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Description:
You’ve built significant wealth across your corporation, investments, and personal accounts—but do you actually know which bucket you should draw from first when it’s time to step away from work?
For many business owners, the challenge isn’t accumulating enough wealth. It’s figuring out how corporate assets, RRSPs, LIRAs, TFSAs, non-registered investments, real estate, and taxes all work together once employment income slows down.
In this episode, Jon and Kyle walk through a real-world planning scenario for a couple approaching financial freedom and show why a simple net-worth number or 4% rule may not answer the questions that matter most: Will I actually be okay, and how should I pull money out year by year?
You’ll discover:
- How to stress-test your financial freedom timeline using spending, inflation, investment returns, corporate income, and future cash-flow needs.
- How corporate dividends, RRSPs, LIRAs, TFSAs, and non-registered accounts can work together in a long-term withdrawal strategy instead of being treated as separate buckets.
- Why withdrawal planning is an ongoing optimization process that can help reduce unnecessary taxes, avoid inefficient distributions, and reveal whether you may actually be able to spend or give away more than you thought.
Press play now to see how a year-by-year wealth drawdown plan can turn a complicated collection of assets into a clearer path toward financial freedom.
Next Steps:
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.
Canadian Wealth Secrets Show Notes Page:
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 corporate passive income taxes at greater than 50%; or,
- …wondering whether your current corporate wealth management strategy is optimal for your specific situation.
For Canadian business owners, effective wealth planning goes far beyond building a large portfolio—it requires a clear Canadian wealth plan that connects corporate assets, personal finance, tax optimization, investment strategy, and withdrawal planning into one long-term vision for financial independence. In this episode, Jon and Kyle explore how asset projection, retirement planning tools, financial buckets, and an investment bucket strategy can help entrepreneurs understand whether they are truly on track for financial freedom Canada and how to create a more confident early retirement strategy. Using a real-world business owner scenario, they examine corporate wealth planning, RRSP optimization, optimizing RRSP room, salary vs dividends Canada, personal vs corporate tax planning, corporation investment strategies, tax-efficient investing, and Canadian tax strategies that can support business owner tax savings and better corporate structure optimization. The conversation also highlights how modest lifestyle wealth, passive income planning, real estate investing Canada, financial diversification Canada, and thoughtful capital gains strategy can fit into broader wealth building strategies Canada, while long-term considerations such as estate planning Canada and legacy planning Canada help ensure wealth is managed efficiently across generations. For anyone focused on Canadian entrepreneur finance, financial systems for entrepreneurs, building long-term wealth Canada, or creating a practical retirement strategy, the episode shows why financial vision setting and an adaptable withdrawal plan are essential for turning accumulated wealth into lasting financial independence Canada.
Detailed Episode Summary
Luck, Volume, and Planning for Success
Jon and Kyle discussed the role of luck in business success and how to increase opportunities for success through volume. They believed that luck is not negated by volume but instead increases with each opportunity, much like rolling a dice repeatedly. They also stressed the importance of preparation, hard work, and planning in defining luck and achieving success. They encouraged individuals to take control of their wealth building journey by creating their own volume and investing time in clear planning. Lastly, Kyle mentioned the release of the fourth weekly episode of ‘Secret Sauce’ and asked for feedback on the initiative.
Transcript:
Jon Orr: Okay, in this episode, we want to unpack a recent call we had. And to be honest, this call is a very common call we get when people will reach out to us specifically looking for holistic financial planning, especially the blend around corporate assets, personal assets, and how do I think about tax optimization? How do I think about wealth planning for the future?
And so this individual was Jim. And so Jim and his wife, they had a very common problem. It’s a problem that I often think about as well. And I’m glad that, you know, we’ve planned this out for myself, yourself, Kyle. But we did this for Jim. And Jim really came saying, look, guys, like I feel good about my assets. I feel good about my portfolio. I feel good about where I stand. I feel like I’m gonna be okay, but I’m not sure exactly because I’ve never done the projections out. I’ve never like thought about it. Like I look at my size of my portfolio, I use my four percent rule and go, it’s gonna be okay, you know.
But where the complexity starts to live in his mind, this is Jim’s mind, you know, he’s saying like it gets complex because I have so many buckets. I’ve got my corporate bucket. You know, we just got an email the other day that said that someone was like, I’m actually looking to use my corporation as my retirement vehicle. You know, it is a retirement vehicle in a way. So it’s like he’s saying, I got a bunch of assets, like I got my corporate accounts, my investment on the corporate side, I’ve got real estate, I’ve got my registered in my personal name. I’ve got my unregistered in my personal name. My spouse has got all these things too.
And so when you think about all of that adds up to a number and your net worth number, let’s say you take out your primary residence and you’re like, the 4% rule says I’m gonna be okay. And this is what Jim said. But he’s like, the complexity is looks, there’s so much. There’s like LIRAs, there’s RSPs, there’s corporate. But when the time comes for me to say, I’m winding down my operations in my business. I want to take more time for myself, my family, my spouse. Maybe I want to travel. Maybe I don’t. Maybe I just want to chill. But the problem, the complexity says, how do I think about all those assets in terms of drawdown, my meltdown strategies for my RIF, my corporate like when I have to pull money?
So I push money into these things, and I stop taking a salary for say, or maybe I decide to keep taking a salary, but how do I pull the money? You know, what is that plan? And it’s almost like he Jim is very much like me. He was like, give me the year by year. Give me the, let me see what the first year looks like. And do I pull the money from my tax-free savings account? Do I pull the money from my business? Do I pay myself a dividend? Do I keep paying myself a salary? Like tell me the year by year outline so it’s a no-brainer for me so that I can sleep better today. That’s what we did for Jim. We’re gonna outline that here for you today. So let’s start off with Jim’s scenario. Walk us through the details. Like who’s Jim? Who’s his wife? Let’s get into that.
Kyle Pearce: Yeah, so Jim and Sandy, and we’ve renamed them, of course. We’ve adjusted some of the numbers a little bit here. We’ve taken out addresses for any properties. So, you know, full disclosure, of course, Jim and Sandy won’t know, you know, who they are if they’re listening to this episode. But they are currently mid 40s and they had about a seven-year runway in mind. Okay. So they wanted to land somewhere around age 50, early 50s for them to wind up.
And Jim is a business owner, has operating businesses, and a holding company, as many people, many listeners of the show often have. Now, if you don’t have a business, this is still really helpful because this type of work is important regardless of whether you’re incorporated or not. So I think that’s a really key piece. And there’s so many moving parts here that this planning process can be incredibly difficult.
One thing that we had to get Jim to start doing you know, throughout this process is first of all, we start with like, what do you believe your base expenses to be each and every month? And for most people, they’re actually not sure. Like up front, they’re like, I don’t really know. And you know, I usually say, hey, start with how much money typically is coming into your personal accounts, and then how much is left at the end of every month? And if the answer is zero, well, then you know how much you’re spending in general. So let’s start there.
Jon Orr: Yeah. Did Jim know?
Kyle Pearce: After a little bit of, you know, and Jim did not know up front, but along the way, they kind of went back. It’s great to go back more than just a few months. If you can go back a year, maybe even a couple of years, and try to get a general sense, right? Because some months obviously are gonna have more expenses than others. So obviously, the further back you go, the better this could be. Budgeting is obviously super helpful. John, you’re a big budgeter. You use YNAB, and that helps you to determine what your spend looks like.
I have not yet fully gone down that path. However, both me and Chantal are on that path right now. Like she’s agreeing, like, yep, we should get a better sense of that, just so we kind of know so this planning can become more clear. The reality is, as we do planning, if we’re just kind of, you know, usually we’re starting with just general approximations, but we can get pretty refined if we choose.
So with them, they’re in those, you know, mid forties. They’ve got a seven-year runway on their operating companies. We’re gonna assume these are not saleable businesses, they’re very Jim reliant, so to speak.
Jon Orr: Right, right.
Kyle Pearce: So when he stops, he just wants to know. He’s like, first and foremost, most business owners are like, I’ll never just completely stop, like you know, on a dime. I’ll maybe slow down, I’ll do less. But in this scenario, we took Jim’s ideas, and if you’re on YouTube right now, you can see the screen here.
We’ve taken Jim’s scenario. We’ve tried to keep inflation rates, you know, even a little more aggressive than what is by default in softwares. Like we know the target is 2% for the Fed and for, you know, the Bank of Canada. The reality is it’s usually higher. So we’ve got it at 3% here. We can play with different numbers along the way, and we can stress test around these things as well.
For rates of return, we’ve got they’ve got a high yield savings account. We try not to have any sitting capital for too long in the software. So we try to get it into some sort of investment if possible. And we usually use 7% as the default for equity. Now, some of you are thinking, I’ve been investing for the last five years, seven years, 10 years, and my average rate of return is higher than that. Fantastic. We’re gonna use some pretty conservative numbers as a starting point.
Because we’d rather beat our plan in the long run than get kind of pressed up.
Jon Orr: Sure. This is fail safe.
Kyle Pearce: Exactly. We don’t want to get pressed up against the ropes. And a lot of times for Jim, for you, John, for myself, when we’re doing our own planning, we always want to go like, what if the worst case scenarios were to happen? So let’s try to keep our average rates of return to a reasonable number. And we can always crank them up if we want to see what that might look like over time. So we’re using all really basic numbers.
Now, Jim came back and said, you know, over the last while, they found an average monthly spending. So we threw in base expenses. You can see on the screen here, they have a combined annual amount between Jim and Sandy. They are spouses, they have shared finances of about $75,000 per year. So that $75,000 does not include any mortgages that they’re paying out of pocket. Okay. So they do have a mortgage.
Jon Orr: Okay.
Kyle Pearce: The mortgage is going to automatically get tacked on. The reason why the software does this is so that when the mortgage runs out, we don’t have to come and manually change the base expense. It’ll just disappear. So if there’s five years left on the mortgage, in five years, that payment just goes away. And all of a sudden we have additional cash flow in our life that we can do something else with.
Jon Orr: Right. Got it.
Kyle Pearce: So these are considerations that it can be very hard for us to do if we’re just going to spreadsheet them out and go, I spend this much per year. Here’s my investments, my investments grow. You know, is the 4% rule going to work for me? Great starting point, but it is way more nuanced than that, especially if we’re not sure if maybe in five years the kids are out of the house, maybe our spend goes down, maybe we want it to stay the same. Maybe we want to start taking bigger trips and more often, now that we have all of this free time. These are all things that we can do in the software, and we can kind of see what sort of impact they have on the longer term plan.
Jon Orr: Got it. Got it. All right. So that gives us a good sense of base expenses. So, you know, when we want to project out, I think, you know, answering, let’s talk about like some of the assets that Jim and Sandy have, because we’re trying to like let’s give the overall of where they are, what they’ve had, because you know, hearing about someone’s scenario, hearing you might have some similar assets, some similar things. Like this is something we did for Jim. We do this for every single one of our clients who book a call with us to talk about that holistic wealth planning portion. But what else what other kind of assets, incomes do we are we looking at so that we can set the stage for looking at withdrawal, right? Like the goal here is are we gonna be fine and how do we withdraw when the time comes?
Kyle Pearce: Yeah, absolutely. So we want to make sure that we’re accurately, you know, showing the incomes that are coming in currently. If they have any rents like this individual does, if they have any other cash sort of coming in in a given year, we can add that in. Sometimes people are, you know, preparing for an inheritance in some year. We can add that in. So we’ve done all of that work over here. We’ve added in their assets.
This person has a LIRA. They’ve commuted a pension, used to work at as a government employee before going into business.
Jon Orr: Mm-hmm.
Kyle Pearce: So shared a lot of things in common with us. And then we’ve got all kinds of different buckets: the RSP, tax-free savings account, non-registered accounts, and real assets as well. So these are all things that we can look at and we can build out. And then as we look, we can also add in their corporations. So in this case, they’ve got two operating companies and a holding company. The holding company has some investments in it.
So we’re not going to get too specific in terms of the numbers here at this time.
Jon Orr: Sure.
Kyle Pearce: But what I want to show is the opportunity for us to go into the operating company. And when I click on planning pages, we can actually see the net or sorry, the operating income coming into the business here, going for another seven years.
Jon Orr: Okay.
Kyle Pearce: Something that Jim wanted us to do was to say, listen, I know what I’m earning top line revenue this year. I know what my expenses in general are. Let’s not use any inflation. We’re not going to grow the business. We’re not going to contract the business. We’re just going to keep it the same steady Freddy. And we’re going to take a specific salary each year for Jim and Sandy, just like they have been doing.
Jon Orr: Okay.
Kyle Pearce: We loved the number that they were taking, that the two spouses were taking $140 each because they were earning more than $500,000 in net operating income across their two operating companies. So that was sort of like a nice sweet spot to make sure that they were creating some RSP room. They’re not getting too aggressive given that their spending didn’t require more money coming out.
Jon Orr: Right.
Kyle Pearce: So we’ve got kind of like the best of both worlds happening in this particular illustration. And here we can see what we are left with from a net operating income perspective for the first operating company, as well as what’s happening in the second company from a net operating income perspective.
So these two businesses are, I shouldn’t say growing. They are continuing to produce income for the next seven years. But then you can see here in the software that we’ve completely shut it down at Jim’s age of 53. That’s where they wanted to see, and they wanted to say, like, so what happens after that? Like, what can we expect? Given the cash flows in the business and given the actual investments that we’ve made along with any of our spending that we want to continue off into the future.
Jon Orr: Yeah, and you can you if you’re listening to, you know, like what you’re probably also hearing and what triggered us right away, is to say, look, you’re paying yourself a combined two hundred and eighty thousand dollars of salary. Your living expenses are only seventy five thousand, right? So when you compare those two, yes, you’re gonna be paying tax on the two hundred and eighty, distributed to the two different employees, the two spouses, you know, but that’s a quarter of that salary is going to expenses. That’s, you know, even if you take off half the expenses, you’re still looking at fifty percent of your net income going to expenses, which is still a good chunk of savings, right? Like that’s that’s the kind of the my gosh, like Jim, you are saving and investing that savings heavily in these years, which is probably gonna make you okay, especially with a seven year runway.
Kyle Pearce: Yeah, absolutely. And you’ll notice too that, you know, because they’re taking $140,000 each. And again, their spending is what I would call very conservative for their household. They actually have a lot of money here. You can see over these next seven years, you’ll see in year one, for example, they can contribute forty eight thousand dollars to RRSPs across Sandy and Jim. And a lot of people would say, like, I thought the RSP was bad. And it’s like, well, in this scenario, this is actually kind of a nice optimization strategy. They’re able to invest a good chunk in their RSPs.
You’ll notice that they didn’t have a huge RSP. However, they do have a LIRA over here as well. So we have to consider that like a LIRA acts much like an RSP. So if we combine those two things, they have more than half a million dollars in combined RSPs and LIRAs across the two individuals.
Some people would say, like, when should I not contribute to the RSP? To me, the answer usually lies in how much money am I taking out of the corporations, getting taxed on, putting it into the RSP, and then getting a full tax deferral on those dollars. What is that number relative to what’s left in the corporate structure? I would say the larger the gap is between those two numbers, the more helpful I think the RRSP really is, meaning we still get a great corporate investment strategy and we get the benefit of the RRSP.
And some people would say, but Kyle, like if I’m going to be in a high tax bracket even in my retirement years, because I’ve accumulated a great net worth, is that really a good idea? And I would say the answer is yes, it’s a good problem to have. And this is where if you want to be more optimized, this is where leveraged investing strategies come in.
What I want to make sure we’re clear on here, and again, not financial advice, we’re not your accountant, we’re not your lawyer, we’re not your fiduciary here. But what I want people to recognize is that oftentimes the wrong people use leverage strategies. Usually the people who are trying to get a kick start or a head start in their investment plan to grow a very small net worth to a larger net worth get into the leverage game. It’s like they do it out of a desperation play because they’re like, I don’t have enough cash flow. I can’t invest out of my paycheck and my net worth is really small. The only way I can do this is by borrowing money and hoping and praying that everything works out.
When we’re in a scenario like Jim and Sandy are, leveraged investing is not because we necessarily need to grow the net worth or even want to grow the net worth, it’s because mathematically it actually makes sense. Because if I can build a solid leveraged investment strategy here, I’m creating the opportunity to write off more interest against other income. And when we get to the retirement years, our financial freedom years in seven years for Jim and Sandy here, in seven years’ time, if I have income to write off or in interest to write off against other income, I can help to deal with any of the tax implication of pulling money out of the RSP or from the LIRA, keeping in mind the LIRA we can’t touch until age 55.
Jon Orr: Right. Got it. Now we did create a whole separate video on YouTube specifically about that type of meltdown strategy and starting now so that you create that bucket that you can write off against your RIF when you go to pull it because you are pulling a lot, you can be writing off that income and all of a sudden you can net you can strategize around that to actually net that tax to zero. So we’ll put a link in the description below to that video if you’re more interested in say that complex or not complex but more strategic meltdown strategy.
Kyle Pearce: Nuanced, you know.
Jon Orr: Nuanced meltdown strategy. Okay, let’s keep going. Because I still I still I’m unclear here for Jim. Okay, we we’ve got the opcos, we got the hold co, we’ve got our personal assets. We’ve kind of outlined like his financial snapshot here. But we still haven’t answered the question about like one, is it gonna be okay?
Kyle Pearce: We gonna be okay? Yep.
Jon Orr: And I think we know he’s gonna be okay because of the savings rate he currently has. But second, and the more important for me anyway, is to see where to pull the money from in the buckets.
Kyle Pearce: Yeah, I love it. I love it. So I’m flipping back to the we have one of the two operating companies. We’re looking at this second operating company for now. And what you might look at is you you see you’re like, well, wait a second. I’ve got a high taxable operating income here. It’s showing about 800,000 of taxable income in this particular operating company. But it says net operating income is a lot lower over here. So then we try to figure out like what’s happening in this scenario and what’s actually happening is we’re actually sending money up to the holding company. And in this software, there is no sort of column to do that. So what we call this is non-deductible expenses.
So we’re actually taking $645,000 and we’re actually getting this money out and sending it to holding companies. However, there are other partners in this world. We don’t see them all in the plan. So some of this money is not going to hit their holding company. Both operating companies are sending any of those retained earnings up that they don’t need to sort of financially survive in the businesses. They’re sending it up to their hold co.
So when I click over to the holding company, what you’ll see here is we have what we call non-taxable other income coming in. These are intercompany dividends coming in. And you’ll see for Jim and Sandy, they have $440,000 coming in in this year. The next year they have $395. And they continue to bring 395,000 into their holding company until that year where they suddenly stop abruptly. Again, Jim knows he’s probably not going to stop abruptly. He’s like, but I just want to see what would happen if that were the case.
Jon Orr: Sure. Yep.
Kyle Pearce: So what you can see here is they have almost, you know, essentially $400,000 going into the holding company each and every year. And then I want to go back to the RSP discussion. We only have about 48,000 going into the RRSPs based on the contribution room we’re creating on Sandy’s $140,000 salary and Jim’s $140,000 salary. So we are maxing out their RSP, but relative to how much is going into their holding company, it’s like a drop in the bucket. It’s like a tenth. It’s a tenth of what’s going into the holding company. So to me, it’s a no-brainer that we utilize that RRSP.
But you’ll notice that we’re not intentionally taking out more than we need in order to put it into the RSP. We tried to find the sweet spot between how much tax we would pay.
Jon Orr: Is yeah, what is in your opinion, what is that sweet spot? Like let’s say I have my retained earnings, I see my RSP contribution, it’s like, where should I ’cause what you’re saying is what I’m hearing you say is that if you’re taking money out of the business to invest in the RSP, but you’re taking all of it out, don’t do that. And so that’s one extreme and then the other extreme is don’t take any of it out to put in RSP. And I think we’re saying don’t do that either. But what is the sweet spot here to be like, where do I pull the money like what is the number to look at? Because you were using a proportion. You’re saying like it’s a ten per s like right now his contribution RC is ten percent of his retained earnings in the hold co. Is there a is there an optimal number that you aim at with clients?
Kyle Pearce: Yeah. And you know what? It would be essentially again, the more money above the small business deduction limit of $500,000, the more likely we want to get just somewhere around that $140,000 number. Now, some people need that because their spending is high. For these individuals, their spending isn’t high enough to require that amount. So it makes the RSP decision super easy. If they need a lot more for lifestyle, we then have to start like getting a little more strategic. And we try to figure out we try to utilize as much of that RSP space as we can without spending too much tax to take extra money out or spending too much, I guess, in expenses in order to get these monies out in in order to fund that RSP.
So every scenario is a little different. Here, that sweet spot’s somewhere around $140,000, which is fantastic. And it still leaves them a significant amount, 10 times more to be reinvested in the holding company. And in the holding companies, they do have some different insurance policies. They also have an investment account as well. Their investment account currently sits somewhere just south of half a million dollars. They also have a number of policies that have about a half a million dollars of insurance cash value in them as well.
Jon Orr: Got it. Okay.
Kyle Pearce: So a lot of times we’ll start at a 50-50 split. Because there’s always a fear that what if the business doesn’t perform as we anticipate? What if I have some equipment failure? What if I have to reinvest in the company? They don’t want to have 100% in equities like maybe a salaried individual might have and you know, maybe a small little emergency fund. They want to make sure that they have available capital that can be leveraged very easily. So they’ve taken care of that in the holding company as well.
And when we go to the combined picture, lots of numbers on the screen. But some things I want to highlight here is I want to highlight this base expenses of 75,000 that we do have inflating with inflation.
Jon Orr: Okay, good.
Kyle Pearce: We’re using that 3% as a pretty aggressive inflation rate overall for now. But again, we can get even more aggressive on that if we want to. We have the value of the corporation. You’ll notice that right now they’re taking a salary for the next seven years. But then after that, we actually start cutting it. And we’re actually gonna start making these dividends. We’re gonna use eligible dividends to try to utilize the refundable dividend tax on hand credits that we have. And we’re going to start utilizing some of our other investment buckets if and when it makes sense.
So, what you’re gonna sort of start seeing happen here is over time in the corporation, we’re taking out dividends for a number of years. And because we’re taking them out and the corporation’s investment account continues to grow, you’ll notice we actually have no need to take any money from the other investment accounts that we’re holding at a personal level yet.
Jon Orr: So let me ask you this then, because this helps answer, you know, the second question, which is where do I pull money from the day I retire and what does that look like? Now this is kind of our fail safe scenario. So what we’re saying is like this isn’t maybe yet fully optimized in terms of taxation. But what this is showing us is like right now, you’re saying we’re not pulling from our personal assets yet. What we’ve got in a scenario to start here is let’s pull the salary, let’s mimic the expenses here to cover their lifestyle expenses, but let’s issue dividends from the corporation first. Is that what is that what’s happening here?
Kyle Pearce: Yeah. And you know what? What it really comes down to is a little bit of a game. Like we’re playing a little bit of a game. When we’re taking eligible dividends out of the corporation, if we have refundable dividend tax on hand credits or we have a GRIP balance, these can be some moves that we can utilize some of the deferred kind of built-in mechanisms inside the corporation. So we want to utilize some of those. And then what we try to do is we try to look at how do we defer as long as possible? Specifically in the tax-free savings account, that’s like one of our favorite buckets that we want to defer. In the RSP, we also like to defer there as long as possible as well.
Now, if we layer in leverage strategies, that also gives us more levers to pull along the way. Ideally, what I try to do is I try to look to my corporation and say, like, is there a way that I can continue growing my assets in the corporation while still taking dividends out of the corporation. And that’s going to, you know, really vary on every individual situation. So in this case, they’re able to more than deal with their ongoing expenses, which are growing with inflation, without touching any of their personal investments yet.
Now that may not be the optimal move yet, either. We’re just trying to see how do we keep everything growing for now. And then what would happen way down the road if let’s say we live to age ninety-five or a hundred?
Jon Orr: So in Jim’s scenario here right now, because his total corporate invested assets, the return on that is actually more than his expenses. He’s he’s fine. He’s like, I look I could I’m I have infinite money here because the dividends I pay myself, it’s like it’s I’m always gonna outgrow that number. And therefore I never have to actually touch any personal assets from here on out. I could just keep giving myself dividends forever. Like you’re saying, it’s not necessarily optimized for taxing tax reasons, but that’s a answer to the first question. He’s fine.
Kyle Pearce: Exactly.
Jon Orr: Just with corporate dividends forever. And actually, like because you’re looking at the screen, you’re saying, look, in his retirement year, he’s got almost five million in corporate total value. And then that’s invested. Like we’re that’s also assuming, right? Like we’ve made some assumptions here for Jim that like you’re not letting cash just sit around. It’s invested at the seven percent seven percent on equity. It’s three, I think, three and a bit for fixed income. But right there answers that question and answers the second question that if you do nothing, Jim, you can sleep better at night knowing that what you’ve built so far will pay you forever. And you could, if you want, just pull dividends for the rest of your life and not even think about anything else, and you’re still gonna be fine.
Kyle Pearce: Exactly. Exactly.
Jon Orr: So that answers that in a in a simplistic way.
Kyle Pearce: Yes, it does. And and as we go here, and I like your your point here, is like I always say this is like when we go through this for the first time with a client, I call it draft one of infinite number of drafts. Because every year this is gonna change. Cause maybe in a year you wanna do a big trip. And a big trip may not make sense to take extra dividends out. Maybe it does make sense to take the a little extra from the tax-free savings for that specific year, or maybe using leverage against some other asset.
Jon Orr: Right.
Kyle Pearce: So we can explore those options. Now, the part I also want to highlight here in these first handful of years of financial freedom, we look at age 54, 55 for Jim and Sandy. You’ll notice that we’re taking out a number of distributions. In order to keep the corporate value or asset growing here, you can see it’s going from five million. It continues to grow each year, taking a total distribution of about 154 in that year. And we’re gonna inflate that out.
Jon Orr: And and let me ask you this. Let me ask you this. Like you just said you decide that to like keep it growing, but it also if you think about the distribution, it’s almost double, you know, what the what the expenses are. Like is that accounting for tax at that point on the dividend tax? And therefore that noxy like it’s just around what his expenses are gonna be to keep his infinite like. Like tell me about that decision right there, other than the fact that it keeps the thing it keeps the corporation investments growing.
Kyle Pearce: Yeah. Well, and I would say in this particular case, we are certainly not optimized because we are paying tax. And this is net of all taxes, right?
Jon Orr: Yeah. Yeah.
Kyle Pearce: Depending on the province we set up and so forth. It’s all accurate to that point. And because we’ve taken this first round of distributions out, what you’ll notice in the first handful of years is that we’re actually growing a personal non registered account each year. You can see this number here, and that account’s growing.
We see the tax-free savings account is fully funded every year, which that’s a good move. I like that. But then even the RSP, we’re including some contributions there, which suggests we’re taking too much dividends because we’re taking care of expenses, but yet here we are growing our personal investment accounts, one of which is not a tax-deferred account in the non-registered. So it doesn’t make sense in each of these years to take this much out. We should be adjusting down. Which means our overall corporation’s value is going to go up by an even larger number. So I call this like poor planning. This is like inefficient meltdown in stage one.
Jon Orr: Okay.
Kyle Pearce: And then we tweak as we go along. Now, there is something important to note is that those RSPs and LIRAs, eventually we have to start draining them out if we haven’t yet by at least age 72. So in age 72, we actually have to start taking money out of those accounts. And what you’ll notice in this case, we just turned distributions off completely, starting at age 72 for Jim. And what you’ll see here is that now their big RSP and LIRAs are basically servicing all of the required expenses at a personal level.
Now, again, not super tax efficient here because we have no other write-offs to sort of help us out on that front. If they’re interested in going down this path, we can explore leveraged investing opportunities so that we can create a little bit of a tax benefit as we move up. The problem that they could run into is that their RSP and their LIRA could get so large by age 72 if we haven’t tapped into them prior that we could actually start clawing away our OAS, right? Which may or may not actually matter for this individual because of the great net worth that they built up here.
Jon Orr: So in I guess in general, and and this is in general in personal finance and the blend and the seams between personal and corporate is never a good phrase to use. Because in general, like there is no general. Everyone’s case is specific. And this is Jim’s. Like yours listening right now is different. But I guess in gener like this is what I’m gonna say, I don’t want to say in general, but I can my my default is to say in general right now is to say like if you have corporate assets, do we wanna think about trying to utilize the corporate investments before like you deferred or the default here was to defer any RIF withdrawal strategy to the mandatory time to start taking that out, right? Like which is like now’s now you gotta start taking this out by by rules. Like, is that a recommended strategy? I know it’s gonna be different for everybody, but is that a good like is that good strategy for Jim? Because he can drain that corporation.
Kyle Pearce: Well, typically what we start to do in the next drafts, which we haven’t yet done with Jim and Sandy, but as we get down this path, what we actually start to do is say, listen, each year we want to take up some of the lower tax brackets with some of that RSP. We’re going to take a next little bit by taking maybe some dividends out as well. The next stage might be taking out some non-registered funds out as well. And the reason why we go to non-registered is because we have the opportunity to only pay tax on half of the capital gain.
There is the opportunity for us to go, well, listen, as we go up in our personal tax brackets, we can take that income to actually only account for half of what that bracket really is. Because again, we get half of the capital gain completely tax free. And the other half is going to be taxed. And that’s without considering the adjusted cost basis or what we call the return of capital that’s coming in. If I’ve doubled my portfolio, every two dollars I take out one dollar I get back for free because that was my money. And then 50 cents of the profit comes back free because that’s gonna not be taxed as a capital gain. And then the other 50% is going to actually be added to my actual taxable income.
So we have so much more optimizing to do here. But the first thing we want to do in draft one is, are we going to be okay on this timeline? Even if I call it we do the most inefficient moves in taking these dollars out. And something that we’re gonna see is when we go all the way to the bottom, we get two numbers that we can see here: the net worth number at age 100, and we get the estate before tax numbers. So because they have insurances and the right amount of it, you’ll notice at age 100, if they keep doing what they’re doing based on this very inefficient meltdown strategy, they will have about $83 million of net worth at age 100.
Jon Orr: Hm. Not bad, Jim.
Kyle Pearce: Now, Sandy is saying, this would be Chantal in my life, is saying, well, why aren’t we spending more? And that’s something that we can explore as well. Like maybe we should be considering giving more money away now to charity or helping to support the kids. We can run those scenarios in different cases. But the part I think is important, important because they have corporate owned insurances in the corporation, in the holding company in this case, you’ll notice the net worth is 83 million at age 100. And the estate before tax number is 85 million. So actually, what ends up happening after passing, the policies are now worth more than they were when we were alive. And that can help us to address some of the actual capital gains, taxes, and other taxes on the estate.
In their case, the tax on the estate is going to be about $9.4 million. So again, they’ve got more than enough money to do it. And the insurances are going to make sure that there’s enough liquidity there. So they don’t have to go fire sailing anything in order to deal with those estate taxes. So there’s still some optimization to be done on that side as well. However, I just wanted to highlight that basically what we try to do is go, are we going to be okay? And then we look at do we have too much or more than we want to bring with us? Cause guess what? We can’t bring it with us. And then what could we do in between so that we can make different moves along the way?
Jon Orr: Yeah. And like you said, this is draft one to show Jim two things. One is you’re going to be okay. And we do this for every single client that books a call with us. Draft two, like you know, I guess sorry, problem two is how do I start pulling that money out? We strategize that together. Because in this case, Jim, we’re saying, look, option one is you could do this and not think about it again. It’s a no-brainer if you do it this way, but we can play with optimization strategy, which leads us into draft two, draft three, there’s infinite drafts of this plan that we can be running based off different scenarios and we put into place our expertise and our experience to give you the optimal withdrawal strategy, which is also will change year to year.
Like Kyle, you said that you know, one year all of a sudden the business might be adjusted in terms of retain earnings. And every year we should be looking at the strategy and going, is that strategy still valid based off what we now see? That’s an important component of why you want to have, say, your holistic wealth planner or your holistic plan in place, but also reviewed with a guide, with say a professional to kind of review every single year as you move forward.
This is as I said, this is what we do. We help business owners navigate the seams between personal and corporate assets to answer those two questions. We do that every single time we book a call with the people like yourself if you have a blend of those two sides of the asset corporate veil we call it. If you would like that projection, you know, for yourself, then there’s some links below to explore some of our resources and also to book a call with us so that we can build that projection for you and see what that looks like so you can answer those same two questions Jim was looking to answer. Am I gonna be okay? And where do I pull that money from when the time comes? And what does that meltdown look like? Big part of what we’re doing here at Canadian Wealth Secrets.
Just as a reminder, the content you heard here today is for informational purposes only. You should not consider this information as legal tax investment or financial advice. And Kyle Pearce is a licensed life and accident and sickness insurance agent and the president of corporate wealth management here at Canadian Wealth Secrets.
