Episode 273: The RRSP and Corporate Cash Strategy High-Income Business Owners Overlook

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Are you so focused on eliminating taxes that you’re overlooking better opportunities to grow your wealth?

A rising tax bill can feel painful, especially when your business is generating more profit than ever. But paying more tax is often a sign that your income and net worth are growing—and the real challenge is learning how to keep more capital working strategically instead of chasing the unrealistic goal of paying nothing.

In this episode, Jon Orr and Kyle Pearce unpack a real business-owner scenario involving a significant corporate tax bill, excess cash, and missed planning opportunities. They explain how a shift in mindset, combined with practical changes to compensation and corporate wealth structure, can create greater flexibility today and stronger long-term outcomes.

You’ll discover:

• Why focusing on after-tax wealth growth is more valuable than trying to reduce your tax bill to zero.
• How adjusting the balance between salary and dividends can create RRSP room, reduce corporate income, and improve tax deferral opportunities.
• How business owners can put excess corporate cash to work while maintaining liquidity, supporting future investments, and preparing for estate taxes.

Press play now to learn how smarter tax planning can turn a frustrating tax bill into a more intentional wealth-building strategy.

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.

For Canadian entrepreneurs, building a resilient Canadian wealth plan means looking beyond the goal of simply paying less tax and creating financial systems that support long-term growth. This episode explores practical Canadian tax strategies, including salary vs. dividends in Canada, optimizing RRSP room, personal vs. corporate tax planning, and corporation investment strategies for excess business cash. It also examines how leveraged investing through a corporate line of credit may create a tax deduction when borrowed funds are used for eligible business or investment purposes, while emphasizing the importance of investment risk, liquidity, and professional guidance. By organizing capital into financial buckets, coordinating an investment bucket strategy, and combining tax-efficient investing with corporate structure optimization, passive income planning, financial diversification, and legacy planning in Canada, business owners can pursue financial independence, strengthen their estate plan, and build long-term wealth in Canada with greater clarity and flexibility.

Transcript:

Jon Orr: We just got off a wealth strategy call with a great individual and they — I guess this was the second strategy call. But in the first strategy call this person came in basically saying I hate giving up profits on a — like all this profit to tax and I need help. There’s got to be a better way than just dishing this all out to the CRA. And we helped him specifically and very actionably in those two calls with two specific things. There was a bunch of other things that we helped along the way too, but two specific things we want to call to attention here in this episode of how we helped him with this phrase: I hate the tax, and I need help. Kyle, let’s unpack the context so that we can get into the two specific ways we helped this person.

Kyle Pearce: Yeah, absolutely. So this particular individual, pleasure to chat with. I would like to consider them similar to a Tom reference, because they had actually made a comment that the tax bill kicked them right in the — I’m not gonna fill in the blank on that, but it’s a location, yeah, it’s a location sort of in the middle of your body, you know, and ultimately, I thought it was hilarious. I wrote it down in my notes. I actually think I even sent you a message just saying like that was quote of the day. And the reality is it’s true. You know, the bill was high, but the nuance here is that this is where taking the low-hanging fruit that’s available is so important if that’s something that really bothers you. Now, there’s other clients that we’ve chatted with, and that we’ve done some strategy calls with. And, you know, for them, they’ve sort of recognized that as profits go up, taxes are going to go up. And I think one of the hardest things for us to recognize and swallow is when that tax bill gets to a point where the tax you’re paying, let’s say in your corporation, is more than maybe you’re paying yourself per year. You know, like that’s something where you look at yourself and you go — that number cannot be accurate, you know, like how is it possible?

Kyle Pearce: And in this particular case, the tax bill was around $400,000 for corporate tax. Now, if we kind of reverse engineer — at the same time, they only take about $180,000, this is each spouse in the business taking $180,000 out of the business. There’s actually another partner and their spouse taking $180,000 each out of the business. And they’re paying this $400,000 corporate tax bill. And they also still have to pay tax themselves at a personal level. Like that is a lot. But then we have to also look back and we have to say, okay, what is causing a $400,000 tax bill? And we have to get comfortable with the idea that the absolute amount of tax that we’re paying is not what really matters here. It’s actually relative, right? Like it’s important for us to recognize — and you and I being former math teachers, recognizing the difference between absolute numbers and relative numbers, right?

Jon Orr: Tell me more about this.

Kyle Pearce: Well, immediately — like I’ve now grown accustomed to, I still don’t like it. Don’t get me wrong. When I see that big tax bill, you’re like, my God, how is that possible? But what I try to remind myself, and I try to almost have to go to the books and I have to prove to myself, like, why is that number so high? The number’s high because the net operating income of our business is high. And if it was $300,000 last year and now it’s $400,000, that means that my net operating income must have actually gone up. And therefore, it should be going up by dramatically more than $100,000. It should actually be going up by about three times as much, right? Because as this number goes up, our corporate general tax rate here in Ontario is slightly higher than 25%. So if I’m paying an extra $100,000, and that represents 25% of the new net operating income that I’ve created, there should be three times that — 25, 50, 75. The other 75%, I should have profited an extra $300,000. I should say the total profits are $400. You give 25% of it away. You get $300,000 to keep for yourself.

Kyle Pearce: So this is a good problem to have, as we like to say on the podcast and in many of our strategy calls. However, when we look around, and in this particular case when we were on the very first call, we recognized a massive gap in their thinking around this idea of the tax bill. And we’re going to dig into that, but then talking about the more recent strategy. So now taking that low-hanging fruit, they’ve now taken that, applied it. And now we’re kind of evolving into the next strategy for them to ensure that first of all they become comfortable that — news flash — we’re gonna have to pay some tax. And we can’t avoid it unless we don’t have profit or we expense it all away somehow. Right. So like we have to find a balance here so that we can optimize and try not to leave too much on the table unnecessarily through the planning process.

Jon Orr: Yeah, and let’s — we’ll get into that part, like what that actual move was for this person. But I think that the first of the two things we said we helped them with is this mindset — that you think you can almost take your tax bill to zero. It’s like there’s gotta be — I’ve heard that there are people out there that pay zero tax on corporate income because of this and this and this. Like how do I do that? And I think you have to — the mindset shift that we helped with this person was to say there’s a lot of win here for thinking about like, you’ve grown your business, your tax bill is going to go up. And if you’re pushing yourself past, say, the small business deduction limit, the first five hundred thousand dollars, now all of a sudden your tax bill is more than what it was by last year’s results because you grew past that number. Like you’re going to pay tax.

Jon Orr: I think when you think about I want to pay zero tax, then you’re asking yourself the wrong question. And that’s I think what we helped this person with — stop thinking about it in that way. There are moves you can make, like the low hanging fruit that we can put into place for sure. But we need to get over this hump that I can pay zero tax somewhere in this world. And I’m gonna find this magic bullet that I’m missing. And I think what we helped him think about is you’ve made a lot of gains. Yes, your tax bill’s gone up because you made so many gains. That’s a huge win. But you’re asking yourself still the wrong question. Stop asking yourself how can I pay zero tax. Start asking yourself where does the excess profit live to generate more wealth?

Jon Orr: Like these are the questions we should be asking ourselves. Like instead of saying let me just pay zero tax, let me figure out where does my money reside so that I have more opportunity to continually grow it? If it’s inside the business, great. Keep it inside the business. Let’s grow the business because we can compound inside there. Is it on the side? Is it in my holding company? Do I invest it? Do I do these moves over here? Do I have access to capital in this way and this way and this way? Like these are the more important questions to ask than just trying to minimize to zero tax because you’re not going to get there. There are some moves, but let’s make sure that you’re putting your attention in the biggest gain possible. Because the way that I think you phrased it is like they tripled — let’s say if in order for us to grow, that tax bill grew but they tripled the revenue to get that growth in the tax bill. But it’s like if you could spend more energy and more thought and more strategy to think about growth inside the business, you’re better off. You’re way better off long term to think about those moves. Yeah, there’s tax optimization moves you can make, but let’s ask more questions and more thought around that. So like people who come to us want to always pay zero tax and like help me figure this out. And we’re like, you’re thinking about this wrong.

Kyle Pearce: Yeah, a hundred percent. And you know, it’s funny because the analogy that I’ve used — I don’t know where I heard it, it’s not mine, but I heard it somewhere — where someone said is like, would you ever take, like, you know, let’s say you’re earning $200,000 a year and your boss came up to you as a T4 employee. Your boss came up to you and said, I’d like to give you a raise to $400,000. Would you ever say no to that raise? Because now your tax bill is going to go up. And here’s the crazy part: your tax bill’s not going to go up linearly. Cause when you’re at 200,000, you’re not at the highest tax bracket. When you get to 400,000, you now have a higher marginal tax bracket. You’re actually going to pay more than double in tax. Like that’s a lot of money. Even though — but would you say no to the raise? No, you would of course take the raise. You want to make sure that you have more after tax money in your pocket as well. And in this case, it’s no different.

Kyle Pearce: And in a business, we actually have luckily — it’s like even once we pierce that $500,000 net operating income number and we start moving into the higher tax rate, the general rate, we’re still only paying around 25%. I say around because every province is a little bit different on that extra money. So you still get that $500,000, that nice little 12.2% or nine to twelve percent or so, depending on where you are. You still get the benefit of that small business rate. That’s a fantastic deal. And then it gets worse from there, just like it gets worse to go from 200,000 of T4 income to $400,000. The difference is, as you move up as a T4 employee, you get to pay upwards of 50% — in the corporation, as long as that active income is what’s coming in, active income is not going to get taxed beyond that 25-ish percent number. Like you can look at it and think of it as like if you are a wealthy individual in Canada, and you are in the highest tax bracket, you will only pay around 25-ish percent on any capital gains realized. But any ordinary income is gonna be taxed at above 50%. So there’s still a massive win here for our business owner friends.

Kyle Pearce: But now it’s like, how do we take every other aspect? And on the screen here for those who are hanging out with us on YouTube, make sure you hit subscribe if you’re gonna come and check this out. On YouTube, here I’ve kind of drawn out the diagram. And when they first came to us, we’ve got an operating company. Again, there’s two partners as well as spouses. They’re all connected to their holdcos. They have two holdcos side by side, and the holdcos own the operating company. So that means that any of the retained earnings from the operating company after we pay tax — keep in mind, like this is after paying tax in the corp — we can move that money up to the holdcos. And from there, we can decide if and when we want to distribute out to shareholders. Now they were dividending themselves from the operating company up to the holdco and out to themselves as dividends.

Kyle Pearce: And the reason why was because they were like, the RSPs, it’s just a scam. Like they were like, RSPs, we’re gonna save tax now. But when I go to take this money out later down the road, remember, like we’ve got a lot of money here. Those who are looking on the screen, about 1.8-ish million dollars in net operating income. These are all roundabout numbers, by the way. Their tax bill was around $400,000 to the corporation. And ultimately, at the end of the day, that’s a lot of tax to pay, but that’s also a lot of retained earnings. So their thought process was sometime down the road, we’re gonna have to continue taking money out as dividends to fund our lifestyle. And taking money out of the RSP isn’t gonna be worth it because we’re gonna be in the highest tax bracket. And they’re not wrong in that aspect. But what we’re forgetting about is being able to not pay any tax before we put that money into the RSP. We get all the tax back. So, John, you had said like, we’re gonna have to pay some tax. Well, in the RSP, we don’t have to pay any tax yet if we put it in the RSP. We get to allow a bigger number to compound for a large number of years. And yes, you are gonna get kicked in that place he was talking about later if you were to take it all out all at once. But there are ways that we can mitigate this. So deferral is gonna be a huge, huge move here, right? Put it off till later, but then we need to plan for the later.

Kyle Pearce: So we needed to get them to rethink taking, say, only dividends out because they were not creating any RRSP room for themselves when that was the easiest immediate tax deferral tool that they could have been applying along the way. So that was the first suggestion. We go from $180 per person of dividends only. And we said, listen, let’s shift that to salaries. They also had RSP room that they had not used.

Jon Orr: Salary — you wanted to shift it to salaries.

Kyle Pearce: So we’re gonna shift — yes, sorry, I’m not sure what I said there — but from dividends to salaries so that we can create that RSP room. And each of them had other T4 jobs in the past that they had never utilized RSP room. So they had a little extra already sitting around. So that was a great easy move that they could do by just simply changing a — turning a knob and going, let’s do T4 income, keeping in mind that T4 income reduces the net operating income of the operating company. So that is going to, in fact, reduce some of the tax to be paid in the next corporate financial year end year for income tax purposes. So that was a massive move. And I was so happy to hear by call two, they had already turned that knob. They had already grabbed that low-hanging fruit. And they are now going to do this because they’re starting to recognize that listen, you’re going to pay a lot of tax along the way because you have a lot of money. You have a lot of wealth. Like this is something, this is the reality. It’s a good problem to have. But let’s try to turn the knobs to give ourselves as much optionality as possible. Let’s continue to grow our net worth. Yes, I’m sorry. Your RSP is going to grow. The investments you have are going to grow larger now because they’re tax deferred, making you a future tax problem that is bigger than you would have had otherwise, but it’s because your net worth is higher. Like this is a good problem to have. And we have other ways that we can address those issues down the road.

Jon Orr: Yeah. And we’ll put a link in the show notes. We created a YouTube video that deals with that exact problem, which the title is RSP meltdown strategies. How do you melt down that RSP with limiting how much personal tax you’re going to pay on RSP withdrawals and how do you set that up? Like it is not just hey, get to RSP time and I start pulling, but I’ve got these special techniques to put into place at that time. No, there’s some unique strategies to start now to put into place so that you get to that spot and you can melt that down tax efficiently.

Jon Orr: Do you want to add anything else to what we just discussed there that the link won’t take care of, Kyle, for someone to go off and watch that video? Or do we wanna talk a little bit about specifically around what this person did with now these two pieces of information, right? Like it was these two pieces that we helped them with — one is mindset around tax and saying, I’m asking the wrong question. I shouldn’t be just asking how to pay zero tax or as little tax as possible. The shift is where and how do I grow more wealth with the reservoir that I have access to and how do I create that reservoir? That’s the better move and question to be asking yourself. But then the second move that we made here, or the other key takeaway that this person got on those two calls, was that immediate action of like there is some low-hanging fruit around salary and dividends that you haven’t been optimizing for to create less tax in your corporation, your operating company, put that into place and they put that into place between our first two calls, which is a quick move that you can just be setting up and all of a sudden it’s an immediate tax advantage move.

Kyle Pearce: Yeah, absolutely. So I think that link’s gonna definitely do that job. Now let’s look at what’s going on inside the companies because what we have here is, I’m gonna say, a cash flow intensive business. So lots of cash coming in, but there’s also the need for additional cash as well. So the number one thing I notice is there’s a lot of cash hanging around. And quote unquote, from this business owner, they said the bank’s constantly calling us saying, listen, why don’t you take some of that cash? So in the operating company, more than two million dollars sitting in their bank account. In their holdcos, over a million dollars each in their bank accounts in these holding companies. And their concern is, and the bank said, listen, just at least toss it into a GIC, like toss it in, at least earn something on it.

Kyle Pearce: And I would argue like you want to toss it in something. Like, we don’t want to earn nothing. We also don’t want to avoid passive income to the point where we’re like, we’re not going to earn anything, right? Passive income’s taxed at 50-plus percent in some provinces inside the corporate structure. So that can be scary. But there’s ways that we can structure this. The other part that they mentioned is because the business is so cash intensive, they are concerned that even if they locked it up for a short period of time in a GIC, they may need the money to do something. One of those things might be actually putting it and infusing it back into their own business. But recently they also bought another business. So they needed that cash available. And some would argue like you don’t need all that cash available to buy another business. We could use leverage with a bank and so forth, all kinds of different things we could do. But right away it was clear that they want to be mindful about how much money goes into investments and how much money is sitting there available and liquid.

Kyle Pearce: So for these individuals, while with most business owners we generally talk about what we call a 50-50 strategy of going, listen — now when I say fifty fifty, this is outside of the cash that you need for the next quarter. Okay, the next three months, you want to make sure that like you’re not at zero, that you’re not constantly stressed or anything like that. You want to make sure that there is some cash, but this is way too much cash. So usually we start with a 50-50 split between long-term assets — and that might be like corporate class ETFs, it could be private equity, it could be a mixture of some of those things, it can be real estate — and then the other aspect is going to be our corporate-owned insurance strategy. And this is going to help solve some of the other problems that, for example, the RSPs might introduce down the road.

Kyle Pearce: As they build this RSP and they continue to grow their net worth, there’s going to be more tax to pay down the road. Well, that’s where the insurance can help us at the very end when it pays out tax-free to the capital dividend account and flows out tax-free to shareholders. It’s the only asset that is worth more after we pass away than less or the same. When I say the same, our primary residence and our tax-free savings accounts, those are the only two things that stay the same value because there’s no capital gains tax on them. Our RSP is going to get chopped in half if there’s more than 500,000 in there. Your corporate cash is all going to be taxed based on the valuation and the assets that are in that corporate structure. So everything else goes down. The insurance will be the only thing that goes up in value, which helps us to mitigate that tax.

Kyle Pearce: Now, in their case, they can’t do a 50-50 split on long-term investments versus this short, more safe, liquid GIC-like growth asset in cash value in this insurance policy because they need a lot of cash available. So, what I’ve proposed to them is to do a 70-30. So 70% is going to go into corporate owned life insurance, which will be held inside their holding companies. Now, some people get worried and they go, I don’t have holding companies opened yet. Keep in mind a policy can be set up in an operating company as well. And we can transfer ownership when you open the holding companies. Same’s true for a family trust. We’ve discussed that in general to say, hey, is a family trust — are we at the point now where you as families want to consider a family trust? So there is some learning to be done there still, but that’s a further down the road hanging fruit that we’re going to be reaching for.

Kyle Pearce: So right now we’re going to look at an insurance policy that’s going to be high cash value so that we can fund cash value that can be leveraged against for any type of investment or business use that they need inside of their structure. And what we propose to them is that we actually set up a line of credit directly against the cash value immediately so that they actually have it available. Like some people would just use policy loans with the insurance company. Here, we’re gonna set up a line of credit. Some people call this an IFA or an immediate financing arrangement, so that they have access to significantly more cash value from day one. We can have that set up. And basically, as soon as that policy is funded and ready to roll, a couple weeks later, all of a sudden we’ve got leverage there through a line of credit or through an actual loan if you do need the money back in your hands.

Kyle Pearce: What they’ve done is they’ve created the opportunity for them to generate cash value that’s going to grow at GIC-like returns, which is what the banks were asking them to do with this extra capital. The difference is the GIC is going to be taxed at 50%. Whereas the cash value here is not going to be taxed at all. The death benefit is going to be significantly greater than the cash value from day one and will continue to grow for the future, all the way through. If they fund this thing long enough for a, I call it a 10-ish year runway, the death benefit will continue growing for the rest of their lives, which is going to help to ensure the policy keeps up with inflation from a death benefit perspective. So that there’s enough death benefit there to help pay out and leave your estate in a better place than it was had you not had this type of asset integrated.

Kyle Pearce: And the key is that with this line of credit, this cash that was sitting doing nothing is now going to be utilized to help them keep running the business. So we’re not giving anything up. We’re going to have access to almost — I’m going to call it 85% of the premium that we put in from day one will be available to them if they need it. And by about year four, they’re gonna have more than the amount that they’ve put in available to them to utilize in the business. And if they don’t end up using it, that cash value growth is gonna grow just like the GIC would have grown that the bank was suggesting, without triggering any passive income tax or any sort of grind down on their small business rate that they want to keep intact. Because remember, tax is on their mind, so they don’t want to grind that rate away unnecessarily if they don’t have to.

Jon Orr: Right. So they came saying, like, I hate tax, help me figure this out. We first said, hey, we have to ask some different questions first. One is like let’s realize that you are going to pay some. It’s just where does that sum come from and how do you put it — play it or pay it. Which means now ask the question about where your wealth reservoir is. Let’s let’s think about that. Then what we also did was we helped them think about these quick moves that we could be making and where’s that low-hanging fruit? And in their case, their low-hanging fruit was the mix between their salary and their dividend that can offset some of their tax that they were already paying, to pay less year to year. The scenario you just outlined is an optimization structure for thinking about your wealth reservoir portion in long-term implementations of tax across the board — from opco to holdco to personal. It kind of creates this optimized playbook or this optimized strategy that will long term create less tax for you now and your estate forever if you put this into place. And it’s one of those moves that we use ourselves that is also great for many of the clients and the people that we meet with on the strategy calls.

Jon Orr: And remember this was a strategy call that we held with this person who was listening to the podcast, just like you, who then said, hey, I would love for them to look at my scenario, my situation, my unique constraints, my unique components and pieces, my puzzle pieces, and help me build the puzzle that I’m trying to build because I’ve had less clarity on what the puzzle pieces are and what the puzzle should actually look like. That’s what we do on those strategy calls. And all this person did was click the link in the description below to book that strategy call. And at the end of that first call, they had that low-hanging fruit. And by the end of the second call, they had the strategy in place for long-term wealth creation and tax minimization. That’s what our goal is for you as well. So if you would like us to take a look at your unique situation so that you have more clarity on your wealth creation journey, click that link in the description below and we can be booking a call to have that conversation and to give you that clarity.

Kyle Pearce: I love it. And, you know, just for those who are curious and they’re saying, you know, that line of credit, if they utilize the line of credit, what is going to happen? Like there’s going to be interest to pay. Well, I think one of the key pieces that we need to remind ourselves is that if they’re borrowing against this line of credit and they’re utilizing it for business or they’re utilizing it for investment within the business — so whether that money goes this way to the investments or whether it comes back to the operating company for use — we now have a tax write-off in the business that gets to help chop down some of that future tax bill that they’re going to continue to pay over time. Now, the goal here is to create more tax problem, right? So we want to create a greater balance sheet for this corporation, which in turn creates a greater personal net worth statement for all of the shareholders. But we now have a flywheel approach working here so that we can grow our net worth and also create opportunities for tax write-offs at the very same time without introducing any unnecessary risk. Because remember, that policy is only going to go up in value. It will never go down during a downturn or anything like that. And you’ll always have that extra dry powder ready to rock and roll. So if you’re interested in booking that strategy call, make sure you hit the link in the description. And we’re looking to help you take care of some of those low hanging fruits in your business or in your personal finances.

Jon Orr: Just a reminder, the content you heard here today is for informational purposes only. Should not consider this information as legal, tax, investment, or financial advice. Kyle Pearce is a licensed life and 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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