Episode 257: From Retained Earnings to Tax-Free Cashflow: A Smarter Corporate Wealth Strategy

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Want to turn corporate retained earnings into future tax-efficient cash flow without locking your money away?

If you are a business owner sitting on retained earnings, you have probably felt the tension between paying personal tax now or leaving money in the corporation and dealing with the tax consequences later. This episode walks through a strategy designed to create more flexibility: using a corporate-owned permanent life insurance policy as a pass-through structure that can support borrowing, asset growth, and long-term estate planning. It is especially relevant if you want more optionality with your money while keeping an eye on taxes, liquidity, and legacy.

In this episode, you’ll learn how to:

• Understand how a corporate-owned permanent life insurance policy can help reduce future personal tax friction on retained earnings.
• See what funding levels like $1 million per year versus $100,000 per year can actually look like in practice, including cash value growth, leverage potential, and policy offset options.
• Grasp how this structure can support both living benefits now and estate planning advantages later through growing cash value, borrowing flexibility, and tax-efficient death benefit planning.

Press play now to see how this strategy can create more control, more flexibility, and a more tax-efficient path for your corporate wealth.

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.

Canadian business owners looking for a smarter Canadian wealth plan will find practical insights in this episode on corporate wealth planning, personal vs corporate tax planning, and tax-efficient investing. We explore how corporate-owned whole life insurance can help turn retained earnings into tax-efficient cash flow, support business owner tax savings, and strengthen legacy planning Canada through the capital dividend account. The conversation connects key ideas like salary vs dividends Canada, corporation investment strategies, corporate structure optimization, and Canadian tax strategies to bigger goals such as financial freedom Canada, financial independence Canada, and building long-term wealth Canada. It also fits into broader retirement planning tools and wealth building strategies Canada, including early retirement strategy, passive income planning, RRSP optimization, optimizing RRSP room, and capital gains strategy. For entrepreneurs building a modest lifestyle wealth approach, the episode highlights financial systems for entrepreneurs, financial buckets, investment bucket strategy, and financial vision setting while comparing options like real estate investing Canada, real estate vs renting, and financial diversification Canada. Whether your focus is Canadian entrepreneur finance, estate planning Canada, or creating a durable roadmap for retained earnings, this discussion offers a clear framework for more intentional, flexible, and tax-aware decision-making. 

Transcript:

All right, great job. We are moving along nicely. In our last video, we had looked at our structure and why it makes sense for us to do a corporate owned permanent life insurance policy inside the structure to help us mitigate some of the personal taxes that you may already be experiencing if you’re taking out large sums of money as a salary or dividend currently, or…

that you’ll be paying in the future if you leave those retained earnings and invest them directly into assets. Down the road if and when you want to take those retained earnings out without a structure in place you will be paying the taxman.

on those retained earnings. So the goal here is to create our pass through structure. In this case, we’re using an example of $1 million per year. Note that it does not have to be that high. So we’re gonna look at two examples today. We’re gonna look at a million dollars and we’re gonna look at $100,000 per year.

into different policies to show what that might look like and sound like in order to create the optionality for borrowing to create more assets, having money working in two places at once, and to eventually get you to a place where you can get cash flow in your personal pocket without attracting personal.

taxes. The higher the policy is, the sooner that this door will open for you. So in today’s video we’re going to dig into some examples. So let’s have a look. All right what you can see here next to me is an illustration that we’ve created. This is a 50 year old individual non-smoker and just at a standard health rating.

All right note that if you are older that does while it will impact how the illustration does look it won’t disqualify you from potentially benefiting from crafting a structure like this. So today we’re picking 50 years old so that those who are younger than 50 and those who are older than 50 you get a general sense of how these policies might look and sound. So as we have a peek here

we can see that each year we’re putting in a million dollars of premium into this policy. Now of course, that one million dollars is going to the insurance company and they are investing it in the Whole Life Participating Fund. So these funds work.

Unlike a mutual fund where you’re putting the money into a specific set or basket of investments and then you’re getting all of the upside after expenses, here we’re actually getting contractual guarantees instead. One of the contractual guarantees is the death benefit. The second contractual guarantee is an ever-growing cash value.

And of course, as the fund works and grows, you’ll be benefiting and your policy will be benefiting from that fund. However, we’re not looking for upside or upscale type returns. This is not Nvidia, it’s not Bitcoin, this is not the investment, unless you are a conservative investor and you’re typically putting money into something like GICs or balanced funds that return about four to 5 % net

of tax because again this is going to grow tax free. So not saying it can’t be the investment for you but for most business owners typically you’re looking to use this as a pass-through structure that’s going to give you the contractual guarantees that you need in order to craft this tax efficient plan. So as we look here as this

cash premium goes into this policy, you get two things happening. One is you get a cash value. This is what your policy is worth to you today in cash. Meaning that if you were to put that premium in and cancel the policy, you get to walk away with the cash value.

Not a good move here as you see in year one to do that. That’s intentional by the insurance company. They want to demote the idea of canceling within the first couple of years. So you’ll notice that they actually do not have 100 % of the premium available to you to leverage. The cash value is what we can leverage against to buy assets or to…get cash flow at a personal level and we’ll talk more about structuring how we can do that in a compliant way.

But in the meantime, let’s talk about how this policy grows. There is a little bit of opportunity cost here. However, the lenders that we work with will actually consider lending on 100 % of your premium in the first few years and then working towards 100 % of your cash value. Because as you’ll note, after what we call the breakeven point of your cash value, which is somewhere around between year four, it looks like at year four, you’re at breakeven point.

here. So after year four you’re actually growing by more than a million. You can see I put a million in my cash value actually grew by about 1.2 million. We want to be able to leverage against that so let lenders will typically allow you to lend against your premium.

and then they’ll allow you to lend against 100 % of the cash value. Note that on smaller policies, typically under $250,000 of cash value starting in year one, you will have to lend or borrow from…

the insurer contractually guarantees that you can borrow up to 90 % of the cash value at any given time, which is also a great fallback should a big bank not be interested in lending on this asset. However, this is a bucket of cash and banks typically are eager to lend on it because there’s very low risk for them. It’s a very consistent asset. The cash value does not go up and down.

up and down like a volatile market, but rather it only goes up each and every year. So there’s a lot of certainty there for lenders such as the big banks to lend 100 % of the cash value here. Now, this is the column that we care about most while we’re living because that is the living benefit. That is what this policy is worth each and every year. And you’ll notice that by year 10, we’ve put 10 million into this policy and yet it’s worth

12 million and change, right? 12.4 million. Now, if we die at any point along this journey, we will eventually die. We’re going to have a large death benefit.

In an earlier video, I estimated this $1 million premium to get us about 10 million of death benefit. It’s actually gonna be around 16 million for this particular individual, as you’ll see on the screen. And as we fund this policy, the longer we fund this policy, the greater the growth of the cash value and the greater the growth of the death benefit.

And something that’s really important to note here is that while we’re able to leverage against the cash value, we have something sort of magical happening here because if we’re leveraging for whether it’s cash flow or whether it’s for investments, something will eventually happen. We can leverage against the cash value, but you’ll notice the cash value is much less than the death benefit. And therefore, if and when,

Not if, but when we pass away, the loan balance will actually be wiped out by the death benefit and there will be a surplus remaining for the corporation. And remember about that capital dividend account, we get a large amount of that death benefit coming out tax free from the capital dividend account, as you’ll see here.

Each and every year, the premium that we’re putting in is slowly eroding away as our adjusted cost basis because of the cost of insurance. So as you can see here, that eventually over time, our capital dividend account credit is going to be so large while our adjusted cost basis will slowly be decaying away in the background despite putting in a significant amount of premium.

If we are lucky enough to live to age 100 in this particular scenario and we were funding $1 million of premium every single year from age 50 to 100, you’ll see here that all $184 million of death benefit would come out through the capital dividend account. Now, if we live in average age,

of say 85, you’ll notice here that you could have leveraged up to about $86 million and the death benefit’s still $106 million, which is quite a large amount in excess to the loan balance. And you’ll see here that 92 million of it can come out to shareholders tax-free to deal with any loans against these policies that might exist.

Now, funding for a lifetime at a million dollars may be in the cards for some business owners and it may not be for others. Some business owners might have some success now and they might be looking for more like a 10-year runway, which is usually the runway I’m encouraging business owners to be thinking about is having at least a 10-year runway to fund a policy and then determining how that can help us and how we can build a tax-efficient structure based on those retained earnings.

Here we see a million dollars funded over a 10 year period and then the premium is offset. When we offset premium, what we’re telling the insurance company is do not expect any more premium payments to come from me and let’s allow this policy to continue growing without additional premium being funded into the policy. So you’ll notice that the first 10 years look identical to the previous scenario because it’s the same exact policy, just a slightly different funding.

scenario that we’re modeling here. So in year 10 they said this is my last payment and next year I’m not going to make any more payments and you can see that even though there’s no more payments going into this policy you’ll see the cash value continues to grow as well as the death benefit continues to grow. One other aspect you’ll see here is that the adjusted cost basis will actually start decreasing much more quickly because there’s no more premium going in

which means there’s less premium to erode away from the cost of insurance in the background. And therefore, if this person lives a healthy life until 83 or later, all 100 % of the 10 million that was put into this policy will be able to come out through the capital dividend account to the next shareholders. But keep in mind, although we only funded 10 million into this policy,

you’ll see that the death benefit was 44 million or close to 45 million. Something that’s not accounted for is what we did with the cash value in the meantime. What we encourage you do is one of two things is one, you invest in assets. We leverage against the cash value to continue growing your business, your portfolio, whatever investments that you like and enjoy, because that is just an additional

asset that is growing. And something that’s going to happen in the meantime is this large death benefit is going to keep building which allows you to not only handle any of the loans against your cash value but it also helps you to address any other capital gains that might exist upon your death. So these are estate planning benefits that you receive without locking up your money inside of a policy without getting to see it ever again.

because once again, we have leverage against this high cash value. The goal here is to keep as much of this capital liquid as possible and to use leverage strategies in order to grow our assets or increase our tax-free cash flow at a personal level. So.

Let’s take a quick peek here. We’re looking at a million dollar scenario. Note that policies can be offset fairly early. I usually have business owners plan for a 10 year runway. However, we can offset policies earlier than 10 years, depending on your funding schedule and of course the performance of the policy over those first few years. Now,

Let’s look at a smaller policy. We’re going to flip to a hundred thousand dollar policy and just to show you that it works in a very similar fashion. So a business owner that may not have enough to fund say a large policy and start using personal leverage strategies immediately, they can work towards those personal leverage strategies by funding a policy and doing what I call a leverage later strategy. So this hundred thousand dollar policy, if we were to fund it over

for the rest of this business owner’s lifetime, then obviously the death benefit will grow. The same is true for our capital dividend account, right? Our capital dividend account is going to get out a significant portion of that death benefit each and every year. And the adjusted cost basis is going to continue eroding down over the duration of our lifetime to get as much of your premium out tax-free down the road, as well as

as much of the death benefit out tax free to shareholders. In the meantime, that cash value is leverageable. Note that in the early years when the cash value is at a lower amount, you’re probably gonna be taking loans against your policy from the insurance company, which means you will be limited to 90 % of the cash value and you will be under the terms of whichever insurer we are working with. If we’re working with smaller policies,

we work with a specific insurance company that has some of the greatest and lowest borrowing rates in order to mitigate that small nuance. Once your policy is large enough, then we can start exploring big bank options for lending, whether it’s for assets inside the corporation.

or whether it’s for a tax-free cashflow at a personal level, we have strategies that we can utilize this policy size to help you and keep those options open so that you can pay less tax now and plan for a much more wealthy future, both from a net worth perspective and a net estate perspective. So my friends, we’ve done a quick overview. This is the tool.

This is the general structure. So something I want you to be thinking about on your end is what questions do you have now? Hit the reply button or comment or put whatever information or whatever reflections that you have around this video so that we can interact and we can help you with your plan. Or maybe you’re ready for a call. Feel free to book a call on our page.

by hitting the button around this video or heading to CanadianWealthSecrets.com forward slash discovery so we can hop on a call today. Take care.

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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