Episode 200: Holding Company Hype: What You’re Not Being Told

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Should you really set up a holding company for tax savings—or could it actually cost you more in the long run?

Many Canadians hear that incorporating is the golden ticket to tax efficiency and wealth building. But the truth is more nuanced. If you’re a T4 employee or just starting your real estate journey, rushing into a corporate structure might create unnecessary fees, added complexity, and even higher taxes. The real challenge is knowing when incorporation makes sense and when it’s better to stay personal with your investments. This episode unpacks the myths and realities so you don’t fall into an expensive trap.

By tuning in, you’ll discover:

• Why transferring personal investments into a holding company can backfire tax-wise.
• The clear line between when to keep assets personal versus when a corporation truly adds value.
• How to build a strategy that creates a tax problem worth solving—rather than a structure that solves nothing.

Press play now to learn how to spot the right time—and the wrong time—to incorporate on your path to financial freedom.

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 investment optimization, tax-efficient investing, and making the right choices between personal vs corporate tax planning. Whether you’re exploring holding companies, corporate structures, or real estate investing in Canada, a smart Canadian wealth plan aligns your financial vision setting with proven wealth building strategies. From RRSP optimization and navigating salary vs dividends in Canada to using retirement planning tools for an early retirement strategy, the key is balancing financial buckets for growth, protection, and legacy planning in Canada. Entrepreneurs can benefit from corporate wealth planning, corporation investment strategies, and business owner tax savings, while families can lean on estate planning Canada tactics and capital gains strategies. By focusing on financial independence Canada with modest lifestyle wealth and financial diversification, you can move closer to financial freedom in Canada while uncovering true Canadian wealth secrets.

Transcript:

Kyle Pearce: All right there, Canadian wealth secret seekers. Today we’re gonna dig into a topic. It’s a common topic and a lot of, I’m gonna argue misunderstandings out there when we’re talking about optimization, including our investment optimization, as well as our tax efficiency. Here, we’re gonna dig in down the rabbit hole. We’ve got someone from the audience who’s listening and probably will listen to this episode as well. We’re obviously gonna keep it anonymous.

but they had reached out wondering how they can become more tax efficient and to better plan for their estate. Amazing. But they’ve kind of got things a little bit backwards. We’re gonna dig into it a little bit more. Yeah, here’s the question it said, and I reached out back and forth, back and forth. We kind of went through email in order to get a better sense of what’s going on in their world. So both spouses are T4 employees.

Jon Orr: Well, yeah, what’s the question? What was the-

Kyle Pearce: They’ve been doing great things with investing. And the big question is, as they say, the main goal for the call is to identify my best option and method to open a holdings company and transfer my portfolio into it for tax advantages and estate planning. The three-year goal would then be to begin my real estate journey within the holdings company and invest into a joint venture. So lots of goals here, lots of ideas, but lots of nuance.

Jon Orr: Okay, well, well, so what I heard was I wanna, I’m thinking of opening a corporation, I got real estate on the mind. Sounds like that’s what people do, right, is to say like I’m gonna put a corporation in place because of liability, because of, you know, I wanna make sure that I’m putting all the dollars in the right spot for tax optimization, because hey, corporate dollars are tax less, especially on the first $500,000, so.

So tell me what’s happening here and, cause it sounds like you were like prior to recording here, you were like, well, I don’t know if this is what they should be doing.

Kyle Pearce: Yeah, 100%, 100%. And that’s why I think it’s so important. Because this individual said they’ve been listening to the podcast, went all the way back to the beginning, as a lot of people do, and they’re working their way through. They’ve almost accomplished like 100 episodes under the belt. Amazing. But then when this question comes back, it kind of makes me recognize that we can’t forget to come back to when does it make sense for us to do certain moves.

I want to talk about a lot of the pros that they’ve got going on. As you know, if you’re listening to this podcast, we’ve done a lot on strategies like the Smith maneuver and such. This couple was great because they actually bought their primary home. They actually paid it down aggressively and re-borrowed on a home equity line of credit so that they can invest into. And they’re in the markets. And they’re actually doing dividend investments, right?

And they’re doing quite well doing that. So they’ve got the Smith maneuver going on. They’ve got money in their R.S.P.’s. They’re young. So they’re in their mid 30s mid 30s. They’ve got some emergency cash on the side. Good salary, good spending like all of these things are lining up. But now they’re sort of taking this step and in their mind they’re going, OK, we want to start. We want to.

Obviously tax efficiency makes sense for them. They’re saying, well, that’s why they’re doing the Smith maneuver, right? They’re trying to write off the interest on the money that they borrowed against their primary home to make some of these other investments. And now they’re looking to kind of go down the rabbit hole of how do we do it even more tax efficiently? And the thought is that they’ll open up this holding company and maybe transfer investments into it. Right now they have a big $300,000

non-registered investment account with a brokerage that they’re doing this dividend investing and such, which is great. And the way we’re hearing it is they’re saying, we’re going to take that, we’re going to put it into the holding company. And therefore, because it’s in a holding company, like we’ll get taxed less. And in reality, that’s not really going to be the case here. It’s actually going to cause them a little bit more tax inefficiency and more costs associated with it.

Jon Orr: Right, right, they got the passive rule, passive income tax. we’ve always said, like if you earn money personally, invest it personally. If you earn money inside a corporation, invest it in the corporation. Like don’t, like keep the corporate veil up between those two things. Like all they’re doing is sending, if they’re sending the money into the corporation, so the corporation’s like buying that investment off of them.

it’s now going to be inside the corporation and all of a sudden subject to, if it’s dividend paying, they’re gonna be subject to the 50 % passive income rule and all of a sudden it’s like, but you probably weren’t paying 50 % as a T4 employee. So there’s your tax inefficiency right there. It makes sense to think about, if I’m gonna own real estate, then we think liability-wise, I should have a corporation. But also it’s like, sometimes you get also the,

I guess the misnomer, I don’t know if misnomer’s the right word here, but it’s like you get the wrong information about like, well, it also will protect me against my debts. It’s like I’m gonna buy, gonna loan, you’ll take loans inside the corporation, I’ll go buy some property. It’s like I got full protection. I’ve got full protection here, except that it’s like you’re forgetting partly, it’s like you’re not fully protected. Somebody’s gotta guarantee that money and you’re the owner.

There’s that component. Like I get the whole like we should have a corporation for liability purposes, but for tax efficiency, sometimes it doesn’t make sense.

Kyle Pearce: Right, 100%. And you you’ve probably heard us on the show talk about like, we have corporations and, but we also have rental properties and some of those rental properties we own in our personal names just because it made sense because that was where the money was coming from. We also talk about that like flexibility piece. It’s like what people are all really doing. Like at the end of the day, when there’s a corporate structure, people would rather have all of the money in their personal hands.

than in the corporation. So when you think of it that way, it makes it a little easier for you to kind of recognize that this maneuver isn’t necessarily gonna be more helpful. Like you’re actually creating more complexity for yourself than you really want to. You’re also creating more tax liability, of course, right? You’re gonna pay a higher amount on that passive income tax. But like at the end of the day, you’re gonna want that money to come back to you as well. And I think where sometimes you can get,

stuck and like lost in the weeds is like we’re constantly talking about corporate owned insurance and how it’s like a superpower inside a corporate structure because at the very end when that death benefit pays out you get the net death benefit to come out of the corporation through the capital dividend account tax free. That is phenomenal. But you know what happens if you buy that same policy personally you get the whole death benefit tax free.

right? So it’s like at the end of the day, it’s like you’re not actually getting an advantage in doing this. The policy in a corporate structure is to help deal with the fact that I made money here and I want to get as much of it out with as least tax, you know, cost or expense as possible along the way. But if I could, if I could, I would rather have all that money in my personal pocket as long as I didn’t get hammered in tax.

getting it to my personal pocket right away. So in this particular case, they’re actually not going to be better off because they’re actually only gonna generate passive income inside this corporate structure, not active income. That active income is the one that’s really motivating to people to go, I wanna open an operating company and I want to pay less tax on any of the net operating income.

that I’m gonna keep in there and I’m gonna defer that tax as long as possible. they’re T4 employees. They already paid the tax they’re gonna pay. They got some of it back because they were contributing to RSPs. They don’t actually get the same benefit that someone who’s operating a actual active operating business inside a corporation, like they’re not getting that advantage upfront, which in turn sort of goes.

If liability wasn’t a thing, you would say like, don’t put any of your investments inside of a corporate structure. You’d want to be holding them personally. And we would be doing other maneuvers at a personal level, like the Smith maneuver that they’re doing in order to try to mitigate some of those taxes.

Jon Orr: So I guess what you’re saying is because their real estate aspirations aren’t at the point yet where the operations of managing, taking in rent, all of the expenses aren’t at a point where that can offset the cost of setting up a corporation, doing the books on the corporation. You’re saying it’s not there yet. It’s like in the future, because it’s like people have holding companies that own investments. But, but it’s, saying, you’re saying, I’m not there yet.

Kyle Pearce: Yeah. And, and you know, I, I vividly remember when I, and this was me and Matt at the time and another partner at the time, we were opening up our first real estate holding company. We’re all T four employees at the time. We didn’t have any other businesses. We had never had a corporation before. And to be honest, I’m pretty sure it was me that was like on the court. Like, so I see myself in this individual, right? Like I was like efficiency, I want efficiency. And I,

I’m a fact finder. So I’m going down the rabbit hole and you hear all these good things about corporations. And I remember our accountant saying he was like, how many properties do you plan to buy? And the big thing for him was sort of like, and how long, because we were at the time ready to buy one property at six stores. So these were like six individual single family cottages on like one property.

We were going to buy this property and basically his big thing without considering liability, you know, any of that stuff was is this it or are you planning to buy more? And the big question really that got us to land on why we opened the corporation at that point was because we had ambitions to open more. So at some point down the road, building up a corporation with assets that we would personally guarantee in the short term, but then eventually just the

history of the corporation being its own entity would be able to support further lending and so forth and all of those things when we needed money down the road would be a great move. And here’s the other aspect, John, that is so important. If you’re going in with different partners,

it can also make a lot of sense to do the corporate structure. So now it’s just, hey, you have half the shares, I have half the shares. It’s easier than say a joint venture, a bear trust agreement or any of these things that are kind of floating around. It’s like very cut and dry. So because we had three different partners from three different households and because we were planning to scale up and because we have big ambitions, we had that property under contract.

And at the same time, while the property was under contract, we had about 45 days to close. We set up the corporation at the exact same time. Whereas in this particular case, what I’m hearing is this idea that I’m going to set up the corporation. So like we’re ready for when we do buy the property in two or three years or when the next investment opportunity comes up. And I would argue that’s like solving a problem for a problem that doesn’t exist yet.

right? Like you’re creating and you’re in a sense wasting a lot of time and energy like Alex Hormozi would say like you’re focusing on the wrong thing, right? Like that is not what you want to be focusing on right now. Knowing this information now hopefully will serve you well so that when that time comes, I’ll be honest, if it’s a single family home or a duplex or even a quadplex and it’s just you and your spouse buying it, it might still make sense to just make that purchase at a personal level.

Because once again, rule of thumb, I earned the money personally. If I can invest the money personally, that’s going to be a better move than trying to get that corporation going unless there’s like some big ambitions or there’s big concerns around liability that you’re really worried about.

Jon Orr: Those are some good, well these are some good tips to think about when you’re setting up your corporation. I know that one of the big components of the decision this person was making was most likely to try to move some large personal assets into the corporation now, thinking that that might save them in tax. We talked about that not being the case.

I want you to, like you’ve obviously given us a nice example of like why it made sense for you and the good uses of your corporation at that level and why that made sense, like why it was a good choice. And sometimes we can use that to help us clarify whether it’s a good choice for us and whether the choices we have made with our corporations are correct. I want you to think about a client now, like think about some of the.

the clients that we have helped navigate this world, these lands, and then use their corporations in the right way to optimize their investment structures. That’s the third stage of our healthy financial planning system, either personally or corporately. Give us a scenario. Think of somebody that you’re like, this person is using their corporation optimally as a structure.

And they’re also using these structures optimally within it to maybe navigate tax, but also navigate in a better way. So the person that you are thinking about, the person that you’ve been communicating with has a great kind of model to go after.

Kyle Pearce: Yeah, absolutely. And I would say really what it comes down to is when we’re doing a lot of this corporate tax planning, we’re not opening these corporations because opening a corporation is going to give you some sort of investment tax efficiency. It’s quite the opposite. It’s that you open this corporation to make active income. So you’re going to pay on the first $500,000 of profit. You’re going to pay a low tax rate. You’re going to pay around 9 to 12 % in most provinces.

which is fantastic yet to keep more of every dollar. And that’s the main reason. And we unfortunately don’t get that tax rate on investments. We don’t get it on rental properties. We don’t get it on anything that’s considered passive. So that corporation, when you’re building a business, when you’re a consultant, when you’re selling widgets, when you’re, you know, what an electrician doing some sort of electrical work, like whatever that might be, as long as you do not need all of that profit,

to fund your lifestyle, because this is the other nuance as well. it’s not even worth opening that corporation if there’s no money left at the end of a year after you need to pay all the expenses, taxes, and your lifestyle. If there’s no money to be had, there’s no tax deferral going on there. So again, it’s a wasted structure, right? So for those people that are going,

I’ve got $30,000 of retained earnings every year, or I’ve got $100,000 of retained earnings. And of course, as that number goes up, it becomes even more imperative to be structuring some of these things, including a corporate owned life insurance policy, because it gives you the ultimate flexibility through leverage. And then through leverage, we can start to do some of the same things that

this individual reached out is already doing at a personal level, right? This Smith maneuver is great for T4 employees at a personal level. We’ll get a lot of business owners that reach out and they go, I wanna do the Smith maneuver. And I tell them, unfortunately, in order for you to do the Smith maneuver, it means you’re gonna have to take more money out of that tax deferred bucket, which is your corporation, get taxed at a high rate. So maybe paying 30 or 40 % on that.

in order to pay down a mortgage so that you can write off 5 % of interest at the end of the year. And when you do the math on that, go, that’s not a good structure for a corporate owner, right? Someone who has active income, we’d rather you defer it over here. And what we’re gonna do in that corporation is we’re gonna kind of create a Smith maneuver like strategy inside the corporate structure.

so that you can leverage a policy which is gonna be safe and foundational much like a primary residence is safe and foundational for a T4 employee out here. And you’re gonna be leveraging that so you can make investments. Now, we can make those investments in the corporation depending on the size of the policy, the health of the corporate structure, we can potentially leverage at a personal level, right? There’s different ways that we can do this. Cause remember, if I had my way,

I would have all of my access to capital at a personal level, right? Because remember, the structure is there to defer more tax. So ultimately, just like the RRSP is a tax deferral bucket, at the end of the road, when you pull that rip cord on the RRSP, whether it’s through you taking it all out or the universe deciding it’s time for you to take it all out, because you move on to the next place, the tax will be paid in an RRSP.

in a corporate structure, we have the ability to set up structures so that we still make all the great investments we wanted to make. We still have all the growth that we’re after, but we also have a massive tax advantage through the capital dividend account. So when I kind of describe that, I’m just trying to give everyone who’s listening kind of a sense as to like figuring out where I am, where’s my income coming in. And if I’m earning all of my income personally in my household,

A corporate structure is probably not going to be something that’s super advantageous for you, at least in the short term. Whereas if you’re earning it inside the corporation actively, there are massive, massive things that you can do inside of that tax deferred bucket to be able to invest and try to pay less tax over the long term.

Jon Orr: I just, well I. I just wanted to clarify because you’re saying I earn it personally. Let’s say you’re not incorporated but you’re running a business and you’re earning that business. You’re not a T4 employee. You’re earning business income and that income is more than what, that retained earnings of that business is more than what you need to live on. That’s when it makes sense because now you can incorporate to have that tax deferral.

Like when you, think what you were saying before, just to clarify is like if I’m a T4 employee making money, not business income, then it’s hard to make that justification to incorporate for what? Just to hold the property, the one property in liability? That’s when it might not make sense.

Kyle Pearce: Yep. And I would argue as well, it’s like there’s a lot of times we’ll get sole proprietors. So these are people that are running a business, but they’re not incorporated. And they’re coming, they’re like, I want to incorporate to save on tax, but at the end of the year, they’re left with very little money. Like they’re basically, they’re spending all the money. Right. So what ends up happening for that individual is they incorporate and all the same things happen, but then they have to pay themselves through salary or dividend or both in order to

Jon Orr: They’ve probably maximized all their expenses, right?

Kyle Pearce: live lifestyle, the corporation has nothing left. You’ve deferred nothing. You’ve actually just created yourself extra tax or I shouldn’t say tax tax fees. Yes, fees, right? And accounting and structuring and all of those things. So, you know, you really have to be in your mind. I always like to say create the tax problem before solving the tax problem, right? So someone who’s earning $40,000 as a T for employee for some other corporation,

You know, they’re taking their $40,000 of tax and the Smith maneuver is not necessarily like something that should be on your radar. Why? Because like you’re already in a really low tax bracket as well. Like you’ve got to think about ways that I can earn more income, create the tax problem. And then you go, okay, now it’s time for me to do the Smith maneuver, do all of these things. And the same would be true of course, with anyone who’s incorporating an active operating business.

Jon Orr: Yeah, I think you’ve given us a clear snapshot of this common question is when should I incorporate, should I incorporate for these reasons? I think we’ve pointed out some reasons you would want to, but also some reasons that you shouldn’t choose to. But we’ve also hopefully painted a picture of like how, when you do incorporate, how to use that corporation to solve your tax problem or assist you in that tax problem when you’ve created.

the tax problem that they are using some structures, some optimizing structures. We wanna make sure that when you are in that situation, you’re listening in, you’re leaning in right now going like, well, I already have a corporation, I already earn operating income in there, I pass it up to say a holding company and maybe I’m just missing out on some key moves here. Hopefully we’ve shed some light on a couple of those moves that past clients of ours have made, but also we have made ourselves specifically optimizing with that wealth reservoir move. Kyle, any last thoughts here for our listener?

Kyle Pearce: You know what I think for anyone who’s out there and you are on this, you know, investment journey or retirement financial freedom journey, or just trying to optimize your situation, always keep in mind that you can head on over to our website and take our pathways assessment. This will help you to try to figure out where you are in the journey and where you might want to most focus your attention. You could do that over at Canadian well, secrets.com forward slash pathways. And by doing so,

This is allowing you to kind of focus on what matters most. So for this individual who reached out, you know, they’re doing all the right things. They’re researching, they’re learning, but I would rather them take that energy, that time, that effort and focus on what is that rental property that I’m actually going to be trying to purchase, right? So focusing on the actual investment, create yourself a tax problem worth solving. And as you run into those bumps, you know, you can reach out to us over at Canadian wealth secrets.com. forward slash discovery for some help along the journey at that point.

Jon Orr: Just a reminder, the content you heard here today is for informational purposes only. She does consider any 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 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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