Episode 193: How Corporate Structure Can Unlock Flexibility and Tax Efficiency in Canada

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Are you building wealth through real estate but worried your corporate structure might cost you flexibility—and thousands in taxes—down the road?

Many investors think incorporating will solve all their tax problems, but the truth is far more nuanced. Without the right setup, you can trap yourself in rigid structures that force you into unnecessary payouts, lock you into partner decisions that don’t fit your personal circumstances, and even block you from leveraging your growth for future wealth. If you’re juggling rental properties, side businesses, and long-term wealth goals, your structure matters just as much as your investments.

In this episode, you’ll discover:

• Why buying properties inside a corporation doesn’t always save you tax—and what to do instead.
• The powerful role holding companies can play in giving you flexibility, control, and protection.
• How corporate-owned life insurance and shareholder agreements fit into a smarter long-term wealth and legacy plan.

Press play now to learn how to avoid costly mistakes and set up your corporate structure to fuel—not limit—your wealth journey.

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 real estate investing—it’s about aligning your corporate structure, holding companies, and investment strategy with smart Canadian tax strategies. Whether you’re weighing salary vs dividends in Canada, exploring RRSP optimization, or using life insurance as part of your corporate wealth planning, the right system creates tax efficiency and sustainable wealth management. For entrepreneurs, integrating personal vs corporate tax planning, capital gains strategy, and shareholder distributions can unlock significant business owner tax savings. Pair that with financial vision setting, investment bucket strategy, and financial diversification in Canada, and you’ll have the tools to pursue financial freedom in Canada, from a modest lifestyle wealth plan to an early retirement strategy. With proper estate planning Canada, legacy planning, and tailored retirement planning tools, your financial buckets become a roadmap to financial independence in Canada and a durable wealth system that balances today’s lifestyle with tomorrow’s security.

Transcript:

Jon Orr: In this episode, we sat down with two busy professionals and they’re building a serious real estate empire and it’s on the side of their full time careers. And Kyle had actually reminded me in the early days of yourself, Matt Bigley, was one of the first hosts of this podcast a few years ago.

This team, you know, with nine rental properties, a development project and a construction and property management business, generating strong revenues, their ecosystem is pretty impressive. But when it comes to corporate structure, I think they’re only a little bit part way through there. And that’s costing them. And it’s costing them flexibility and future tax efficiencies. So let’s dig into this case study. Let’s talk about corporate structure. Let’s go.

Kyle Pearce: Yeah, no, it definitely reminded me. It was great having the conversation because I it wasn’t that long ago that we were in a very similar position. We all had our full time jobs here. We had one partner was working in a government job, super safe, pretty reliable pension, another in corporate and their spouses also had some pretty good jobs. So they had good income coming into the households. Both households had between

200 to 250 or so thousand dollars of T4 income coming in the door. And they, like us, didn’t want to just rely on whatever the pension looked like and sounded like. So they got into real estate. They opened up a corporation and the two business partners owned the shares in that corporation 50-50. Very, very similar to our own story and our own path.

you know, this conversation sort of, you know, had us talking about some of the things that are important and maybe not so important along the journey. The one that struck me as a very common misconception we had it ourselves was that, you know, buying all this real estate inside a corporation is going to somehow save us tax. And in reality,

not really the case, right? Because we got passive income coming in, even if you’re claiming the income, or I shouldn’t say claiming, you’re going to claim it, but you may not actually have a profit to show based on all the expenses, repairs and maintenance and all of these things. So there’s really not a huge tax savings there. And really, they were looking for like, what are the next steps here for them to get structured so that as they grow in scale,

that they’re in a position where they don’t look back and go, shoot, wish we would have, could have, should have done something different with that structuring.

Jon Orr: Right, so let’s just recap here. They co-owned, like in their personal names, they both were owners of one corporation, which is in a way the holder of the properties, the owner of their nine rental properties. They thought that they were gonna save some tax. The liability obviously is a huge win for moving into a corporate structure.

and owning properties inside that corporate structure. But I think these folks were going like, that’s a bonus, that’s the cherry on top, but let’s make sure we save on taxes down the road. Specifically, a lot of people are thinking about when that money comes out, how do I save on taxes when I distribute it to myself? And that’s where you get that sense of like, if I was holding all of this in my high income T4 job, then when I go to, you know,

pay myself, all of a sudden I’m paying myself at the highest bracket that I’m currently in because now I have income. if, because if the company did make, you if we did not incorporate, then the company did make income or net profit, then all of a sudden now we have to take it, we’re forced to take it. So there’s that nice kind of benefit of the corporate structure saying like, we don’t have to take the income, it’s up there. Now, when they go to, you know,

take the income or distribute that income in terms of either payroll or maybe it’s in dividends, that’s where some of the say dividend maybe savings may come in. However, I think the real benefit for these two and what they were missing is something that was true for you and me, it was true for you and Matt is where we realized that each person has different unique circumstances in their personal lives. And when you co-own

corporation, when you decide that it’s now time to send and distribute retained earnings down to the shareholders, if you’re all equal shareholders of the same share type, those equal distributions come out. Unless you’re paying yourselves payroll, and if you’re doing all of that, it all gets messy.

So I think remember we were thinking about this, it’s like how do we do this? It’s like well if I wanted to issue $50,000 of dividends to myself, but I have to issue $50,000 dividends to you and you’re like wait a minute, I don’t need $50,000 of dividends this year. I’m gonna have to pay tax this year. Or all of a sudden, you know I had a death in the family and all of a sudden I got this and now I’m in a different tax situation than you and that’s gonna be messy for me and why are you forcing your, what your needs on me? And this is one of the.

big benefits of deciding to open up another layer of structure. And this was the recommendation that we thought these two needed is to say, now each of you need to open up a holding company to be able to freely distribute those dividends to the holding company. And then the holding company, each holding company can then make those calls. Each holding company can decide whether we are gonna issue dividends down to the shareholders and the shareholders of the holding company or the family members or…

and that, like ours, we’ve got each of us have a holding company, the money goes up there and now we can distribute freely if we need, if we don’t feel like, or if we don’t need to distribute that, we keep it up in the holding company. But if you wanted to, you get that opportunity, you get that choice and we got that, we solve that problem and I think this is where this team needs to solve that problem.

Kyle Pearce: Yeah, and they actually had an interesting or a unique sort of structure. And it really grew kind of from a single company, right? So as you’re articulating, it’s like they bought some real estate early in the journey. They both held it inside a corporation. When I first opened a corporation, didn’t know what, you know, is there like when we call it a holding company, an operating company, a real estate holding company, like, do you have to do something different? And the answer is no, it’s just a corporation that

has a certain purpose and we’re gonna like almost nickname it just so we kind of know what’s going on in that particular business. And really when you look at the financials and the balance sheet, it kind of tells the story. So you don’t have to look at the balance sheet and try to figure it out and then name it. We just say, hey, listen, they started with this real estate holding company. They bought real estate inside and then over time, they started to do things like, for example, doing their own construction. Now,

myself and, and mad and yourself, we’ve never done any of this stuff because you know, we, we don’t know how to throw a hammer, you know, so we’re, we’re not in there, but they were, so they were like, well, listen, if we’re going to do the construction in our own properties, they structured an operating company, the construction company so that they could essentially start doing some construction on their own properties and then also offer services to other.

investors, which I thought is great. It’s brilliant. They did the same thing on the management side of things. This is something we also considered, but then thought, wait a second, we don’t want to manage properties. That doesn’t sound like fun to us. So we never did it. They manage their own properties, and they offer services to other investors as well. So these are like two businesses that they can build. The problem with this structure, as you articulated, is that

they’re still stuck the way it looks. And if you aren’t seeing this, it’s probably because you’re on Spotify or on Apple podcasts. So make sure you head to YouTube and you subscribe to Canadian wealth secrets there and you’ll see this video. It’ll have the same title as this particular episode you’re on. And you’ll be able to see kind of this visual of the two individuals owning one company, the real estate holding company 50 50 and then

under that company. It’s like the holding company owns shares in the construction company and in the management company. And there’s something interesting about this because of course, if there’s profit from the construction company, they can send it up to the holding company. I like that. The same thing is true about the management company. If there’s profit there, they can send it up to the holding company. I like that. But we still run into the same problem you articulated.

which is trying to get money out to individual shareholders here. Right now, they really don’t have much of an option other than paying themselves a dividend. And if we are gonna send a dividend, unless they have different share classes and so forth, they’re going to likely have to take the same dividend, even though one partner may not want the dividend, the other partner may want it. So right now, they’re in a fairly inflexible situation.

not to mention that they also are in a situation where they’re not really able to charge their real estate holding company to do the construction or to charge the management company because they actually own those companies. So really I might want to see this restructured here where they actually have their own individual holding companies that own the shares.

of all three of these companies, right? So they have like the real estate holding company, the construction company, and the management company side by side. And their individual holding companies own half of the shares in each of these companies. It gives them a little more flexibility. Once that real estate holding company starts turning a profit. So let’s fast forward.

You know, and when I say this, it’s because a lot of times we have mortgages, we have all kinds of expenses and things. So we may not be paying a whole lot in passive income tax now, but if you do ever pay off mortgages, you’ll probably have this big bump in passive income. And that passive income, it would be great to be able to expense some of that to the construction company.

And when I say expensive, they actually get charged or invoiced from the construction company to get invoiced from the management company for the management fees. And then any of the profits from the three companies could then send their dividends up, inter-company dividends up to their individual holding companies so that each partner can then decide.

what they want to do with those dollars. Do I want to defer tax longer by keeping it in the holding company or do I want to actually take it out personally taking on personal taxes and losing that deferral of taxes through our corporate structure in order to use it for lifestyle or some other expenses in their personal lives.

Jon Orr: Yeah, so it seems like the current structure of their company is preventing them, like you’re saying, probably down the road, probably right now, they’re not generating profit, they’re paying, you know, they’re not paying tax anyway. So when they go to make that profit, they could, by just a simple restructuring, all of a sudden start having more expenses that were there anyway to…

offset some of that tax at that level, but they can’t currently, like they’re prevented from that. So if they fast forward five, 10 years from now, they can’t do that in the current structure.

Kyle Pearce: Exactly. It’s going to just look a little different. Now, there’s ways to book keep around this. But it’s not actually an issue for them yet because the real estate holding company is still in the scaling phase. So since there’s so much growth there, they’re basically just churning all the money back into buying more assets, creating more expenses. The same thing happens when I’m chatting with someone about doing a tax strategy. They go, I want to pay less tax.

And what we end up doing is like we actually usually create more investments and they go, but isn’t that going to create more tax? And you’re like, yes, it will. But by reinvesting and compounding and growing, but then also putting in the proper, you know, techniques in place, you’re going to be able to deal with the taxation throughout your lifetime. And then of course, down the road, when you go to pass on these assets to your family, spouse, children, or charity,

if we do it well. So over here, you’ll notice I’ve drawn kind of a modified structure here, where basically each of the holding companies is going to have an ownership in each of these existing companies that they have any money that’s going to be left in the real estate holding company, the construction company, the management company.

can flow up and it’s gonna be likely, I’m guessing 50 % for the one holding company and 50 % for the other. So half of all of the remaining retained earnings will flow up to their individual holding companies, which they will own or what I’ve recommended since they are married is that their spouses also are shareholders on their individual holding companies. They can decide if and when they wanna flow.

those dollars out. And it also gives them the opportunity that they can do some other investing inside their own holding company that maybe the other partner wasn’t interested in investing in. if I, let’s say we had PE gate on the podcast recently and on the YouTube channel talking about private equity. If you want to buy shares in a private equity company,

you can do so through your holding company without actually taking the money out personally, paying personal taxes, and then reinvesting those dollars at a personal level. Or if you are really interested in leveraged insurance strategies, which I know you are, then you can do that. And the other partner may not be into that. And that’s okay. Maybe they don’t know, maybe they don’t have a need for it. Maybe they just don’t care.

Totally up to them. Now you have full freedom to be able to set things up the way you want to do it. Even if the choice is as partners oftentimes do, you kind of work together and you kind of, you know, pick paths together. And it’s more or less about having an accountability partner or having somebody there where you can kind of, you know, chit chat about the strategy. So you don’t feel like you’re a lone ranger, but if you have a partner that’s just not interested, you’re not feeling restricted to have to do something by

paying more tax, taking money out, or by getting money stuck in there when maybe you need the money out in your personal pocket and you just can’t seem to twist the arm in order to get it out.

Jon Orr: Right, right, okay, so we talked about corporate structure and some of the small nuances that we might want to consider when thinking about saving tax or structuring for future tax savings. Now, talk to me about their corporate wealth reservoir strategy. Stage two for us is establishing a corporate wealth reservoir at the corporate level or obviously a personal wealth reservoir if you’re investing personally.

This is like our opportunity fund or emergency fund or investment fund. This is our rainy day fund, but also the important funds that we use to invest with. One of the tools that we often talk about here as a great tool to use to help establish that reservoir is life insurance, whole life insurance. Let’s talk about corporate owned life insurance for just a moment because I think these two may have listened to the podcast and thought about, you know what?

Like maybe what I can do is I can take some of the retained earnings we have and I can buy life insurance, whether it’s maybe it’s term, maybe it’s whole life, whatever, but then all of a sudden, if I get that, then that’s like an expense to my company, right? And if it’s an expense to my company, doesn’t that mean my net profit will go down eventually if I had net profit? And then therefore it’s like, well why wouldn’t I just wanna buy a lot of life insurance? Talk to us specifically about life insurance inside the corporation and tax.

Kyle Pearce: Yeah, so they have a couple term policies. They actually have some personal term policies, which is great. That’s important to have. They’ve got mortgages. They’ve got debts. They’ve got spouses. They’ve both got dependents, right? So these are important things to have. So having adequate amount of term insurance is important. Of course, having quite a bit of term insurance in the real estate holding company is really helpful as well to just make sure if either partner passes that they are able to cover

their mortgages. One thing that was absent was an actual shareholders agreement that actually said what should happen if partner A or partner B passes. Now the hope is that both families work together and that everything’s great and it all comes out in the wash. But the reality is, is we know when things happen, especially traumatic things happen. Sometimes people get very emotional. I shouldn’t say sometimes, we always get very emotional.

And sometimes we do things that are irrational. And sometimes it changes who people are and it can cause fights and arguments. So that was a big one. The one part that I wanted to caution them from, they weren’t certain of this, but they were saying that it was a write-off for the insurances that they had in place. Now, when it comes to term insurance,

That can be true if there’s a debt or some sort of obligation and the requirement for that debt or obligation was to have insurance. So for example, the bank gives you a loan and they say, listen, one of the conditions of having this loan is that you have X number of million dollars of death benefit in order to cover the debt if you were to pass. If it’s a requirement, then you can get away with writing off the term insurance.

policy premium. However, if it’s money that you’ve just put there, it’s a little bit more gray area. And the reality is, is that you’re putting it there and you’re putting it in as protections, but there was no, no one mandating for you to do this. So I would hold off on actually expensing because the problem is if you expense it, you could be creating yourself a negative impact on the CDA, the capital dividend account credit that you get to get the death benefit out.

tax free to shareholders. So set another way, if I’m writing it all off over here, I could be creating myself a little bit of difficulty when that death benefit pays out to the corporation in order to get it out through the capital dividend account. And that to me is way more valuable than writing off a small amount of term. Now, if we extrapolate this to permanent insurance, we think about whole life insurance.

The reason that it should make more sense here, if I take $100,000 of premium and I put it into a high early cash value policy, and if I’m able to write off all of that insurance premium, just because I decided to open up these policies, then it would make sense that every business owner take every single dollar that they have in the corporation of profit every year and make sure it goes into a policy so we pay zero tax every single year for the rest of our life.

That is not how it works and nor should you be bookkeeping in that manner. Here’s the thing. If you don’t get audited, no one’s ever gonna find out about it. So you might be saying, no, I do that every year and it’s okay. Well, it’s like, it’s okay until it’s not, right? So be careful there. Don’t try to get a write-off on the term insurance if you’re not able to, if it’s not a requirement, because again, if you extrapolate it to the permanent insurance, that would be a big.

right off and I’m sure you will get audited sooner than later if you’re always showing, wow, my balance sheet keeps growing significantly, but I pay zero corporate tax every year. Remember operating income. So any income from the construction company and the management company, we’re going to get taxed at a low rate. It’s still a deal to be able to put it into policy premium instead of taking that money out personally, paying a higher tax amount and then buying the same policy, be it term.

or be it permanent insurance. So you’re still getting a massive deal. So just don’t take it too far where you actually put yourself in a spot where you’re writing off something that actually can’t be written off.

Jon Orr: Got it, got it. Now while we’re on the topic of that, specifically corporate owned life insurance, do you recommend if we do have a policy when that premium comes due, most of the time that you’ve structured, we’ve structured these to have say our minimum, premium amount with an accelerated deposit option which kind of like allows the cash value to grow faster, would you recommend paying the maximum?

upfront or spacing it out over the year. Talk to us specifically about that choice that these two would have to make in that situation.

Kyle Pearce: Yeah, and interestingly, they already have two small permanent policies in the holding company, which again is problematic again with like who gets it, what if I want to borrow against it, you know, as long as you’re using it within your businesses and only for those purposes and any investments you both want to jointly make, it’ll all work out. However, you have less flexibility as we discussed these two policies they have in here. They put about $15,000 of premium in per partner per year.

And what they’ve been doing is this is money that kind of comes in and out of the business anyway, through just general expenses. So they get rents, they get construction income, they get management income, and they roll it into the policy and they use these policies as a bit of an opportunity bucket here. So what I would say in their case is that if there’s money there in the corporate account, in order to max fund the policy at the beginning of the year,

you’re always going to be more at an advantage to do so, right? We’re going to get it in there. You’re going to get it compounding early. And the money is still there. The vast majority of it in year one, we know that there is some opportunity costs there. So we have to be aware of it. But if that money’s sitting there as a just in case fund, as I was discussing with a business owner earlier today, that money is sitting there doing nothing, getting it in the policy and then leveraging the policy. If you do need it due to a cashflow crunch,

is going to be a huge advantage for them. So they’ve got two smaller policies. When I pull back the actual structure I’m recommending for them, opening their individual holding companies, they do have the option in order to essentially transfer these two policies they have in place up to their holding companies, changing ownership of these two policies and actually essentially having each holding company sort of pay back.

in order to equal out the cash value there. So there is the opportunity for them to transfer them up to their holding company. Not a huge deal there, a little bit of bookkeeping to do, but they’re not stuck because they had opened it inside of that one holding company. So funding early, if you can, amazing. If you can’t, funding the minimum, and then when the capital is available using the additional paid up addition option,

throughout the year is totally fine to do as well. For some people that have consistent income coming in small amounts each month, it can make sense in that case to do monthly premium as well, right? If you just know it’s coming in, it’s fairly consistent, that makes it easier. But keep in mind that, you know, the first month of premium is gonna compound for 12 whole months before the last month of premium even starts compounding, right? So that has an effect over time.

But if that’s the flow of capital coming into your business, into your corporate structure, it can still make sense to do so.

Jon Orr: Yeah, so overall you think about these two business partners and their trajectory of what they’re trying to do for their wealth financial plan. And we think about our four stages. Our stage one is about vision planning and knowing where we’re trying to go. What are our key numbers? Are we just kind of aimlessly kind of trying to build, but we haven’t been clear? We didn’t talk about stage one specifically today. We talked mostly about stage two, which is about establishing your corporate reservoir, your opportunity fund.

structure to make that happen. And then we also talked about stage three, which is, you know, optimizing structures for tax purposes. And that was that, that discussion. What we talked about is maybe the restructuring of their corporate structure and the ownership levels could be beneficial to them for future purposes for tax savings down the road. And so we talked about some of the options there. We talked about some of the options in stage two. We did not also get into stage four, which is about legacy and estate planning.

strategies, basically directly, but with that corporate strategy restructured, they’re automatically putting themselves really in a good position when they also optimize their corporate wealth reservoir, especially using that whole life policy, they’re automatically optimizing that legacy and estate strategy as well. So we got some tips there specifically for these two to move forward with. Looking forward to seeing how that shapes up for them in the future.

Kyle Pearce: Awesome, and friends, if you want to run your scenario through our four stage process, head on over to CanadianWealthSecrets.com forward slash pathways, and you can see how your pathway is shaping up and the places that you can work on in the interim. And of course, if you’re ready to hop on a discovery call, head on over to CanadianWealthSecrets.com forward slash discovery, and we’ll be chatting with you sometime soon.

Jon Orr: Just a reminder of the content you heard here for today is information purposes only. Should not constrain the information as legal tax investment or financial advice. And one more reminder, Kyle Pearce 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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