Episode 241: How To Reduce Tax on RRSPs, Capital Gains, and Corporate Retained Earnings for Financial Planning

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Are you accidentally letting hundreds of thousands of dollars sit idle in your holding company… unsure how to deploy it without triggering unnecessary tax?

If you’re a Canadian business owner with retained earnings building up in your holdco, you’ve probably felt the tension. You want to grow your wealth—but you don’t want to make a costly mistake. Your accountant tracks what’s happened, but who’s helping you think proactively about what to do next? With salaries, RRSP room, rental properties, corporate investments, and tax efficiency all in play, it’s easy to feel stuck between “do nothing” and “overcomplicate everything.” What you really want is clarity—and optionality.

In this episode, you’ll discover:

• A simple 50/50 framework for splitting retained earnings between risk-off liquidity and long-term growth.

• How to structure corporate investments to create tax-efficient capital gains and future tax-free income through the Capital Dividend Account.

• Why thinking holistically—across your corporation and personal assets—unlocks powerful flexibility, leverage, and long-term tax control.
  

Press play now to learn how to turn your holding company into a strategic wealth engine—not just a parking lot for cash.

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.

A strong Canadian wealth plan starts with understanding how your Canadian business structure, retained earnings, and holding company work together within a broader personal vs corporate tax planning strategy. For Canadian entrepreneurs, decisions like salary vs dividends Canada, RRSP optimization, and corporate structure optimization directly impact long-term tax optimization, risk management, and overall wealth building strategies Canada. By using clear financial buckets, an intentional investment bucket strategy, and diversified corporation investment strategies, business owners can align real estate investing Canada, passive income planning, and capital gains strategy with their goals for financial freedom Canada and even an early retirement strategy. When paired with disciplined personal finance, estate planning Canada, and smart Canadian tax strategies, this approach creates sustainable financial systems for entrepreneurs—helping you build long-term wealth in Canada, support a modest lifestyle wealth vision, and design a legacy that lasts for generations.

Transcript:

Jon Orr: Okay, we just got off a call with a fellow Canadian business owner who is looking, you know, they have a typical problem. This is one of the issues that we talk about the most when we first are introduced to a Canadian business owner is that I’ve got my business, I’ve got my operating company, I’ve got a holding company, and the operating company is doing its job, you know, it’s generating income.

Kyle Pearce: Mm-hmm.

Jon Orr: that flows up to my holding company where my holding company is now my wealth building engine. We talked about this two flywheel approach on a previous episode. Your operating company is one flywheel, you gotta treat your holding company as another flywheel where it needs to generate, it needs to generate future income, retirement income, safety income. You have to think of it as like it needs to be able to kind of like keep moving.

And so the operator, this individual, the operating company was generating money, flowing tax-free up to the holding company. And now there’s retained earnings like sitting there, right? Like in the operating company, that’s what we do. We can take the retained earnings, we flow them up. But now it’s like, now they’re up in the holding company and we constantly go, I don’t wanna make a financial mistake here. I don’t wanna like go, I need to think about this differently.

My accountant maybe isn’t so proactive. They just kind of account for the things that I’ve done. But what am I missing here around structuring my retained earnings in a way that allow me to make sure that I keep more of it in my holding company so it can continue to compound? How do I make sure that when I do require that or I send that out through dividends or however I want to distribute that into my personal pocket, how do I do that so I don’t pay as much tax?

Like these are the questions we get asked all the time. And what we want to do today here is just talk about what we constantly recommend to people on those calls. We wanna kind of like recreate the discussion points that we have and we wanna talk about risk on versus risk off assets and how to think about that holding company and what you’re doing with retained earnings up there.

All right, Kyle, let’s go.

Kyle Pearce: Right, yeah, definitely. And really, what is really important too is like we gotta look at the whole picture.

So, you know, on YouTube, if you’re watching on YouTube, you’ll see a diagram. I’m gonna kind of build out this diagram. Anyone who’s had a discovery call would know that we do build out essentially diagrams as we chat things through, usually rounding numbers a little bit and just trying to get a sense of like, what’s going on now?

And then what are the goals? Like what are we hoping to achieve in the short, medium and longer term? And then how optimized are we? And the reality is, John, you know, I say this all the time to clients on calls is you don’t have to be optimized. Like it’s a choice, right? Like you get to choose how optimized you are. And oftentimes that means choosing how simple or maybe complex your situation is, right? So those two things go hand in hand.

There’s never like a one size fits all for anyone, right? And I, you know, we often, again, the bias is like, we’re going to talk a lot about what we do for ourselves. And, you know, we are optimizers. So we tend to do things certain, certain ways, but ultimately at the end, it’s all about knowledge and understanding.

And we’re really just trying to make sure that you understand when you make a choice, what you’re saying yes to and what you’re saying no to and ultimately at the end of the day, you as the person as the end user as the owner of your financial world, get to decide whether it’s worth it to you, right?

Just like in a business where we decide if I put extra time or effort into something, is that going to provide me with enough return on my time or effort or thinking or stress? The same thing is happening here, right?

So really it’s about educating, making sure that we understand what we’re saying yes and no to. And today we’ll talk about some of the things that we talked about on that call yesterday with an individual here in Ontario.

And again, most of this is translatable or transferable across different provinces with very small variations in terms of, let’s say, the amount of tax that you’re paying in the operating company.

That sets the stage in the diagram here. You can see as a start. We’ve got a couple. They are about 50 just approaching 50 and they have a holding company that they both own shares in and that holding company owns the operating company.

Now something for those who are kind of curious about this and so forth. You’ll notice they have a significant amount of retained earnings. We’ll get into that in a moment, but there’s less in my opinion like less nuance required around exactly the share structure and so forth, even whether the holding company owns the operating company, whether they’re side by side, there are nuances there, of course, but from a tax perspective, you’re likely not going to bump into really any differences there.

There could be from a liability perspective, there could be when you go to sell your business down the road, those are things we can chat about as well, but today, we’re going to focus in on like the flow of capital here and we’re going to talk about what they are doing and then start talking about what we might choose to do in order to potentially optimize if they so choose.

Jon Orr: Got it, got it, okay.

So in your diagram here, you’ve got the operating company, looks like both, this is common, this is what we also do for ourselves, is that both owners of the operating company are taking salaries, you’ve got here labeled 75,000 each year.

We’ve got previous episodes where we talk about why you might wanna be considering salary versus dividend, the mix of both of those. We’ll put that episode in the show notes so that you can dig into that.

There’s a lot of nuances there to kind of consider about key numbers, especially here in Canada of like how much salary you should be taking. We’ve got that situation happening here. We see this very common. We’re taking money out in a salary format here.

You said they got retained earnings inside the hold co it flowed up. We got on the diagram here $200,000 a year. Let’s talk about that. Let’s zero in there. What are we considering here for our retained earnings? How do we want to think about these, making sure that, you know, what are the big ideas we need to consider?

Because right now, if I’m listening, I want to do this to myself. I want to say, am I thinking the same way? Or is John and Kyle’s thinking not right? Or maybe I’m missing something.

Kyle Pearce: Yeah.

Right, absolutely. And just to clarify as well, both spouses are working in the business, so they’re both receiving $75,000. So that means that this operating company is actually writing that as an expense, right?

So we’re not actually gonna pay any corporate tax on the $150,000 that’s kind of flowing into their personal lives. They’re gonna take on the full tax liability personally.

And as we’ve discussed before, they are making the choice through doing the salary that they are going to not only personally pay into CPP, but they’re also going to corporately pay into CPP.

So this is really important to note because basically what you’re doing is you’re cutting your return on CPP in half comparative to a T4 employee who is working for a business they are not connected to or they do not own shares in.

So that’s important to know. Some people and this is why a lot of accounts say dividends the way to go. They go well, I mean you’re you don’t have to pay double the amount of CPP that everybody else does in Canada.

To me that extra $8,000 $9,000 round trip both personally and corporately is not a massive in my opinion a massive game changer unless you have a very intentional purpose for those $9,000 and you’re going to grow it yourself and you’re confident and all of those things.

But the other thing we’re saying no to, if we don’t take a salary, is opening the room for our RRSP contributions either now or in the future. And as we get older, there may be an opportunity for opening what they call a individual pension plan.

So if I’ve been paying myself dividends my entire life out of my corporation, the IPP is also going to be a no go for you, which is basically kind of an enhanced RRSP.

Now that might be fine. We tend to say, you know, the salary piece, it just opens the door for some optionality. Maybe you don’t have intention to use the RRSP now, but maybe you do later or maybe you need to later due to maybe some unexpected high income that you can’t really control at a personal level.

It’s nice to have. And again, we’re all about diversification. When I look at $8,000 or $9,000 of total payment into CPP, not only do we get CPP, but it’s a small fraction of the amount.

Like if we look at the retained earnings here, there’s $200,000 of retained earnings. That’s after corporate tax retained earnings that are in the holding company. That extra eight or $9,000 is a small fraction of that portion, right?

Like we’re talking just under 5 % of that amount. Does it matter over time? It can, but ultimately at the end, again, we tend to choose a little bit more around optionality and providing ourselves with some other guaranteed buckets that are available to us just so that we’re well diversified.

Jon Orr: Okay, let’s get into the holding company then.

Kyle Pearce: All right, so now let’s chat a little bit about what else they have going on in their personal lives.

They have a primary residence here. We’re gonna say that they’ve got about half the equity available. So half is mortgage, half of the equity is available. The numbers aren’t exactly all that important, but it could be a million dollar home and you owe 500,000 on it.

So there’s a good amount of equity there, which opens the door for some optionality as well, which is important to know.

Now, they also have registered accounts between their RRSPs. They also have like Lira from an old company pension they’ve rolled over. Like, so these registered accounts, they’ve got about $300,000 in RRSPs across the spouses.

Their tax-free savings accounts are about half full each. So I’m gonna say it’s at about $100,000 total between the two, so there’s some optionality there for them as well.

They have zero unregistered accounts on their personal side, but they do have two rental properties that they own and have leveraged in order to do these properties over here.

Jon Orr: Okay.

Well, let me ask you this.

When you think about like when I first started this episode, we said, let’s talk about how to think about the retained earnings holding company.

We’ve been talking a lot about outside the holding company right now. So why does that matter when you think about your own situation?

Because everyone’s situation is gonna be different.

We’re going into the details about RRSPs, tax-free savings accounts, salary, like that’s all outside my holding company.

My rental properties are maybe owned by the holding company, maybe they’re owned personally, I think they’re owned personally here.

I’ve got my primary residence. Why is it so important for us to consider that before we start kind of going, how does my holding company, the retained earnings sitting there, why is it important for us to know about that?

Kyle Pearce: I love it.

And ultimately it comes back to this starting point. I don’t want to say rule of thumb, but like sort of this idea of it’s great to have assets on both sides of that corporate border.

So why we really want to look at what’s going on outside the corporate structure altogether is so that we kind of get a sense as to where the assets are and where we might see the assets growing most.

So for example, number one question we get and I got it from this couple as well was around these real estate properties out here.

They’re like we own them personally. Should we have bought them in the holding company? Should we move them to the holding company?

And we’ve addressed this on past episodes as well, but it’s important to reiterate that I actually like having some of that rental real estate outside of the corporation because remember, if I have them inside the corporation, I’m not actually getting a tax discount on the passive income that these properties are going to generate.

Usually once you have too many properties, then you almost are forced to buy the future properties inside a corporate structure just so you can get the financing you want.

But from a tax perspective, you have way more flexibility with having these properties outside of the corporation because if I want to take leverage against them, I can just do so.

And if it’s for personal use, I can’t write off the interest on that new leverage that I’m using. But if I want to utilize that capital, I can literally take it and utilize it for lifestyle.

And then we just have to be cautious about what the plan is for that leverage over the longer term and especially for the estate value.

However, out here, they’ve got a good thing going on. They’ve got a fair amount of equity in their primary home. These properties are not cash flowing a whole lot.

So that’s the other aspect too, is that if they are cash flowing, they might want to consider taking more leverage if they’re not at the stage of life where they need the cash flow for lifestyle.

Otherwise, they’re just paying tax unnecessarily on that cash flow.

So taking some leverage, using that leverage to then reinvest in something, maybe put it down on the primary mortgage and then re borrow Smith maneuver style in order to open up an unregistered account or using that leverage in order to buy a third rental property if that’s what they’re after.

There’s a lot of things that we can do here.

But why I wanted to really highlight why the RRSP bucket here is important to note is that, again, if we’re diversifying our strategy here, if that RRSP bucket was zero, then we might be talking more about maybe taking a higher salary so that you can start filling some of your RRSP.

So essentially expensing more to the operating company, leaving less retained earnings in here in order to get more money in your personal hands to put in the RRSP.

Now that may or may not, just because if it was zero, it doesn’t mean that’s the right move. It just means that could be a diversification move so that we’re taking some of that extra retained earnings and putting it into the RRSP.

Some people might look at this and say, even though there’s 300,000 of RRSP room, maybe they wanna take a salary of 100,000 each so that they’re in a slightly higher tax bracket that’s gonna open up more RRSP room and they’re just gonna dump the extra in the RRSP and get the tax back.

They’re not necessarily going to be ahead at a personal level, but they’re just diversifying where those dollars are sitting.

In the RRSP, we have a fully tax-deferred bucket which will have to pay tax on the way out.

There is some negative to that that we’ll talk about, but could be a good move.

Or on the other hand, the retained earnings are kind of like an in-between where the retained earnings, we’re gonna pay a small amount of tax, especially for those who are earning less than $500,000 of net operating income every year.

We’re gonna pay nine to 12 % off the top and then we get to keep the rest to do whatever we want with it.

And when we invest it, especially in any capital gain assets, any growth assets, we get the benefit of getting half of the gain out completely tax free down the road.

So once again, we’re not saying like do the math and figure out like which one’s going to ultimately get you all the best return in terms of taxing or minimization of taxes.

The reality here is trying to make sure that we have optionality for when we do want to pull this income later without necessarily triggering too much tax in any one given year.

Jon Orr: Right.

So we want to look at the whole picture and say, what do we have on both sides, and what do we need on both sides?

Because if you have all of your assets on one side, then you kind of lock yourself in.

So like, if all my assets were inside my holdco, but then I need money personally to like, you know, buy a cottage or, you know, help kids with school or something like that, it’s like, well, now you gotta get it out.

And when you get it out, you’re going to pay personal tax, you’re going to pay the dividend tax.

So, part of this is like having assets on both sides so you can have optionality, but also so you can use different levers for different reasons.

Kyle Pearce: Exactly.

And so now we get into the holding company. So here’s what they have.

They have $1.5 million in retained earnings sitting in the holding company.

It’s primarily sitting in cash and in short-term GICs, and they basically said, we don’t really know what to do with it.

They said we have an investment account, and we have like a basic mutual fund solution in that investment account, but it’s not a big part of it.

And they said, we just, we feel like we should do something more, but we don’t want to screw it up.

Jon Orr: That’s such a common problem.

Kyle Pearce: It’s extremely common.

And it’s the same thing that we talk about a lot, which is that on one side, you want growth, you want compounding.

But on the other side, you want safety, you want liquidity, you want optionality.

And we kind of use those two terms risk on and risk off.

Risk off being things like cash, GICs, high cash value insurance, things that are stable, predictable, low volatility.

Risk on being things like equities, real estate, private equity, private credit, things that are designed to grow, but they come with volatility, they come with risk.

And so when we talk about that holding company and those retained earnings, one of the first things we like to say is, what is the purpose of this money?

Is this money for retirement?

Is this money for a future buyout?

Is this money for lifestyle?

Is this money to buy another business?

Is this money to buy real estate?

Because if the purpose is different, the way you invest it is different.

Jon Orr: And I think that’s what we were unpacking on that call.

Kyle Pearce: Exactly.

Because a lot of people will say, well, I want to maximize return.

And then you say, okay, but what does that mean?

Does that mean you want the highest possible return?

Or does it mean you want the highest possible return for the amount of risk you’re willing to take?

Because those are two different things.

And this is where the complexity comes in, because we have to match the investment strategy to the behavior.

If you put someone in an investment strategy that they can’t stick to, it doesn’t matter how good it is on paper.

Jon Orr: Right, because you’ll abandon it at the worst time.

Kyle Pearce: Exactly.

So when we look at retained earnings, we often say, okay, what is your risk on bucket and what is your risk off bucket?

And then we can begin to say, okay, how much should go into each bucket.

But we also have to look at the personal side and say, well, what do you have on the personal side?

Because if you’re short on the personal side, maybe we need to be building more personal assets so you’re not forced to pull from the corporation at the wrong times.

Jon Orr: And then we also have to talk about the tax rules inside a corporation, because investing inside a corporation is different than investing personally.

Kyle Pearce: Right.

So inside a corporation, when you invest in things like GICs or interest income investments, the tax rate is very high.

So people say, why do we always talk about corporate owned insurance?

Why do we always talk about certain strategies?

Because a lot of those strategies are not necessarily the highest return strategies, but they can be very tax efficient strategies and they can preserve optionality.

And they can allow you to keep more money compounding inside the corporation.

Jon Orr: And the other big thing that we talk about is the refundable dividend tax on hand, the RDTOH.

Kyle Pearce: Yep.

Because when you earn passive income inside a corporation, like interest income, dividends, capital gains, there’s a whole other tax system that applies.

And so when you’re holding $1.5 million in cash and short term GICs inside your holdco, you might feel safe, but the reality is you’re paying a lot of tax on that interest income.

Jon Orr: And then inflation is eating it.

Kyle Pearce: Exactly.

So we’re losing in two ways.

We’re paying high passive income tax, and then inflation is eroding the value.

So yes, it feels safe, but it’s not actually a great long-term plan if you’re trying to build wealth for retirement.

Jon Orr: That’s why we talk about this idea of having a risk on portion that’s designed to grow, but also having a risk off portion that’s designed to be stable and liquid.

Kyle Pearce: Exactly.

And one of the things we also talked about on that call is that you don’t have to do it all at once.

You can phase into it.

You can say, okay, we’re going to move $100,000 into a growth strategy.

We’re going to keep $500,000 in risk off.

We’re going to decide what our dry powder amount is.

Because dry powder is important.

You want to be able to take advantage of opportunities.

You want to be able to buy a property if it shows up.

You want to be able to invest in a private deal if it shows up.

But you also don’t want to have so much dry powder that it’s just sitting there doing nothing for years.

Jon Orr: So how do we decide that?

Kyle Pearce: That’s where we start talking about the timeline and the purpose.

So if you say, we might buy a property in the next 12 months, then okay, we keep some money in cash or short term.

If you say, we’re not going to need this money for 10 years, then why is it in cash?

So we start building out buckets.

We say, okay, here’s the bucket for the next 12 months.

Here’s the bucket for the next 1 to 3 years.

Here’s the bucket for 3 to 10 years.

Here’s the bucket for 10 plus years.

And then we invest accordingly.

Jon Orr: And then there’s also the question of, are you going to sell your business?

Kyle Pearce: Yes.

Because if you’re going to sell your business, there are planning opportunities.

There are tax planning opportunities.

There’s the capital gains exemption.

There’s purification strategies.

There’s things that matter.

And if you have too much passive investment inside your corporation, it can impact your ability to use certain exemptions.

So we also have to consider those rules.

Jon Orr: Right.

Kyle Pearce: And for this couple, that was part of the conversation too, because they said, we might sell in the future.

So we said, okay, we have to make sure that what we do doesn’t accidentally create a future tax problem.

Jon Orr: And then, of course, there’s the question of corporate owned insurance, because we talk about that a lot.

Kyle Pearce: Yep.

Because corporate owned insurance can be used as a risk off strategy.

It can be used as a tax efficient compounding strategy.

It can be used as a legacy strategy.

It can also be used as a liquidity strategy.

Because as cash value grows, you can borrow against it.

And that gives you another bucket of dry powder.

So a lot of people say, well, why would I do that?

And the answer is because in a corporation, the tax rules matter.

Jon Orr: So what would be like the simplest way to summarize what we recommend on those calls?

Kyle Pearce: I think the simplest way is this.

Step one is get clear on your purpose for the retained earnings.

Step two is decide what amount is truly dry powder, truly risk off.

Step three is decide how much can be risk on for long term growth.

Step four is build a diversified strategy across different asset classes.

Step five is make sure that the strategy matches your behavior so you can stick with it.

And then step six is make sure you’re not accidentally creating future tax issues by ignoring the corporate tax rules.

Jon Orr: And that’s really what we were doing on that call, was helping them see that they’re not alone in feeling stuck.

Kyle Pearce: Exactly.

Because a lot of business owners are in this position.

They’re doing really well.

They have retained earnings.

They’ve built this wealth building engine.

But then they freeze.

Because the fear of making a mistake is bigger than the fear of doing nothing.

And doing nothing is a mistake too.

Jon Orr: So what’s the takeaway for listeners?

Kyle Pearce: The takeaway is if you’re sitting on retained earnings, you need a plan.

You need to think about risk on and risk off.

You need to think about corporate tax rules.

And you need to think about your personal side as well.

Because the holding company is not a standalone thing.

It’s part of your entire financial world.

Jon Orr: And if you want help with that, reach out.

Kyle Pearce: Exactly.

Head to CanadianWealthSecrets.com forward slash discovery and book a call.

And as always, this content is for informational purposes only and you should not construe any such information as legal, tax, investment or financial advice.

Kyle Pearce: And as a reminder, Kyle is a licensed life 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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