Episode 269: Why “Defer, Defer, Defer” Can Leave Canadian Business Owners Stuck at Retirement

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Many incorporated business owners believe they have only two choices: pull money out of my corporation now and pay the tax, or leave it inside the corporation and deal with the tax later. But both extremes can create problems. One owner may earn great income yet watch most of it disappear into lifestyle, taxes, and cash flow demands, while another may defer successfully for decades only to face mandatory withdrawals, clawbacks, and a much bigger tax bill in retirement.

In this episode, you’ll learn:

• Why high income and high net worth can still lead to the same underlying issue: lack of long-term planning.
• How aggressive tax deferral can become a future tax trap if there is no strategy for flexibility later.
• Why the best answer often sits between spending everything today and deferring everything forever—using planning tools that help protect lifestyle, grow net worth, and improve tax efficiency over time.

Press play now to learn how to avoid building tomorrow’s tax problem with today’s financial decisions.

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 for business owners requires more than basic tax planning or wealth management—it needs a complete financial planning system that balances tax deferral, leverage, insurance, retirement planning tools, and long-term tax strategies. For Canadian entrepreneur finance, this means understanding personal vs corporate tax planning, salary vs dividends Canada, RRSP optimization, optimizing RRSP room, corporate wealth planning, corporation investment strategies, and corporate structure optimization so you can create business owner tax savings today without building a future tax problem. By using financial buckets, an investment bucket strategy, tax-efficient investing, passive income planning, capital gains strategy, and financial diversification Canada, incorporated professionals can support financial freedom Canada, financial independence Canada, and even an early retirement strategy while maintaining a modest lifestyle wealth approach. Whether your plan includes real estate investing Canada, real estate vs renting decisions, legacy planning Canada, estate planning Canada, or building long-term wealth Canada, the key is financial vision setting and creating financial systems for entrepreneurs that protect flexibility, improve tax efficiency, and support sustainable wealth building strategies Canada.

Transcript:

Kyle Pearce: Have you ever noticed that most business owners think that they have a tax problem? But after a few conversations, you realize they don’t actually have a tax problem at all. They have a planning problem.

Jon Orr: You know, and what’s interesting is that the planning problem can show up in completely opposite ways. You can have someone who’s making great money, building a successful business, and yet every dollar seems to disappear as fast as it comes in. And then on the opposite side, you can have someone who’s done everything right for decades, accumulated millions of dollars, deferred taxes successfully, built some significant wealth, and they still have a tax problem.

Kyle Pearce: That’s exactly what we’re going to be talking about today. Recently, I had some conversations with two very different business owners. One is approaching retirement, is actually, I would call it financially free and has been for many years. Millions of dollars inside corporate investments, RIF income, mandatory withdrawals, and very little flexibility around taxes. The other is still in accumulation phase. They’re earning great income, building wealth, but finding that most of what he earns is getting consumed by lifestyle, taxes, and cash flow demands. On the surface, these two people couldn’t look more different.

Jon Orr: You know, I think what it looks like to me is, one appears to have too much money, and the other feels he doesn’t have enough. One deferred those taxes aggressively, just like, you know, you’re told to do, and the other is paying massive amounts of tax today. But when you zoom out, they’re actually facing the same underlying challenge.

Kyle Pearce: They both believed there were only two choices: pay the tax now or pay the tax later. And that’s where many incorporated business owners get stuck because those aren’t actually the only options.

Jon Orr: Yeah, today we’re really gonna talk about what exists between those two extremes. How do you build wealth without creating a future tax nightmare? And how do you enjoy your money today without sacrificing your future flexibility? How do you create a system that allows you to maintain lifestyle, grow your net worth, and improve tax efficiency all at the same time?

Kyle Pearce: And perhaps most importantly, how do you avoid becoming either one of these case studies 20 years from now? Because whether you’re in your 40s, 50s, or even your 60s, the decisions you’re making today are quietly creating your future tax situation. And if there’s one lesson we’ve learned after working with hundreds of incorporated business owners, it’s this: the answer is almost never found at either extreme. It’s usually somewhere in the middle.

Jon Orr: Right. So let’s get into it. So let’s get into the extremes. The first extreme we’re gonna kind of unpack here is living entirely for today. You know, this is the person that was making a lot of money, has a lot of income, but every dollar that was coming in was going out. So for simplicity purposes, Kyle, let’s call the first extreme John. The second extreme, because hey, to be honest, you coached me to think the way that we now think because I was this person. I remember — you can probably remember 10 years ago when we first started working together, money was coming in and I was like, but I wanted to go out the door. I wanna go on that vacation. I wanna do that. I wanna do that. So that makes sense. And the we’ll call the other person you, you know, the other extreme is you. But let’s get into John here.

Jon Orr: Keeping in mind John isn’t the name of the person — we’re hiding the name — but give us some details about John.

Kyle Pearce: Yeah, John is a successful business owner. Also quite a bit in the real estate game. So as we’ve discussed before, real estate is a really interesting place to be because sometimes it can cause a little bit of cash crunch situations, right? Equity rich, but sometimes you can feel like you’re cash flow poor for a while until maybe selling a deal or refinancing or doing something like that. But they also have active income coming into their businesses. And at the end of the year, typically they’ve got about a million dollars inside that corporate structure. But here’s the rub, John — because John is the old you — they have plans for these dollars, right? You see a million dollars go in, you go, you know, if we spend like 500,000, or in their case, around 600,000, like feels like pretty decent savings rate.

Kyle Pearce: But here’s the issue — they got to pull about a million dollars out in order to keep about $600,000 in their personal pockets. And that’s essentially what’s been going on in their world. They have a nice home, they’ve got equity as well. So it’s not like they have zero net worth here. They have net worth, but they do have quite a bit of lifestyle needs. And if you do the quick math here, a million dollars, six hundred thousand dollars for spending, that’s a significant tax bill that’s being created. And essentially, we’ve talked about this before — if all of that money is flowing out of the corporation every year, really the corporate structure is really only being used for liability purposes. There really is zero tax deferral happening, at least on this sitting cash. Now there are assets in there as well, and there is some deferral, but remember, the deferral on real estate or other capital gain or growth assets is going to be treated the same way, whether it’s in a corporation or whether you hold it personally. So, really, for all intents and purposes here, the corporate structure is not doing them any favors in terms of their flow, their process here, because money’s going in and it’s immediately coming out, and we’re actually not utilizing the tax deferral mechanisms of that corporation from year to year.

Jon Orr: Right. Right. Like that’s an important component because I think we get into — hey, my next move is I make a lot of money, let’s put it in the corporation because the corp, you know, the corporation gets taxed less, especially on that first five hundred thousand dollars. Therefore, because it would be — pulling it out. So it’s like the money’s gonna go in there, I’m gonna get a tax, and maybe I could send it out as dividends or whatever. But ultimately between the two taxing of that income, you might have been, you know, you’re now better off than just not incorporating and having a say a sole proprietorship and taking that money personally, other than like what you said, you now have some liability protection. So let’s get into the other extreme — because that first extreme is like money’s coming in and lifestyle is taking up a good chunk of it. And really what we’re saying is I’m not deferring any tax. I’m not pushing it off. I’m taking the tax hit now. I’m losing 50% of that, you know, no matter where it comes from and which place it’s coming through and what pathway it takes — pretty much 50% of that is not getting into my pocket.

Jon Orr: Okay. Other extreme is what the accountants typically tell you because you have a corporation, is that defer — which means now you maybe you’re not spending every dollar. You’re thinking a little bit more in lines of — and this person is, right? So this person is like, I’m a saver, I don’t need to spend every dollar. Because this is what you also hear in personal finance — that live below your means. Live below your means so that you can save for retirement. You can have a — you know, you can retire early, you can, you know, you’re financially independent. And do it in a corporation, because your corporation can be that deferral mechanism, that deferral bucket, that structure that helps you kind of defer taxes that you don’t need. You can keep it inside the corporation. You can grow it over there and only pay yourself what you need.

Jon Orr: Sounds like a smart strategy. That’s what a Kyle — with this person, we’ve changed the name to you — would do. And, you know, this is the typical recommendation, that’s why you have that corporation. And this person did this for many, many years. So Kyle in this scenario is 71. And Kyle did this for a long time, just like — imagine, here’s the idea, right — is like if you could go back in time and tell John how to fix things, you would tell him — like the recommendation for John on how to fix things is to be more Kyle. Right. Like it would be like, go be more Kyle now, when you’re early, and defer, defer, defer, because you can live below your means. Don’t let lifestyle creep up.

Jon Orr: And now you’re less flexible because now in order for you to make any moves to pay less tax, you can’t, because now you have to really just adjust your lifestyle. And you don’t want to do that when you’re John, who’s now 55 to 60 and has lived this life of lavish lifestyle and can’t have the flexibility because now you have to go back to your spouse or your kids and say, like, well, we’re gonna completely change our lifestyle because we need to save more tax to then — but then say to do what? I don’t know. Just because I don’t want to pay the tax.

Jon Orr: So, so let’s — so your recommendation is to be more Kyle, but tell me about Kyle, who’s now — let’s say you have been more Kyle, but now you’re 71, because this is the other client we talked to this week.

Kyle Pearce: Sure. Sure. Yeah, I was gonna say, you know, a lot of people think I’m a lot older than I really am. But, you know, as a forty-three year old individual, like we’re talking almost thirty years into the distance when I get to, you know, when I get to seventy one. So when I’m over at seventy one and I’ve been doing this for say thirty years — but if I’ve been doing it to the deferring forever extreme, which is something that people can do, I’m gonna argue, if you’re gonna pick one or the other, I’d rather defer forever. Now, mind you, you can’t defer forever because when we do move on, there’s gonna be some tax consequences down the road as well. But you will get a significant amount of growth. So if I’m gonna pick one or the other, it’s probably gonna be this one, but it’s also unfair because I’m also Kyle and that’s how I operate. But let’s talk about some of the things that are happening now, unless I do specific planning.

Kyle Pearce: Is that, you know, if I’m 71 and I’ve been trying to defer in the best way possible, you might be like this particular individual who has utilized their RSP. Now, some other people may have LIRAs, RSPs, maybe they have individual pension plans or personal pension plans that they had set up through their corporation. These are all tax deferral mechanisms as well. So you’ve got that big bucket full. And then at the other end of the spectrum, you’ve also likely have quite a bit stored up in your corporation because from year to year you’ve been trying not to be in a high tax bracket, right? So again, this is a good problem to have. You’ve created all of these assets, but at around 71, when we have to start draining the RSP, we get into a situation where now that RSP — and in this particular client’s case, now knock on wood, let’s hope this doesn’t happen to current Kyle in my situation — but this particular client’s spouse had passed a couple years prior, and their RSP has now rolled over to Kyle’s RSP as well. So now in their mind, they may have been planning around — hey, if I have to start taking money out of my RSP, which is now converted, it’s forced to be converted into a RIF, R-R-I-F, and now I have to take out a minimum amount each and every year.

Kyle Pearce: And if I start doing that, in their case, they’re at over a hundred thousand dollars just out of that one bucket. So they’ve got taxable income, they’re starting to get OAS clawed back. And then here’s the other rub — they also have non-registered accounts personally as well as corporately producing a significant amount of dividends. You know, they’d never really planned around it. Like, what could the dividends do to their income and their lifestyle? And now they’re in this position where every single year they are now in the highest tax bracket because there were no other plans put in place in order to deal with this. So earlier in their world, in their career, they may have been in lower tax brackets. That allowed them to defer for longer. But now, later in life, everybody around retirement planning is always suggesting that you will be in a lower tax bracket. But that’s not always the case, specifically for those who have corporations.

Kyle Pearce: So we really want to be finding someplace in the middle so that we not only have a significant net worth, we have a potential tax problem worth solving. But then we’ve actually got to do the work ahead of time to make sure that we have a plan in place so that we can, with the optionality, we can have that optionality to be able to control things a little bit more so that we can maintain or grow net worth while still living the lifestyle that you’d like to live and not having a massive tax bomb down the road.

Jon Orr: Yeah. Right. Yeah. And I think so the corporation, you know, deferring does make sense, but deferred tax eventually becomes tax due. And that’s what Kyle is facing, right? So like both of these individuals, the John, the Kyle, both are saying they have tax issues, and both are right. But to us, I think the real issue isn’t a tax issue. Like that’s not their real problem. Their problem was planning. And their problem was thinking about, say, the plans around thinking about their tax problem, right? So it’s like you’ve got — you think you have a tax problem, but actually your problem is hidden. It’s like you have this other kind of underlying root cause here. Cause if you could rewind the time to both of them, the question is like, would you recommend the other approach? And you wouldn’t.

Jon Orr: Like the real problem here is — is, under — is thinking that you only have one of these two approaches, is that I either can pull it out now and enjoy life and pay this tax now, or I can defer and hope that I have less tax later. But, you know, you’re listening to this show, the whole point is to grow it. So you’re gonna pay more tax later if you don’t have a plan in place. And I think that’s the real issue here, is almost like you think that there’s this dichotomy, like there’s these two choices, there’s two pathways to take. And I should take this deferred pathway because that’s the better of the two, because I pay less, I don’t need the money now. So that makes sense. But the reality is that there’s not just two pathways. The third, you know, the third option here, the third solution to thinking this way, is to think about the tactics — to actually allow me to enjoy my life now and then defer tax in a way that makes it look — makes it get to a point where I’ve got things in place and flexibility.

Jon Orr: You say this a lot here on the show — that we want to put tactics into place to create flexibility for ourselves later. And that’s the third — that’s to me, that’s the real third solution. Is that we don’t tend to look at what are the tactics to create the flexibility. And that’s why we’ve designed the show the way it is, is to help understand what these moves and tactics look like so that you’re not forced into one of these two pathways, because no matter which pathway you take, you’re gonna say you have a tax problem. Because the people who take the middle option don’t say that anymore. Like they don’t say, I have a tax problem. And that’s the important distinction.

Jon Orr: So I think when you roll that back, it comes down to planning. Because if you could rewind time for both of them, we could help them with what is the right plan to go down the third option. And that requires planning. That requires learning. That requires setting your goals and understanding where your goals are, understanding the problem you really have. And I think that’s the — that’s the hard part of why people don’t go down this pathway, because you almost have to know what you don’t know, which is to understand that the problem you want to solve has many layers to it. And it’s a hard path to go down. Don’t get us wrong. It’s easier to go down one of these two pathways for sure, but you’re still gonna end up with the same problem in the end. And so let’s kind of talk there. Let’s talk about the middle, you know, like what — we’ve kind of unveiled that this is the real problem at hand, but why does that early planning matter so much and what does that look like?

Kyle Pearce: Yeah, well, you kind of highlighted that the human struggle that we have is like we want things to be all in or all out. We talk about it all the time, right? And we’re saying we gotta find someplace in the middle. And the middle isn’t right in the middle for everyone. It’s somewhere in the middle. And that’s the hardest part — trying to get yourself planned around to determine what it is that you want. I’m gonna argue, as we have said, both of these extremes are not ideal because in the one extreme, there’s not a whole lot of reinvestment happening and there’s a lot of lifestyle creep going on. Like if you’re literally draining your company every single year to live life, even though you have assets, that is a really hard thing to do because now you need those assets to be able to help you maintain that lifestyle at some point. So financial freedom probably is gonna be well off into the distance for someone like that.

Kyle Pearce: So there’s multiple reasons why that extreme’s difficult. On the other hand, if we go to the other extreme and we go, Kyle’s been saving and deferring for so long, there’s a few things that could be a problem there. One is that, first of all, I may have been in like my lowest tax bracket years may have been when I was earning the most money as a business owner, which is kind of backwards. Like retirement planning says, don’t do that. Don’t actually be in the lowest tax brackets while you’re working and then save it for retirement. The other part is that maybe I’ve actually not utilized as much money for my own lifestyle or for giving or for, you know, helping my children or helping other charities or whatever it might be. I may not have done that just because I was so hyper focused on just sort of growing that pile and not, you know, planning for it.

Kyle Pearce: So, really, what we want to do is we wanna get to the middle. The only real way to solve a tax problem is by not actually having income, right? If we have zero income, you know, that’s like the biggest, easiest solution — we’ve expensed it all away. Like sometimes we’ll see it on our social posts, someone will say, well, if you just spend more in your business, that way you don’t have to pay a lot of tax. I’m like, well, yeah, I guess you could, but like now you have nothing left at the end. That’s not really my goal or the goal of a lot of business owners.

Jon Orr: Right. Taxable income.

Kyle Pearce: So the other options that we have — is that we can introduce, and here’s the reality of it — we can introduce leverage strategies, creative leverage strategies that can help us with offsetting. Now, a lot of people, as soon as we use the word leverage or debt, we’ll get the word risk. But I’m gonna argue, like, think of how risky it is to pull a million dollars out of your corporation every year and lose $400,000 of it every single year because we don’t want to be quote unquote risky with leverage. Now, when we leverage, the key is we’re not YOLOing into fartcoin or some sort of, you know, crypto or anything like that. We’re talking about reasonable investment strategies, diversified strategies, all of these things. We’re not going to get into what to invest in, but if you’re going to use leverage, when we do investment loans, we have the opportunity to write off interest against income. And that can be a really powerful tool.

Kyle Pearce: We’ve got YouTube videos on meltdown strategies that are really helpful. Well, in this particular case, the one thing with leverage that it does is that when we take that money and we use leverage to reinvest into other assets, we are now growing our net worth and we are able to write off that interest. That is a massive unlock. Now we’re not suggesting that you over leverage. We’re not suggesting that you take, you know, 70% of your total net worth and leverage it. We usually suggest that a Smith Maneuver style strategy can be very helpful using your primary home as the asset for a starting point. But the problem with that is that we still have the — the pile, 71-year-old tax bomb problem that can happen, right? Meaning at some point we move on to the next place and we do have to sell these assets, whether it’s a deemed disposition through the transfer through your estate or through a trust or however you’re doing it, there is going to be tax to be paid on all of that deferral.

Kyle Pearce: And that’s where we are big, huge advocates of utilizing permanent insurance, high cash value. And if you have a corporation like these two individuals do, you get the added benefit of being able to fund that policy in the corporation with tax-deferred dollars. These are after corporate tax dollars to create essentially like a living GIC with a massive estate benefit that will pay out tax-free through the capital dividend account. And when we combine these two things — using leverage at a personal level to be able to write off interest against other income — that gives you the ultimate optionality so that you have a little more control over the tax that you’ll pay from year to year, and you have a massive resolution to the big tax bomb later.

Kyle Pearce: So ultimately, what we’re suggesting is that for everyone who’s in this scenario where you’re paying a large amount of tax from year to year, whether you have a corporation or not, there are opportunities for us to utilize leverage. And then the only asset that goes up in value when we pass tax-free, compared to all the other assets, which are depleting in value due to capital gains and other taxes and the RSP or the RIF, it’s essentially 50% disappears overnight. Those are big problems worth solving. And the beautiful part is, when we use leverage, we get to maintain our cash flow that we want for lifestyle while watching our net worth grow over time and knowing that our legacy will be an even larger number, whether we choose to give some to friends, family, or whether we want to leave it for charities or foundations.

Kyle Pearce: So this for me is really the core of what we do around our planning is really trying to figure out — when we’re working with any prospective clients, we’re trying to help them determine where are you now? What tax rate should you be paying? Because I’m never going to tell anyone that you should never be in a 0% tax bracket. That means you clearly have an income issue, right? You don’t have enough income happening here. But what we want to do is we want to go, okay, what’s the ideal tax rate for you to be in now? And when we project out, based on the runway of your business or your high income job that you have or whatever it is that you’re doing, based on that runway and on conservative projections, what sort of tax problem are you creating for yourself? A good problem to have, that we can help to start a plan now so that when you get to 71, like Kyle in the example, that you’re in a position where you have more control. There’s more gear shifters around for you to decide.

Kyle Pearce: And if you choose at that time to say, I no longer want to use a leverage strategy and I’m okay to pay a higher tax rate onwards and perpetually, that’s an option that you have. But the problem that someone like Kyle in our example doesn’t have right now is that it’s not a good idea to try to start a leverage strategy at 71. Or it’s not a good idea — I shouldn’t say it’s not a good idea, it’s very rarely a good idea to get a high cash value policy going at 71, unless you’re in really great health and there’s really specific reasons why. What we want to do is this planning early, and we’re never going to get it perfect. But what we can do is get you somewhere in that middle that works well for you so that you get to live the life that you want for you and your family now. And you better prepare yourself so that you guys get to live the life and the lifestyle that you want later as well.

Kyle Pearce: So now when we look at John and Kyle, these are our two case study individuals here from today’s episode, I don’t see mistakes. What I see is two successful people who solved one problem exceptionally well. In John’s case, he built income. In Kyle’s case, he built assets. The challenge is that wealth isn’t just about accumulation. Eventually, every business owner reaches a point where the question changes from how do I make more money to how do I keep more of what I’ve already built? And that’s where planning becomes more valuable than performance.

Kyle Pearce: So if you’re an incorporated business owner or a high-income earner in Canada, here’s the question we’re going to leave you with. Are you currently building a plan for the tax problem you’re going to have 20 years from now? Or are you hoping that your future self will figure it out? If you’re looking for a hand, reach out to us. We are an education first firm where we work with you to build your financial freedom blueprint. And we are strategically licensed to assist you in the implementation of any plans that you feel are a great fit for you. First and foremost, you have to understand the problem. We help you through that process. Secondly, you have to understand the solution. We also help you through that process with no fees and no obligation. And finally, if you understand the problems and you understand the potential solutions, and they align with you and who you want to be now and moving forward, as an incorporated business owner or a high-income individual in Canada, definitely reach out to us and we can help you with the implementation of those strategies as well. You can find the links in the description to book that call now. And of course, there’s some other links and goodies there if you’re an incorporated business owner looking to take our masterclass, or if you’d like to do our health wealth assessment. All right, my friends. Until next time, we will see you soon.

Kyle Pearce: And just as a reminder that this content is for informational purposes only and educational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. And just as a reminder, Kyle is a licensed life and accident and sickness insurance agent and the president of Canadian Wealth Secrets. And our wealth management arm are all qualified and licensed to manage securities.

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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