Right, yeah, and I’m not even gonna say like, you’re using the word transfer, because like in your mind, it’s like, that’s what it feels like, yeah, but it’s exactly like the Smith maneuver, except now we’re not gonna do it against the home. Like the reality is the Smith maneuver has been around for many years, okay? And now actually Robinson Smith, who’s the son of the creator of the Smith maneuver,

Jon Orr: Yeah. You’re borrowing. You’re borrowing.

Kyle Pearce: Like he’s now advocating, you know, why people should be doing it and wonderful stuff, great book, all that stuff. We love the work that they’re doing over there. The reality is the vast majority of Canadians don’t utilize this strategy because it’s debt and it’s debt against their primary residence. Whereas when we flip it and we look at it in this way and we go, imagine you treated your company kind of like your primary residence, except you don’t have to sleep there. Of course, it’s generating you income.

but you have all this money inside there and you don’t necessarily want this money to come out now because of huge tax consequences in doing so. So utilizing leverage against corporate assets can be a huge, huge benefit, especially when we’re doing it for investment purposes, because just like the Smith maneuver, if we’re able to take this loan and invest it, we are actually creating an investment loan.

and therefore we’re able to write off the interest. The problem with this individual having three million, four million, however many million invested inside the corporation, we know about passive income, we’ve talked about it before, we’re assuming here they’re doing growth assets. And the reason why is because they don’t wanna pay passive income taxes. Boom, great move. The problem is, that let’s say they have a million dollars of capital gains on those investments.

and John, go ahead and they sell the investments. The beautiful part about this is that, you know, let’s say he’s got four and a half million right now, he sells all of the equities. He doesn’t have to pay any capital gains on say the four and a half million of retained earnings, but the problem is the four and a half million are still stuck in the company and you’d have to take them out as a dividend or a salary. So we don’t wanna do that. We wanna leave them in there. But that million dollar gain, let’s say that they have.

They are going to get about 50%, so $500,000 as a capital dividend account credit. Those funds can come out tax-free to the shareholder through the CDA. Amazing, awesome. $250,000 of it-ish are gonna go to taxes, capital gains taxes, gotta pay them, no way around it. But the other $250,000 gets added to retained earnings.

So it’s like, actually are creating more retained earnings by doing this over and over again. And again, still great to be able to get half of the profit out tax free. That’s beautiful. I love it. But the problem is, that now that four and a half million of retained earnings keeps growing every year, even if you’re not doing your active business anymore. Like even if you’ve decided to retire and just live off of this, this is fine. And a lot of people do it.

but you’re losing out on some of these optimization strategies. If we’re able to build a corporate-owned policy inside the corporation, and remember, the policy’s there to help us with legacy planning, estate transfer, it could be all of these things. That’s the reason we want to have this policy in there, because the death benefit’s going to be a large number, and that death benefit is going to be able to come out to shareholders through the capital dividend account. Amazing. In the interim,

we get to go to third party lenders and say, hey, listen, I’ve got this asset inside the corporation. I wanna leverage against it. Will you fund me? And they will say, will they? Exactly, personally, thanks for clarifying. So personally, I wanna take a personal loan and I wanna take that and I wanna invest it personally. And this is not like tax avoidance. Like this is like tax minimization. This is tax planning that you’re doing.

in order to create yourself more assets personally, which again, the CRA likes because you’re creating more tax. Like you are going to create more tax in doing this. You’re gonna create a bigger asset and you’ll be able to write off the interest at a personal level. And if you really think about how this works, like if my policy is large enough in the corporation and I leverage it personally, let’s say $3 million, I can have the same investments but in my…

personal unregistered account, I could write off the interest that I’m borrowing against the policy and that $3 million can be utilized or portion thereof like we’ve discussed previously to help us deal with the mortgage on my primary residence, right? And we can use some of that in order to make that $10,000 payment or $12,000 payment if you wanna increase it and see that number go down.

And therefore you will start to see your net worth growing over time while you’re creating yourself access to more capital over your lifetime through just the income you’re generating from these investments and more, I shouldn’t say most importantly, but very importantly, when I do pass away, that policy is maybe worth 3 million right now in cash value. When I pass away, it might be worth

five million in death benefit, six million. Depending how long the policy is in there and how much we funded it, that death benefit can be quite significant. And the net death benefit gets to come out through the CDA and therefore actually supercharging your net worth and your estate value after you pass, which will help to deal with all kinds of the capital gains taxes that may or may not.

be sitting there for any investors out there, there’s gonna be capital gains taxes to pay. You can leave your estate in a much better place than when you were here without sacrificing the money that you want or need in order to live the lifestyle that you’re

Jon Orr: So let’s think about the lender right now. So let’s say I have retained earnings inside my corporation. Next year I anticipate another million, another million, another million. I’ve got the four and a half million like this person has. And I go to the bank and I say, you know what, wanna take a, I will loan out based off this policy. So the policy I’m funding with my retained earnings, so the premium is getting funded with the retained earnings. Let’s say I make it a million dollars, because I know I’m gonna earn a million.

and then I pay the policy premium, that creates cash value. The cash value is going up every year. So my asset is actually increasing because I’m putting money into the asset, which is I’m just paying the premium. The cash value is increasing. The dividends being paid on that asset by the insurance company also make the value go up every year. So that’s not going to go down because I’m contributing to it and the dividends pay that. Now as a lender,

Do I set this up in advance to say, look, every year I’m gonna contribute to this and every year it’s gonna increase in $800,000 in value because the cash value won’t be exactly the same every year. So does the bank go, it’s like a home equity line of credit at that point where the bank’s like, look, every time you dump some money in here into your asset, send us a statement and we’ll up the value of this so that you can then pull more loan value personally.

So now you’re in this cycling position of like, I’ve earned retained earnings, I loan against those retained earnings on the personal side. And now I can use those retained earnings or this loan that I have now to invest. So now I’m investing personally. All this gets transferred to me anyway when I die or my estate will be taken care of. So I get to invest on this side.

Kyle Pearce: So now you’re in this cycle.

Jon Orr: but all the money’s still technically over on the corporate side, but this was a way kind of a pass through to make this happen. I was just curious about the logistics here about like the bank, the lender is like, no worries, we got you.

Kyle Pearce: Yeah, exactly. And there is underwriting, of course. Now, this would be a different, different than taking a policy loan. So those who are like, wait a second, I thought there was no underwriting when I wanted to borrow against my life insurance contract. That’s true if the owner wants to borrow. So that’d be your corporation. You want to borrow in the corporation, you could just go to the insurance company, say, I want this amount because my cash value is worth this. And you’re willing to lend up to 90 % of it. Great. Awesome.

Boom, no questions asked. It comes to the owner, which is the company. That’s not what we want here. We want actually to get this money to our personal hands. So we’re gonna go to a third party lender, big bank, maybe private, you know, private lender, like whatever it might be. And, you know, typically the big banks are going to be pretty structured in how they do things. They’re typically gonna do 100 % of the cash value every year. Every year, they’re gonna say like, what’s the cash value? And they’re gonna go, here’s…

what you can have, like the difference between what we gave you last year and what the cash value is now worth. Boom, here you go. We’re gonna give you some number around prime for that. And ultimately every year, that’s how it’s gonna work. However, it’s not gonna be like super flexible, like a home equity line where you could like pay it back, pull it back, pay it back, pull it back. There’s sort of like, listen, if you want the loan, take the loan. If you pay it back, it kind of like a car loan, right? It’s like, listen, you can make these payments. The only difference is,

Jon Orr: They want their money. Yeah.

Kyle Pearce: which makes it like a line of credit is that you’re gonna pay interest only. And that can come right from the loan balance. So every year they’re gonna re-advance you more. The interest is some will take it right away at the beginning, some will take it monthly. So it’s really, really flexible. However, there’s other lenders out there that basically like how they sort of get into the market here is by being more flexible. So they could say, listen, John, I’m willing to lend you up to.

Jon Orr: Right, just pay the interest right away.

Kyle Pearce: 100 % of your cash value, but you don’t have to take it all now. You want to take it like one time a year will let you borrow up to 100 % and you can pay some of it or all of it back throughout the year, throughout X number of years. Like they’re a little bit more flexible. There might be a premium on the interest. Like maybe it’s more like prime plus a quarter or something prime plus half, like similar to a home equity line of credit, but it’s a little bit more flexible. So

depending on who we go to and you know, we’ve worked with many lenders out there to help our clients, you know, figure things out and decide what’s going to be best for their specific goal. There is always an opportunity here for someone to be able to leverage against these corporate assets. Now there is some more nuance to it that we work with and we have all of our clients work with tax lawyers to make sure they get a legal opinion showing that what they’re doing is good based on the current

tax rules and all of that wonderful stuff. But ultimately at the end of the day, you certainly do not wanna go into personal leverage against a corporate asset, just like on your own. You don’t wanna chat GPT your way through. You wanna make sure that you’re working with professionals, say us or anyone else in the industry that does and specializes in working with incorporated business owners. Because you wanna just make sure that all of your T’s are crossed, your I’s are dotted.

and that everything that you’re doing is truly to plan towards growing your net worth and not doing this like tax evasion idea, you know, like you never want to get caught where the CRA is like, well, this just looks like you’re in a tax evasion sort of situation. It’s like, no, no, that’s not what we’re doing here. We’re doing a very structured, very appropriate move to essentially, like I say, the analogy I use is like the Smith maneuver for incorporated business owners.

Jon Orr: Yeah, yeah, that’s great recommendation for this individual and any other individuals. you’ve got a corporation, you’re at the corporate level and you’re going, look, I’ve got retained earnings. I’m not sure exactly what to do with them. I know these guys have talked about whole life insurance. You can definitely reach out to us to talk about what that Smith maneuver like move at the corporate level with a whole life policy as an asset, underlying asset could look like. We structure these things all of the time. But for this individual that reached out to us, we, you know,

this person’s in a perfect situation to do this because they have a high retained earnings every single year. Banks are gonna like that for this move. And he’s also solving that problem of the state’s being taken care of, but also his personal situation on his mortgage is gonna be also helped out as well, which is what his original idea was. like, really, is a thorn in my side right now. I need a strategy around this, but how do I do this in a tax advantage way? So we helped him. structure this in a way that’s tax advantaged but also supercharged along the way.

Kyle Pearce: That’s beautiful. And you know, when we ran this particular individual through our Canadian business owner financial wealth system, we found some really, really great things going on here. First of all, you know, when it comes to like the vision here, when we’re looking at the vision, they built a profitable business, they’ve got a plan, they see what this business is going to look like and sound like.

However, some of the areas that they can work on here is like, what does that look like over time? How long are we gonna be in business for? What does my runway look like? if you, you know, this individual follows our plan to sort of just pay out the mortgage slowly or maybe just slightly more aggressively than they are now, you know, like is that gonna align with the runway of their business, right? If they’re only planning to do business for five more years, then maybe we have to rethink that. So there’s a little work to do here on vision John, how about establishing the corporate wealth reservoir?

Jon Orr: Right, now, and one of the strengths already was use of, you know, was holding company to do some moves, is operating company as a structure for keeping the retained earnings, like that acts in a way as a reservoir, almost like a tax sheltered reservoir when you’re ready to move it into your personal hands. He had some growth assets at that stage, you know.

And he was avoiding that passive income specifically at the corporate level because we, know, passive income at the corporate level, you’re gonna be taxed more heavily. So there’s some good moves there. Some of the gaps we’re talking specifically about that next step here, creating that corporate reservoir. There wasn’t, the strategy to use the whole life policy to act as a corporate reservoir, to act as that like emergency fund, because that’s another use for that tool as well.

There’s some moves there that could be made. what about stage three here, which is optimizing? We talked a lot about that here today, though.

Kyle Pearce: Yeah, I was gonna say I’m like, you know, while there’s still a lot of work to be done on the optimizing side of things, it’s like very clearly, which we talk about this all the time, people are often coming to us with a focus on stage three, they’re like, I want to optimize. So right now they’re going like, how do I optimize to get this mortgage paid down without dealing with paying or overpaying on taxes too much too soon?

And that’s what this discussion was really sort of revolving around here today. So a lot of work to be done on the optimizing side of things, understanding the tax implications of taking large sums of money out of our corporations straight up as a salary or dividend and other leverage strategies that might be available. So that’ll be some next steps here in stage three. And then finally, John, how about the legacy and estate strategy for stage four?

Jon Orr: Right, some improvement here was aware that that’s an issue and has some structuring to do in this area. If he takes our recommendation to utilize the tool, the whole life policy tool, it actually will help in this area and bump up his grade at this stage because he doesn’t really have an estate strategy at this point with the money sitting in the corporate structure but like.

When that money, if that money just keeps growing in there, that’s going to be an estate problem. When he passes or when he wants to get it out, you’re going to lose a good chunk of that money into the tax system, which is why the recommendation that we have about, say, using that Smith maneuver-like strategy at the corporate level, using a whole life policy as that underlying asset, solves this problem as well. So that’s where, if they take that strategy, they’re gonna have some of that, but right now, we wanna see that changed.

Kyle Pearce: I love it, I love it. So fantastic discussion that we had here. And guess what? This individual came out to us from the podcast, the Canadian Wealth Secrets podcast community. So if that’s you, you should be reaching out to us over at CanadianWealthSecrets.com forward slash discovery. So you can book your discovery call with us soon. If you want to run your own Canadian Wealth Health Report, you should head over to CanadianWealthSecrets.com forward slash.

pathways and that will bring you to some, you know, five minutes of questions and what will come out the other end is a great customized report for you and a place for us to start our conversation if you do reach out for a discovery call sometime soon.

Jon Orr: Just as a reminder, the content you heard here today is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. And one more reminder, Kyle Pierce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here 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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