Episode 226: How to Escape the Four Money Traps Holding Your Wealth Back

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Are you a business owner who technically has freedom—but still can’t take a random Friday off without guilt or cash flow stress?

Too many Canadian entrepreneurs feel like prisoners to their own businesses. You built your company to escape the grind, yet you’re still chasing invoices, sweating over tax bills, and wondering if you’ll ever feel actually free. This episode dives deep into what real financial freedom looks like—not someday at 65, but today—with systems that let you own your time, not just your job. Whether you’re trapped by cash on the sidelines, stuck in short-term tax thinking, or overly reliant on the “retirement pile” myth, it’s time to reset your strategy.

Listen now to learn:

• The two essential “flywheels” every business owner must build—and why ignoring one keeps you stuck.
  

• How to escape four hidden money traps, including the CRA tax drag and corporate liquidity pitfalls.
  

• Why true financial freedom is about control, not accumulation—and how to design for it now, not later.

Press play to rethink freedom, reclaim your time, and start building a business that works for your life—not the other way around.

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 Lis
• 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.

Corporate wealth management for Canadian business owners goes far beyond basic investing—it’s about building a complete Canadian wealth plan that turns retained earnings into tax-free income while supporting long-term financial freedom in Canada. Through smart corporate tax strategies like holding company structures, life insurance planning, salary vs dividends optimization, and tax-efficient investing, entrepreneurs can create reliable passive income, accelerate early retirement strategies, and support a modest lifestyle wealth approach without unnecessary tax drag. By combining corporate wealth planning with RRSP optimization, capital gains strategies, real estate investing in Canada, and clear financial buckets, business owners can balance personal vs corporate tax planning, diversify investments, and strengthen estate planning in Canada. The result is a repeatable financial system that supports financial independence, business owner tax savings, and a lasting wealth legacy—designed specifically for Canadian entrepreneurs focused on building long-term wealth with clarity and control

Transcript:

You know, in today’s episode, think is going to be, and for us, I think it’s something that we consistently talk about amongst ourselves, the two of us, which is, so it’s probably one of the most important conversations we’ve had, and we wanna have it here with you, the listener, because I think if you’re feeling stuck, you’re feeling stuck in your business, you’re feeling stuck in your investing, you know, your investing cycle, your investing strategies,

⁓ We wanna talk about thinking about how are we truly financially free and when will we will be truly financially free as Canadian business owners. And we’re gonna unpack a few traps along the way that help our mindset shift from where we are now to feeling unstuck on developing this strategy to be truly financially free as a business owner. So we’re gonna get into that here today.

Yes, absolutely. you know, we’re going to talk a little bit about this idea of like, you know, paid time off for specifically business owners. If you really think about it, you’ve developed a business, oftentimes you’re very entrepreneurial spirited. You want to do something more than just say, like, show up and, you know, clock in clock out and you’re wanting to build your wealth. But, you know, a few weeks ago, a business owners, not the first time we’ve heard something like this, but someone said, they said, Kyle, I built this business so I could have freedom.

And yet I still can’t take a random Friday off without worrying about payroll, taxes and cashflow. And the reality is, is that so many people that are in their business and we’re saying like they’re working in the business instead of on the business are stuck in this place. So even though they’re their own boss, they get to decide whether I take a Friday off or not. The reality is really they’re, they’re kind of like contemplating with themselves. It’s like, do I want

Mmm.

to impose that amount of pain on myself by taking a Friday off? Do I want to carry this into the weekend? And a lot of times it comes down to so many different factors. First of all is I’m growing my business. Of course I want to grow the business because I want to be successful. I want to do great things, all of those pieces there. But then there’s also like the actual monetary growth side of things. There’s like, I need to hit certain milestones, right? In order to be profitable.

Hmm, right.

I know that if I’m this profitable, I’m still gonna have tax implications from the CRA. I’m still gonna have all kinds of things going on like market volatility, right? If Donald Trump says tariff, is my revenue gonna go down? Who knows, right? Depending on the industry. So there’s so many people who are talking about these things. if you’re in your mind thinking like, wish I truly was financially free now,

we’re gonna unpack what that even really means because like you might be financially free, but you might feel still tied to the business. And we’re gonna talk about some of the traps that we’re gonna use to help you unclog your system. We’re gonna try to remove some of those traps that Canadian incorporated business owners use that keep them from financial freedom. And we’re gonna try to dig into both the business flywheel

Yep. Yep.

Mmm, right.

And we’re going to talk about something

that hasn’t even come up yet in this conversation, which is building the actual wealth flywheel. That is the true differentiator in terms of giving yourself that paid time off that you’re looking for.

Yeah, so those two flywheels are gonna frame how you wanna think about these traps as we unpack them in this episode because in reality is you have to have both flywheels to be truly financially free. And I think a lot of times we focus on one versus the other and we wanna give you the solutions here today to make sure that you’re thinking about both of these flywheels and you’re putting the right priority and the time and the dedication towards the right flywheel at the right time. we’ll…

We’ll get into what the flywheels are as we unpack some of these traps, but let’s start, Kyle, with what do we think true financial freedom really means here in Canada? So let’s get crystal clear here, because financial freedom to me is not retirement. It’s not waiting to 65 to finally live. It’s not just maximizing my RSPs and building up this pile.

and praying the markets cooperate like you just mentioned. It’s, know, freedom, financial freedom for us business owners is different. And financial freedom is control. And I think that’s the way you want to think about it. It’s control over your time. Like you’re saying is like, oh wait, we’ve got tons of business owners that are still saying like, I just can’t let my foot up off the gas. And therefore, which means you don’t have that freedom yet, which is okay.

Hmm.

where you are now, but we have to design the systems, the flywheels to get you to that place. And that confidence of knowing that you’re on the right track there can actually make you feel like Friday could be taken off because you know the system’s in place. You have to have, like, you’re gonna want control over your taxes. You’re gonna want control over your cash flow. You want control over how and when you work. But the reality is most Canadians are trained to follow that retirement model that was built for employees.

Like it’s not built for us. It’s not built for us business owners and entrepreneurs. And that’s that mindset shift that we want to help you make here today is because, know, truly your RSPs are going to lock your money up. Passive income rules, punish corporations. You know, there’s, there’s things that we’re battling here that not, not, not the T4 employees are not necessarily battling. We’re constantly juggling liquidity, opportunity, tax consequences, like all these things matter. And, and this in the default system doesn’t work.

and it leads to money traps. So let’s talk about those money traps, Kyle. Let’s get into the trap one and then let’s unpack those two flywheels as we go. The first one here is the corporate liquidity trap, which is I think the trap we see the most.

Mm.

Yeah, and we’ve talked about this on past episodes as well, you know, and if you’re watching us on YouTube, I’ve got, you know,

So as I’m holding my hands up in the air here, I’m kind of representing two flywheels. We have like the operating business that you know, you’ve been engaging in and focusing all your time and effort on. And let’s be honest, it’s probably the greatest investment that you’ve ever had in your lifetime, right? Like that’s why you’re in business. That’s why you keep doing it. You’re passionate about it. You enjoy it. All of those great things.

But to the side is the investment, the wealth building flywheel, the true differentiator that’s going to allow you to take that time to, you know, pick up and leave if you ever wanted to. And let’s be honest, like at the end of the day, if I build that flywheel well enough, I could actually like walk away from my business flywheel, even if the business flywheel was to stop. Like if I’m not able to get to a place where the business runs without me, I could literally walk away

wind it up and know that my actual wealth building flywheel is constantly moving whether I’m there or not. And this is the mentality that we want people thinking about. So when we look at the first trap, here’s some things that we can do to try to stay out of these traps. This one’s the corporate liquidity trap because it’s your number one business, because it’s your number one investment, I should say, you have a lot of money sitting on the sidelines inside your corporate structure.

Now this is logical because your business is an investment. just happens to be a very active investment. You are in that business and you are there trying to keep that flywheel going each and every day. And guess what? You are subject to a margin call if that business runs out of cashflow, right? So what do we do? We keep a lot of money sitting on the sidelines and ultimately at the end of the day, you still want to have access to that money, but

There are ways that we can utilize that money while it’s there and it’s liquid for that quote unquote margin call in your own business to be useful to get the flywheel started on the wealth building side. And that is the actual high early cash value corporate owned life insurance policy by slowly funding those dollars over.

you are slowly starting that flywheel, not because it’s going to be the only thing in that flywheel. Okay. I want to be a hundred percent clear here. We need that money just in case. So a great just in case tool that keeps it liquid is going to be the high early cash value life insurance policy for our corporate business owners.

Yeah, it’s like the foundation, like you’re saying, it’s not the only thing that’s going to be on that side of the flywheel, but it’s the foundation that helps that flywheel move a little bit smoother and is a little bit safer, right? It can be the first push. Yeah, and while we’ve seen other business owners not use that as the first push where they’re all of sudden, and this will lead into the second trap, but the…

It’s like the first push, you know, the first push without a lot of risk.

The idea is that most business owners, if I do have my two separate flywheels, I’m transitioning my retained earnings from my operating company up to my holding company, which is where my wealth flywheel is living and breathing over here. And maybe I’m sticking those dollars into the markets and I’m just plugging in there and I’m building up that pile. And that’s what I think is my flywheel. It’s like, over time, this money will generate more money.

and then more money and then all of a sudden I will have this pile that generates me money, which in a way is a type of flywheel. It’s just not the flywheel that I think you’re gonna wanna have to make you go, I can take a Friday off. It’s like you need to think of it in a different way, which we wanna unpack here. But I think that’s the type of trap you’re still in with that first trap is thinking of it as like.

I’m just, we got all this money on the sidelines. So let’s move into the portfolio trap, which to me is the second trap that we get in is because let’s say I do, I’m keeping these funds around and I start to slowly transition funds, but then I’m like, how much is the right funds? And it’s like, okay, I’ve got this flywheel happening over here on the well side and I’m putting it, but like, okay, I’m getting it in the markets. Therefore I’m gonna have passive income down the road and maybe it’s a dividend strategy.

But all of a sudden it’s like, feel like I’m pretty risky over there because I want growth. Or it’s like, I don’t want to be too growth oriented, I need to actually balance my portfolio over there. But at the same time, I have my cash over here because of that margin call in terms of my operating company. And I think that’s the trap here that we find ourselves in is that we tend to think we’re riskier than we are on the wealth engine. And the wealth flywheel.

Mm-hmm.

when you’re not considering both engines at the same time, both flywheels, to really try to create a growth strategy.

Mm-hmm.

And to kind of build on what you’re saying, John, like what we see happening and we know this, like we’ve experienced it as business owners. We’ve been these guys where you see that money that’s sitting there. So we go back to trap one that money’s there. I need access to a certain amount of capital. They might start. As you had mentioned, it doesn’t have to be a corporate owned policy does not have to be that first push. But what we find is that people don’t start the flywheel then if they go directly to a brokerage account and start putting it in long term assets.

because they’re not sure if they’re gonna need those dollars in the short to medium term. So what they do is they do nothing. Whereas when they start opening that brokerage account, so this is a brokerage account inside the operating company or ideally in a holding company, right? That would be the ideal place for this to live. They’re gonna start funding a certain amount each month, each quarter, each year, however they choose to fund this brokerage account. And they might do something like,

Mm-hmm.

going 100 % equities and then they’ll say like, I’m super risk on, I’m like a really like aggressive investor. When in reality, when you look at their brokerage account and all of the other assets that they have inside the corporation, liquid assets that are, that is, so their cash or any policies they might have, what they start to recognize is that they’re actually not nearly as risky as they thought. So for example, if I’ve got,

which is preventing

growth.

you’re preventing yourself from growth. if you have $200,000 in cash in the operating company and in your mind, you’re like, I might need it. Like, who knows? Like what if that invoice doesn’t come through until, you know, three months from now, maybe it’s 90 days later, whatever it might be in terms of getting paid those 200,000, it, it holds me back from putting money in or what they’ll do is they’ll look at 200 and they go, well,

I’m gonna use a rule like let’s say 10%, you know, we’ll use like a Dave Ramsey approach, like let’s take 10%, I’m gonna take 20 grand, put that into my brokerage account and I’ll put it in all equity ETF, which is fantastic. The problem is it’s only 20 grand growing over there and we got 180 over here doing nothing. So that’s where getting both of those things between trap one and trap two, getting those dollars working in the best way possible. So deciding.

How much of that 200,000 am I okay? Am I going to be safe to put into long-term assets that make it more challenging to pull back because of dips in the market, because of any other circumstance that might happen? And the remaining amount, it might not be the whole 180 by the way, especially when you’re first getting started, but a certain chunk of that amount could be considered for.

a high early cash value corporate owned insurance policy so that we still have that liquidity to get those dollars back. Now we’re going to get GIC like growth tax free on those dollars that are starting to build that wealth engine. And now the liquidity I need from my corporation, it exists, but it exists over here in that flywheel. So I can now start contributing more of these additional retained earnings dollars towards

the high growth equity ETF portfolio.

Right, right, and that’s making use of that same tool to do both of those things. All right, let’s talk about trap number three, which is the CRA tax drag trap. And I think this one’s sneaky because I think, and this one is probably gonna, it’s gonna sound like, hey, don’t you guys talk about how to optimize for taxes and how to optimize our strategies all the time? But this one is, I think, thinking about you need to always optimize for.

Reducing tax and what I mean by that is like that’s why it’s a trap like you keep thinking that is preventing your growth and and what I mean by that really is that You’re asking yourself the wrong question, which is like your question. You pretty much ask yourself is like how do I reduce taxes this year? instead of saying how do I reduce taxes over over 20 years and there’s a that’s a difference because I think we get stuck in this like

this short-termism, we get stuck in this short-term thinking because it’s like this year, how do I make sure that this year I pay less tax, less tax, less tax? And that starts to accumulate some of the strategies that you’re taking, but that’s preventing your long-term tax strategy. So you wanna be thinking more long-term and what could you be doing long-term over the course of many years to build your wealth and build your legacy so that you’re not.

restricting yourself now and that’s the trap you’re gonna find yourself in.

Right, right. And I’m going to say too, it’s like, unfortunately, like, here’s like some bad news. Sorry, everybody. But it’s not like one thing. Like, it’s not like if I just get this one thing right, like everything else is good. Like, you know, if I, you know, focus on salary and dividends for a second, right? Like when we look at that, and we go, listen, if your company is earning like a significant amount of money, and you don’t need a ton of money in your personal pocket,

You know, if it’s over $500,000 a year, like a rule of thumb is going to be like, listen, you want to take out probably around 130 as a salary and then use that additional money to stuff the RSP. Like that’s like an easy move. Some people will be like, but Kyle RSPs it’s tax deferral. Like what if I’m in a higher tax bracket later? I’m like, I get it. I get it. I get it. But if you’re taking money out of the corporation and the company was going to have to pay the same amount of tax that you’re going to pay at a personal level anyway, you mind as well.

and get it over there and then we’ll deal with that tax strategy when we do our quote unquote meltdown along the way, right? Like we’ll push off CPP, we’ll do all kinds of different moves in order to help you out with that piece there. When we’re in the corporation, we have to be really, really cautious on what we’re investing in. So again, that money that’s sitting there going all the way back to tax, to trap number one, where we think about liquidity.

and we think about having too much money sitting in a high interest savings account, you’re losing half of the interest to passive income tax. Like it’s just, it’s just not great. You know, it’s better than nothing. Don’t get me wrong. Like I’m not suggesting you take the money out and put it in the backyard and bury it. But ultimately at the end of the day, you want to be doing something that makes sense. So the same is true for that brokerage account that we’re talking about. I don’t care if you’re putting 10 % of the retained earnings in there or 20 % or maybe you’re 50, 50 % because you have

you know, really low expenses or really low risk of, you know, requiring that cash flow, whatever your number is, the dollars that are going into the corporate brokerage account, you want to be aware of how things may be taxed. So if we can, we want to have capital gain, like assets going on, whether that’s corporate class ETFs that you’re using, what we want to minimize is we want to minimize dividends, we want to minimize interest income to the corporation.

Any of that low growth fixed income like investing that you want to do to balance out your portfolio can be done tremendously well with the high early cash value policy. So let that policy do that part of the work and let the equity ETFs do their thing. But instead of just spy or QQ queues, which actually produce a dividend, look to some other tickers that could potentially keep that dividend payment within the ETF wrapper.

so that you’re not experiencing the tax at the corporate level and you’re only going to experience a capital gain over the longer term. The longer I hold onto that ETF, of course, it’s a deferred tax that I’m gonna have to pay and I will have to pay on the capital gain down the road. But remember, the trick up our sleeve is we’ve got the capital dividend account.

capital gain dollar that you realize inside that corporation is going to be able to flow out as a capital dividend to shareholders tax free. That’s a massive advantage. The other half subject to passive income tax. But remember if we’re structuring how we’re going to pay ourselves each and every year, we can use the refundable dividend tax on hand account in order to help us get a tax refund to the corporation and take on some of that

personal tax at a personal level. And when all is said and done, if we do this well and you don’t require say three, four, $500,000 every year in your personal pocket, we can keep you in a really low tax bracket so that you have more cash flow during your lifetime, more net worth throughout the entire journey, and then a much bigger estate value at the end. You get the win, win, win across the entire board.

Yeah, so what I’m hearing you say is instead of focusing on, say, short-term thinking, you want to think of it more as a system. Like, you have to think of it as a system so that it will just control your life now, but you’re setting yourself up for success later. Okay, let’s talk about the fourth trap here, which is the retirement myth. You know, and I think, we said this earlier, but the entire Canadian financial industry still sells the idea that you work for 30 years.

you save in RRSPs, and then you hope there’s enough that you’re not gonna run out, which is that’s not your freedom, like that’s just deferral. And I think this is the idea that you’re stuck on the, I just need a pile, and I just need that pile to be big enough so that I can just start withdrawing from that pile. And this is the trap, I think, for business owners specifically, because you’ve got more things to think about than just that pile, and you’ve actually got more.

your flywheel on the well side needs to be moving in a way that isn’t just continually subtracting from that pile. Well, it’s important component of that wheel. I think you wanna think of it instead of build a pile, subtract the pile. Think of it more as the actual flywheel system. And a flywheel system is as this, as one layer of your flywheel or one component of your flywheel builds into the next and the next builds into the next and the next, and then it’s cyclical.

and then the flywheel grows even though you’re maybe in that withdrawal stage. And I think that’s the type of maneuver what we’re trying to create on our side when we have our flywheel effect with the wealth business is how do we create the system to build while we’re subtracting in those retirement years? Like what are those levers that we can pull here? What are the assets that we can build here that build this so that

It’s actually building upon itself and we’re not constantly thinking of subtraction because that’s where your mindset shift is gonna feel like you can take the Friday off. You can take a week off in the middle of the year. You can stop working on your operational business because this machine over here is a system and not a pile that’s just being depleted. Because I’ll guarantee you, if you’re thinking of it just as the pile, you’re going to restrict yourselves in how your lifestyle could look like.

Mm-hmm.

you know, your freedom’s gonna look like, your control that we talked about earlier is really gonna look

Well, and what I think if we do this well, and again, I’m not gonna argue or I’m not gonna try to, you know, say or promise anyone that this is easy. But if done well, and if we focus enough on some of these traps and how to overcome these traps along the way, and we work on both flywheels the entire journey, eventually that wealth building flywheel will actually be spinning more aggressively than that first flywheel that operating company flywheel. Now in a perfect world, you get them both spinning.

and you don’t need to touch either one. The beautiful part about a wealth flywheel is that if we do it well, that flywheel is going to continue spinning without you. Like there’s nothing you can really do to help it, right? It’s just going to do its thing. Whereas in that operating business, like the perfect situation I know for me is that we could, John, you and I and Matt with our real estate properties, we could literally wind down.

Mm-hmm.

our entire operating business without selling it and be able to just live a nice lifestyle off of the wealth flywheel. Like that for me is the ultimate goal is that we build a successful business. But along the way it’s like that wealth flywheel is there so that we can do this business, focus on it for doing the right things in the business.

And then if we don’t want to do the business, we literally could walk away and not have to worry that shoot. We weren’t able to find a buyer or, know, exactly. So this is a really important thing for people to think about. And the way I look at it is if you have an operating business and you are able to sell it at some point, so you are able to get it to a place where you don’t need to be there for the flywheel to keep going and it becomes valuable enough to sell, then

It’s two businesses.

That’s a huge bonus, right? Like that’s the bonus there, but you don’t want to be relying on that one action because guess what? If I can’t find the buyer or if that flywheel truly isn’t spinning without me being in the work in the business every single day, then I’m never going to quite get myself to that place where I feel financially free. So that for me is one of these big, hopefully big takeaways for people as they’re

reflecting on their own situation and that, hey, your greatest investment is that business 100%. But how do we make sure that we build this other business known as that wealth flywheel? How do we build that? Because that’s the one that’s gonna be the easiest one to move on its own without you. This other one’s gonna be a lot harder to build those systems in and to get it to the place where somebody else might wanna step in and buy that business from you or where…

Literally you’ve done it so well that you can slowly move away and actually not be in the day to day, but still benefit from the fruit of that labor. So hopefully today you’ll think about your definition for what does it mean to be financially free? I would argue this episode kind of really helps you think in stage one of our four stage wealth building plan.

in that finding a vision for what it is that you are after. Because as soon as you get a little more clear on that, the other three stages become a whole lot easier for you to walk through when we talk about building that wealth reservoir, when we look at optimizing our investments, and then building in what that looks like from a legacy and wealth ⁓ or legacy and estate planning perspective. Those stages.

will get easier as you get more clear on what it is that you’re after.

Right, so when you think about having, that’s one of the things we help our clients and the people that we’re working with, the families we’re working with, is to think about those two flywheels at those early stages, because you’re right, it will make all the other planning stages of your designing a healthy financial planning, healthy system flow so much easier because you’re thinking about those two flywheels. That’s your move right now. Where are your two flywheels? Do you have one or?

both moving or are confident that you’ve got one system flowing into the other and the one system is ready to take over when we’re ready to move the other system to sleepy stage. So that’s your kind of takeaway here today. If you do want to learn a little bit more about the four stages of a healthy wealth planning system that Kyle mentioned, you can head on over to CanadianWealthSecrets.com forward slash pathways. There’s an assessment there that you can take

It will actually give you a report on those four stages and where you are and some next steps. So again, that’s CanadianWellSecrets.com forward slash pathways. You’ve already taken that and you’re ready for a call with us to help us help you plan your healthy financial planning system. You can head on over to CanadianWellSecrets.com forward slash discovery. Just as reminder, the content you heard here today is for informational purposes only. should not construe any such information as legal tax investment or financial advice.

and Cal Pierce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.

Hey everyone, Kyle here from Canadian Wealth Secrets. Today we’re diving into one of the most important and misunderstood topics for incorporated business owners in Canada. How to turn your retained earnings into tax-free passive income while building long-term liquidity and reducing the tax bill your family will eventually face. If you’ve ever wondered how do I grow my corporate wealth without paying 50 % tax on passive income,

How do I access that money personally without losing half the tax? And how do wealthy families structure things so elegantly? Then this video is the one you’ve been waiting for. And if you’re incorporated business owner, this might literally reshape your financial life. Hi, I’m Kyle Pearce and I’m the president of corporate wealth management at Canadian Wealth Secrets, where we educate and guide Canadian incorporated business owners to developing strong personal

and corporate wealth management systems designed to help you build your net worth during your growth years, access tax-efficient cashflow during your retirement, and leave a legacy that lasts for your family and charitable organizations. Now that we’ve cleared that up, go grab a pen and let’s dig into the content. The problem with retained earnings. Here’s the challenge that so many Canadian business owners face. You build a great business,

You generate strong profits, you reinvest, you hire, you create value, and eventually you build up retained earnings in your corporation. But here’s where the system turns against you. Option number one, you can pull the money out personally. Boom, hit with personal tax. Depending on your province or territory and assuming you’ve already taken a reasonable income through salary or dividends, any additional funds you wish to withdraw will likely cost you between 39 %

and even upwards of 54%. Option number two, you can let the money sit in the corporate bank account. Now this is a safe and liquid option, but now you’re losing value every single year to inflation and in turn, the amount of goods and services you can buy with those dollars decreases with every passing year. Option number three is you can invest in traditional assets inside the corporation.

Now, while many fixed income assets such as high interest savings accounts, money market funds, GICs or other safe and non-volatile assets can generate consistent and predictable passive income, the CRA steps in and takes 50 % in passive income tax on that corporate investment income. So the average business owner feels trapped. If I withdraw it, I lose half to tax. If I leave it in the corporate bank account, I lose to inflation.

If I invest in safe and predictable fixed income assets, I lose half to passive income tax. If I invest in capital gain generating growth assets, I take on more risk, less liquidity, and must pay capital gains taxes on the eventual realized capital gain. But that’s only because most business owners have never been exposed to other strategic structures and opportunities. Let me show one modern corporate wealth system that can actually work in your favor.

First, we’re going to talk about the holding company advantage. The first step in building a modern corporate wealth system is creating a holding company or a hold co for short. Think of your hold co as a vault, an investment platform, a tax-efficient container, a place where retained earnings can grow without risk of liability from your active income generating operating company. It does four things really well. It’s going to protect assets from lawsuits or business risk.

It’s going to centralize retained earnings from multiple businesses. It’s going to create investment flexibility that operating companies don’t have. And most importantly, it allows you to pass your after corporate tax earnings from your operating company, what we call retained earnings, up to your holding company tax-free. Now this makes sense because your holding company is what the Income Tax Act refers to as a connected corporation, which means that the money can move as an inter-corporate

dividend from one connected corporation to the other without triggering any additional tax. Since no new income has been created, there is no new tax to pay. So let’s pause to think about the significance of that. Your operating company earns active business income. You’re going to pay your normal small business tax rate of 9 to 12.2 % on the first $500,000 of profit, depending on your province or territory.

And then instead of leaving that money exposed inside your operating company, we can sweep it up into the holding company with zero tax impact. No personal tax, no additional corporate tax, just a clean tax-free transfer of your retained earnings into a safer, more flexible corporate structure. That’s what lets your holding company become your wealth engine and not just a bank account. However, it isn’t all roses.

Because our income tax rules are designed in a way to try to be as fair as possible to all Canadians, there are some rules in place that can actually end up penalizing those incorporated business owners who are not educating themselves in order to minimize the amount of taxes they pay inside their corporate structure. For example, one tax rule that’s actually more punitive for business owners and it really designed to encourage incorporated Canadians

withdraw more money out of their corporation is the passive income tax rate. The assumption is made federally and provincially that when selecting income tax rates for passive income generated in a corporate structure, that the shareholder must be in the highest tax bracket and therefore it brings on an approximate 50 % income tax rate for passive income if the earnings are not withdrawn by the shareholder each year to a personal level.

That means placing corporate retained earnings, whether in an operating company or a holding company into a high interest savings account, GICs, money markets, bonds, even income generating rental properties means the earnings are taxed at about 50 % depending on your province or territory. But here’s where things get interesting. Once those retained earnings are sitting safely inside your holding company, you’re actually now in a position to use those dollars to

buy shares in other Canadian incorporated active businesses. And if your holding company buys more than 10 % of the voting shares and more than 10 % of the actual equity value of that business, your holding company and that operating company you’ve just invested in become connected corporations. And that one classification changes everything.

Because now, just like your own operating company can send dividends up to your hold-co tax-free, that other business can do the exact same thing. You’ve essentially extended the inter-company dividend benefit beyond your own business, directly into the private businesses you choose to invest in. Which means, passive investment income from GICs, savings accounts, dividends from publicly traded companies, or rental income, that’s going to be taxed at around 50%.

but dividends from an active business that’s considered a connected corporation to your holding company, those dividends flow into your hold co at a 0 % tax. So now your corporate structure isn’t just protecting assets, it’s giving you a pathway to grow your retained earnings completely tax-free on the investment side as well. This is one of the most powerful and underused corporate tax rules in Canada.

This is why private equity groups like PEGATE, who we’ve collaborated with on this topic, structure their deals so that business owners can actually qualify for that connected status. Because once you do, you’ve now created a tax-free corporate compounding machine. Your retained earnings can grow at 8%, 12%, even 20%, depending on the business, without triggering any additional passive income taxes.

This alone can make the difference between retiring wealthy and simply retiring. But as powerful as the 0 % dividend rule is, there’s a major limitation almost no one talks about. And it’s a crucial one. The hidden problem nobody warns you about. Let’s say your hold-co earns $100,000, $200,000, maybe even $500,000 per year in 0 % tax dividends. Amazing. But

What happens when you actually go to use that money personally? What if you want more retirement income? You want to help the kids? You want to fund lifestyle or transfer wealth to heirs? At that point, every dollar that leaves the corporation is taxed at your personal bracket. This means that the retained earnings that you’ve grown so efficiently inside the corporation suddenly become tax-trapped when you try to pull them out and will likely trigger upwards of 39 to 54 %

pull them out as a dividend or salary. This is the problem that wealthy families look to solve and most small business owners never do. And the solution is surprisingly elegant. It’s not complicated, it’s not risky, and it’s not something the CRA is trying to discourage. In fact, it’s intentionally built into the Income Tax Act and it’s called corporate owned life insurance.

Now when most people hear life insurance, they immediately think death benefit or expenses or protection. But in corporate wealth management, those things are simply bonuses that come with crafting an efficient corporate wealth system. It’s actually a tax strategy. It’s a liquidity strategy. It’s a surplus extraction strategy. And it’s one of the only ways to get retained earnings out of your corporation tax free.

Here’s what high early cash value corporate owned participating whole life insurance does. Number one, it provides tax sheltered growth inside the corporation. Premiums go in, cash value grows, tax sheltered, predictably and without volatility. This gives your holding company a second compounding machine, similar to a fixed income substitute. Number two,

You have access to capital while you’re alive and without taxes. Through an immediate financing arrangement or an IFA, you can borrow up to 100 % of the cash value and it’s tax free. This gives you corporate liquidity, even personal liquidity if structured properly, investment capital, retirement income flexibility, all while your policy continues to compound untouched. Number three, you also get a tax free payout

at death. When the insured individual passes, the corporation receives the death benefit of the policy tax free. And at the same time, the capital dividend account or the CDA is credited with the net death benefit. Therefore, the funds can be paid out to your heirs, the new shareholders, tax free. This is the cleanest surplus extraction tool available in Canada. Number four, it solves the personal tax trap.

By combining 0 % tax dividends being passed from operating companies to your holding company, tax-sheltered corporate-owned cash value policy growth, tax-free leverage against cash value while you’re living, and tax-free extraction at death through the capital dividend account, you now have a structure where your wealth compounds tax-free during life and flows out tax-free at death. That’s the missing piece.

This is the bridge between building corporate wealth and actually using it without being penalized with tax along every step of the way. The Tax-Free Corporate Flywheel Let me walk you through the exact flywheel step by step. Number one, you have an existing operating company that’s generating profits. Number two, after corporate tax profit or retained earnings are moved into your holding company.

Number three, the holding company is then going to buy greater than 10 % of the ownership of an active business. That’s 10 % of the equity and 10 % of the voting rights. Number four, the dividends from the new business investment are going to flow into your holding company at a 0 % tax rate. Number five, those dividends or other retained earnings then fund a corporate owned life insurance policy. Number six, the policy’s cash value then grows tax free.

Number seven, you can optimally borrow against the cash value for liquidity, again, tax-free. Number eight, investments continue compounding uninterrupted. Number nine, upon death, the death benefit pays out to the holding company tax-free. And finally, 10, at the same time, the net death benefit is credited to the capital dividend account, providing shareholders, this could be your spouse, children, charity, with a tax-free capital dividend.

to put money in their personal pockets. Again, tax-free. This is not a loophole. This is how wealthy families and high net worth Canadian incorporated business owners have operated for decades. The CRA built these rules intentionally to encourage capital reinvestment, to strengthen Canadian businesses, and to support intergenerational wealth transfer. This is the system that business owners deserve to know about. So let’s talk about a real example.

Let’s say you’ve got $2 million of retained earnings in your operating company. Based on the connected corporation rules, you’re able to sweep those $2 million of retained earnings up to your holding company that owns the shares of your operating company. From your holding company, you then invest $1 million into an active private company. They pay you 12 to 20 % in dividends. Now again, this is going to be based on the company you’re investing in and you’d have to know this upfront and do your due diligence.

That means that you’d be earning somewhere between $120,000 to $200,000 per year up to your holding company tax-free. Now you can use those tax-free dividends to fund a corporate owned high cash value policy. Inside the policy, the money’s going to grow like a GIC, but tax sheltered. You can borrow against the cash value for access to liquidity while you’re living. And when you eventually pass away, your holding company receives the death benefit tax-free.

and your heirs get to receive money in their pocket tax-free through the capital dividend account. You’ve just possibly eliminated the biggest tax bill in your financial life. So in closing, now Canadian incorporated business owners represent less than 10 % of the population, but you shoulder more risk, create more jobs, and contribute more to the economy than most Canadians ever will. You deserve a wealth system that treats you accordingly.

So if today’s breakdown helped you clarify how you can grow corporate wealth tax-free, create tax-efficient liquidity, reduce future personal tax, preserve estate value, and build a multi-generational legacy, then please let us know in the comments. Now if you want to receive our ultimate guide to using your retained earnings to produce tax-free passive income, drop the word passive in the comments below.

And course, if you head over to the Canadian Wealth Secrets website, you can take our free Wealth Health Assessment, you can watch our free Retained Earnings Masterclass, or you can even book a discovery call. Thanks for watching, and we’ll see you in the next video.

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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