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Description:
Am I going to be okay financially, and how do I get money out of my corporation tax-efficiently?
Those are the two questions many incorporated Canadians carry around for years. You’re profitable, you’re spending modestly, and money keeps piling up in your corporation. But your personal accounts feel thin, and you’re not sure whether working to 65 is enough, or whether that cash and those GICs in the company are really doing their job. Without a clear projection, every decision about salary, dividends, RRSPs or your TFSA feels like a guess.
In this episode, Jon Orr and Kyle Pearce walk through a real client case study of a late-30s business owner, Tom, and his spouse, Sandy (names changed). They map the couple’s financial future to age 100 and confirm the base case: yes, they’ll be okay. Then they show the low-hanging fruit. That includes:
- filling unused TFSA room,
- smoothing their effective tax rate before RRIF withdrawals spike it,
- moving about $1 million of corporate GICs into a growth-focused corporate investment account,
- layering in a high cash value policy funded from idle corporate cash.
You’ll discover:
- How to answer “Am I going to be okay?” by projecting your current spending, salaries, retained earnings and investments year by year, before chasing any new strategy.
- Why about $1 million in corporate GICs earning 3.65% loses more than half its interest to tax in Ontario, and how shifting to a capital-gains-focused corporate investment account and the capital dividend account can change the long-term picture.
- How unused TFSA room, deferring CPP and OAS, and drawing from the RRSP earlier can help smooth taxes, so a RRIF minimum withdrawal at 72 doesn’t push you into your highest bracket.
Press play now to see how one business owner went from “Am I okay?” to a plan with the flexibility to retire at 50 and double his spending.
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.
Retirement planning for business owners starts with a Canadian wealth plan that answers one question first: am I going to be okay? In this case study, retained earnings protected by the small business deduction were piling up in cash and corporate GICs, where passive income tax eroded more than half of the interest. Moving those funds into a corporate investment account focused on capital gains, with the capital dividend account in view, is an example of tax-efficient investing, corporate wealth planning and corporation investment strategies working together. On the personal side, filling unused TFSA room, RRSP optimization and optimizing RRSP room help smooth the effective tax rate before RRIF minimum withdrawals arrive. Deferring CPP and OAS is another of the retirement planning tools that can protect financial independence in Canada. A financial buckets or investment bucket strategy can balance safety and growth. Layering in corporate-owned high cash value life insurance supports estate planning and legacy planning in Canada while keeping liquidity. Whether the goal is financial freedom in Canada, an early retirement strategy or modest lifestyle wealth, the same building blocks apply:
- financial vision setting and passive income planning,
- personal vs corporate tax planning, including salary vs dividends in Canada,
- a capital gains strategy and corporate structure optimization,
- financial diversification in Canada, including real estate investing in Canada and real estate vs renting.
Together, these financial systems for entrepreneurs turn Canadian tax strategies into business owner tax savings and build long-term wealth in Canada.
Transcript:
Jon Orr: Okay, we want to get into this, I guess, case study episode. We had a recent client, a person who works with us on a regular basis. They reached out when they originally reached out to us, our Canadian business owner, we’ll get into the details and the scenarios of their assets and what they actually look like, a financial snapshot here, and we’re gonna dig into. But really, this business owner came to us saying, look, guys, my business is operating the way it operates and I’m making good money.
But here’s what I don’t know. I’m relatively, I’m gonna say relatively on the young side, in their late thirties, and they’re saying, look, I’m starting to think about my future and I’m curious. I have two questions. Am I going to be okay? Like if I keep going the way I’m going with my business and I keep the scenario of my financial moves the way they are. Am I going to be financially okay to hit retirement at 60, 65? Like, am I gonna be okay, or do I have to make other moves to make myself get there? Like, that’s a common question I think people originally reach out to us.
But then he also spun this off and he said, like, and I think he was concerned about how do I get, and this is also a very common question we get is like, how do I take the corporate money? So the dollars I’m making in the corporation, and how do I get them into my personal hands at a more tax efficient or in a more tax efficient manner? These are the two pebbles rattling around in this business owner’s shoe. We helped him answer those questions. We helped them map a full financial future picture. And then we also made some low-hanging fruit suggestions because we answered that. Am I okay? And then we said, and let’s look at this scenario as well. And let’s look at this scenario as well. And so what we did is help them see this picture, but then answer these questions. We’re gonna do that here for you today. We’re gonna give you this scenario. Let’s get into it. Kyle, where do you wanna start?
Kyle Pearce: Yeah, well, first and foremost, I think what you had just nailed it. Like most people are coming in, they want to do this type of holistic planning because they’re not really sure how it’s all going to play out. And for incorporated business owners, this could be an extremely hard. One of the first things is oftentimes we don’t fully understand the different tax rules basically is how are the profits in my corporation governed? We know that if it’s active income, that we’re gonna get that partial tax deferral. Why I say partial is on the first $500,000. That small business deduction takes effect. And we’re going to pay like a low rate, like nine to 12-ish percent, depending on your province, on those profits that stay in the corporation, which is fantastic.
We also may have heard that investment income is actually taxed pretty punitively, unless you’re already in the highest personal tax bracket. And then in that case, there’s just a small arbitrage that we’re losing. We’ve got episodes all about that as well. So the key here is trying to figure out how do we optimize. And in reality, for most people, when they come in, they tend to highlight something like, how do I get my retained earnings out tax-free? First of all, it’s like they don’t actually come out tax-free. There’s going to be some sort of taxation unless we structure different things like investment accounts and use the capital dividend account to get 50% of those gains out tax-free, or we use the capital dividend account way down the road for the estate in order to get the proceeds of life insurance to come out tax free to the estate.
So there’s ways that we can do this over time, but it’s not like wave a magic wand today and be able to get retained earnings out tax-free. There’s leverage strategies, there’s all kinds of things that we can get into, but it’s not really worth digging into unless we really get a sense as to how are things going currently. And with this household, they are not big spenders. Right now, their combined annual spend. So this is an after-tax amount. This is like actual dollars in their bank account. They’ve got about the middle $50,000 range. So like $54,000, $55,000 per year. They argue, though, that they are, you know, they don’t live a lavish, lavish lifestyle.
Jon Orr: Right.
Kyle Pearce: Maybe through this planning, maybe that does change moving forward. Like maybe they treat themselves a little bit more than they have done to date.
Jon Orr: Yeah, that
Kyle Pearce: They don’t have a lavish home either, right? Like they own a home that’s about six hundred and fifty thousand dollars in value. There’s no mortgage on it against showing that responsibility.
Jon Orr: Nice.
Kyle Pearce: Again, we would say that there’s opportunity there that we could utilize, right? The dead equity could be put to use. We could use that tax write-off on invested or borrowed invested funds. And that might be helpful here for a tax strategy, but before we go down that path, like let’s see where things wind up in general.
So overall, we’ve got a really good thing going on here. Thing we love about our software is that we can add in inflation, for example, appreciation of the home and all of those things. And you’ll notice that we tend to use a pretty conservative rate of return for any type of investment portfolio. We usually use 7%. Fairly conservative, right? Some people are balanced, which puts you down a little lower than that over time. Some people are a hundred percent equity, which probably puts you higher than that over time. But we want to be conservative with our projections here so that we get a general sense of like, where are we heading if we keep doing what we’re doing?
Jon Orr: Right, right. So, you know, fifty four thousand a year in expenses is you’re right. It’s very conservative ’cause it’s like that’s forty five hundred bucks a month, right? So it’s like do you spend forty five hundred dollars or they spend forty five hundred dollars a month only on all that’s their, you said no mortgage payment, so this is, you know, all the things. Car payments, groceries, all the things that you spend out of your credit cards and your daily expenses, it’s this adds up. So it seems pretty low. Which is good for them. Like that’s, this puts them in a good spot. So right away I’m already thinking that’s a great spot to start from, especially if they’re not looking to say extend those expenses and past that in terms of the planning right now.
So let’s look at say we’ve talked about expenses, but we haven’t talked about like income level and what is the business making and how does this look so that we can answer this problem of are they going to be okay if they do nothing different?
Kyle Pearce: Yeah, so right now too, and we’ll also use like sixty-five as the typical retirement age as a starting point. They’re willing to work that long, but they’re curious like, do I have to work that long? So we’re gonna try to figure that out. The spouse, we’re gonna call her Sandy, is working outside of the business. So outside of the home, earning a T4 income of about fifty-five thousand dollars. We’ve got that indexed at about two percent. Maybe it’s higher, right? We could be more aggressive on that, but we’re gonna keep it conservative. And we’re gonna keep that going to age 64.
Whereas Tom, the actual business owner, is receiving a salary from the corporation, and that salary is coming out at about $90,000 per year. And you’ll see here up on the screen, those who are on YouTube with us, Tom’s salary is shown up here. $90,000. We have it inflating as well with the cost of living at about two 2.1% or so. But we also have his business. And something that’s really important here. So he’s taking 90,000 from the business, a healthy salary, but not like super dramatic here. And you’ll notice the taxable operating income of the business. This was based on an approximation around the last year’s income. So around 160,000, 170,000 of taxable operating income. That is what is going to be left after paying all business expenses. Salaries and actually Sandy actually has a small role in the business. She takes a $20,000 salary as well. So $55,000 from her outside job. And then she does bookkeeping and other tasks in the business. She’s earning $20,000. His $90,000, her $20,000, those are expenses that are tax deductible to the business.
So they’re not going to pay any tax inside the corporation on this. But they will have about $160, $170,000 of net operating income that can stay in the corporation unless they choose to take it out as a dividend. So at this stage, because they’re spending so low, it doesn’t really make a whole lot of sense to be taking that extra money out unless there was some sort of need at a personal level, which they don’t currently have.
Jon Orr: And I think that’s part of the, you know, getting the answer to them I’m okay because I think when these folks came to us saying, how do I get that money? That if I have a hundred and sixty seven thousand sitting inside the business at the end of the year, how do I get that out to me personally? And I think that question typically arises because we don’t see what the future looks like. We don’t know that I’m gonna be okay, therefore. It’s like if it’s sitting there in the anyway, how do I get that out here so I can start, you know, maybe I haven’t plugged my RSPs and I think that’s a good move, but I don’t really know. And or maybe I have to make sure that I top up my tax-free savings account. We always recommend that’s a really great move to make. Like maybe I should be paying myself more salary to get that out. Like maybe I should be paying Sandy more salary to get some of that money out. But it all stems from the I don’t know if I’m okay, so it makes more sense to get out, and I want to pay the less amount of tax to do that.
Right. So it’s, and again, if you knew the answer of saying, am I okay? And what does that look like? You might not ask all these same types of questions. But you might, but also like you gotta start there. You gotta start with like knowing that this is okay. So take us to the money sitting there. What are they currently doing with it now so that we can answer the are they okay if they do nothing else? Because they’re not pulling that money out in a salary form or dividends or anything else. Like they’re, looks like they’re keeping it in there.
Kyle Pearce: Right. Well, and like let’s quickly just kind of like, you know, assess what’s going on. If we think from a personal side, you can imagine like a lot of business owners feel this way, especially business owners that don’t take a large salary or larger than they need salary. It may feel like at a personal level, things may be thin, right? So for example, if they’re spending fifty-five thousand a year and they’re maybe putting some money in the RSP or there, you know, some of that money, maybe some of the spending’s a little higher from one year to the next, that sort of thing. Those types of things can make a business owner maybe feel like things are tighter and maybe they’re not on a right track or as on well of a track as they really are.
Right now they’re about like late 30s. So this is still pretty early in the journey so far. Tom has accumulated $190,000 of RRSPs. So again, not going to get into like splitting hairs as to like, is that the right move there? If he’s only taking $90,000 a year, do we want it to go in the RSP or do we want to keep it in the corporation? We’re not going to go to that conversation now, but it’s a worthwhile discussion to have.
One low-hanging fruit I do see for Tom is that he’s only got $26,000 in his tax-free savings account. And this tax-free savings account has been open a long enough. It has existed long enough. And Tom is old enough to be around since the very beginning of the tax-free savings account, where there is $109,000 of total contribution room. So unless he contributed the full 109 and it was like on a YOLO penny stock that went to almost zero, my guess here is that there’s a lot of additional tax-free savings account room. We could maybe justify, if the numbers make sense, for us to take a little bit extra out of the corporation in order to fill that tax-free savings account or maybe when we go to the bank, we look at maybe getting a line of credit and we fill up the tax-free savings account and put them on a slow payback strategy over the next handful of years so that he can fill up that tax-free savings account all today and move forward.
We’re not gonna spend that much time today on that specific move, but I do want to highlight like that’s a big low-hanging fruit that we wanna figure out. How do we get that bucket filled, especially the tax-free savings account is such a gift. When we look over to Sandy’s situation, Sandy has less RSPs. You’ll notice less of a salary as well. So that often makes sense. Tax-free savings accounts a little bit higher. So again, a big amount of room there in both the tax-free savings accounts. If we are conservative, I would say they probably have 150,000 across both of them-ish of room. That’s something that we could very easily borrow against our primary home if we’re comfortable with that. If we’re not, then we can also look to how much more should we be taking out of the corporation each year in order to fill up this tax-free savings account bucket without getting hit too hard with taxes as we do so.
Jon Orr: And I think the whole, you know, like I don’t know what the future looks like and I don’t know like if I do that, I’m like that comes back to the am I okay. And I think this is where the scenario running scenarios with actual numbers and giving you a clear picture of what year to year will look like between now and age a hundred can really really help you with the optimal moves because we could say without, imagine we didn’t share with them their financial projections between now and age a hundred. And we said, you know what, topping up your tax-free savings account with borrowing against your primary home is a really great move that you could be making. And then be like, that makes sense with you know rate of return versus rate on my home HELOC, but am I gonna be okay? Right? It’s comes back to that, right? So
Kyle Pearce: Right. What’s that gonna get me? Like what’s it gonna actually do for me? Right. And I wanna be able to see that.
Jon Orr: Right. That’s hard thinking and it’s scary to think about it and then say, well, what happens this? What happens this? And it’s like that’s the nice thing about the projection. Okay. So we want to keep rolling here. We’ve got some assets here that we’ve outlined. Let’s look at the opco.
Kyle Pearce: Awesome, awesome. So no debt at a personal level. So that’s really key to note. So obviously debt’s probably a little, you know, a little adverse to debt as well. But you’re also noticing here, when we look at the assets, a lot of cash on hand. So about six hundred and fifty thousand dollars of cash on hand in the operating company. Now, this, you know, one question and it’s a deep conversation we have to have with all business owners is like, how cash heavy is the business? Like how important is having that liquid capital in the business. For a consultant, that may not be all that important. There may not be a whole lot of expenses. They may though still want to have a little on the side just in case.
What you’ll notice is people who are self-employed through their own businesses, whether it’s a cash heavy business or not, require that extra like kind of padding, right? Because they’re like, I don’t know what happens next. If it’s a business that could be affected by tariffs, for example, you’re going, I want to make sure that I’m okay to keep paying myself in order to live the life I’m living. And sometimes we get a little bit too safe, right? So here we’ve got 650,000 of cash. We recognize, and the business owner recognizes that’s more than they actually need on hand, but they still like it. So that’s important to recognize. It doesn’t matter whether they really need it or not. They have to feel comfortable and confident every night when they go to bed.
You’ll notice there’s also about a million dollars in GICs earning, about 3.65% in interest. Now, as we’ve talked about so many times before, that interest is taxed very punitively inside the corporation. So therefore, that 365 is gonna get taxed at over 50% here in Ontario. Alberta’s the cheapest, you know, you’re gonna lose about 46%. Can we get some of it back? Yes, if we take dividends out to a personal level. So there is a way that we can offset this and we should be offsetting it if you are earning interest income or other investment income in the corporation, but it’s still not optimal.
So we want to make sure we’re just aware of that. Now, GIC. I would rather have the money in the GIC than sitting in cash doing nothing. Like let’s be honest here. We want to have it doing something, but this is a lot of safety here. And what we want to do is we want to start like partitioning into what is possible if we were to push things a little bit.
However, the first step that we want to do as planners on our end is we want to actually look at our combined results here year by year. If we just keep spending what we’re spending and it’s inflating every year, right? And we’re paying ourselves, and that’s inflating every year, the business is inflating, everything is going with inflation here. So we are indexing to inflation. What we want to do is we want to just take a general sense to say, like, where’s my net worth now? Which you can see on the screen over here. They’re at about 2.9, almost 3 million in net worth.
However, at a personal level, they might not like feel that because they look at their personal accounts and they go, like, I don’t have a whole lot of cash in my personal account. I also don’t have like a massive amount of investments at a personal level. So over time, we want to shift that. We want to get more to a personal level. We don’t want to completely drain our corporation either, but we do want to have a little bit more parity between the buckets that we’re using if we can do it in a tax efficient way. So that’s something that we help people do.
But let’s pretend they just keep doing what they’re doing and we don’t do anything different. And they just leave the things in GICs and we just take what we’re taking and we just let it do what it’s doing. And we spend the money we’re spending, you’ll see that net worth is growing every year. And it’s actually growing by a nice clip.
Jon Orr: Right. That sounds great.
Kyle Pearce: Yeah. And if I go all the way, and if I go all the way down to age 100, some people are like, age 100, that’s ridiculous. We like to go all the way down.
Jon Orr: All the way. That’s seventy more years.
Kyle Pearce: Yeah, we’ve got 70 more years of this happening. They’re working until 65. So we have, you know, Sandy doing her job till 65. We’ve got Tom over here doing his work in his business till 65. We’re not selling the business, even though maybe it’s saleable. Right now we’re just gonna completely wind it up at 65 and pretend like he just walks out the door and lights a match. Where are we at if we keep doing what we’re doing? And if we do that, what you’ll notice here is that they actually look pretty solid. They have about a $63 million net worth. So to answer the question, if the variables are if I plan to work till 65.
Jon Orr: Yeah.
Kyle Pearce: And my business
Jon Orr: Right.
Kyle Pearce: keeps doing what it’s doing, and I keep doing all the other things the way I’m doing it, will I be okay? The answer is yes. However, that may not be the most optimal case. And however, there may be some wish list items that we haven’t discussed yet. Like, can I ever increase my spending? Can I work less? Can I do all of these other things? Or could
Jon Orr: Right. Right. Or or could I do better? Like could I
Kyle Pearce: I just do better in general? Like, is there something I could do in order to keep my risk low, but still have a a stronger net worth. And like all of these answers only come by us first mapping out where we are currently, doing what we’re doing. And then we can start looking at the low hanging fruit and see how they might benefit things along the way.
Jon Orr: Okay, so let’s just create a little bit of more clarity here on you know if they keep doing what they’re doing. So one is like they’re keeping earning the same salaries, they’re paying themselves the same way, the business is earning the same way. Remember that inflation is factored into all of these components. They are taking so here’s the interesting thing that we look at on the scenario wise is that we take the expenses. So remember they had low expenses here, so fifty five or fifty-four thousand dollars, I can’t remember exactly the number. And then any excess money on top outside of those expenses and outside of taxes, we’re funneling into their investment opportunities, right? So on the personal side, right? So the business side of that GIC and they had the money growing, and I think there’s assumptions that it grows in the same way by us not doing anything other than what they already had with it. And then on the personal side, we’re saying we’re taking that excess on top of the expenses and we’re pushing it into the tax-free savings account. We’re pushing it into the RSPs. And so then that will grow over time as well.
And then what’s also happening on the day of retirement, right? So, like retirement, all of a sudden, my just like you would expect, there’s no more income on the income side, specifically from salaries themselves. Now it’s like, now I have to start deciding, and this is the nice part about our planning process is now we start to deciding where do I start pulling that money from? And am I gonna be okay? Right? Like that’s that question. It’s like I retire at 65. Okay. My net assets are sitting there. They’re quite large at retirement. But do I pull from the tax-free savings account? Do I pull from my corporation? Like do I start draining these buckets? And what order do I drain those buckets? That’s factored into our planning process. So go back to the answering the question is clearly these people are okay. And now we have to say, okay, could you retire early? Could you increase your expenses? Could I do better? So let’s talk about those scenarios.
Kyle Pearce: A hundred percent. So there’s so many little, you know, low-hanging fruit that we can assess here. And like if we look at this base case for a second, I’m gonna click on Tom and we’re gonna look at Tom specifically, his tax situation, and we’ll look at Sandy’s separately. What you’ll see each year is like the tax rate based on what we’re doing currently. We haven’t done anything. You know, different here. We haven’t even taken dividends out of the corporation in order to try to trigger some of that refundable dividend tax on hand back to the corporation. We haven’t done any of those things yet. We’re just gonna look at like where are we at here? And you’ll notice like the marginal rate currently in these first two years is actually quite low, making the effective, this is like your average tax rate, the total tax you’re paying on the lump sum of money that you’re receiving as income.
In his case, from the corporation, his average tax rate is around what he would be paying in the corporation anyway, at about 11, 11, 12. But then you’ll notice in year three, it starts to jump there. So these are little problems that are worth solving if the business owner is willing to do so, right? It’s like in if we can smooth this effective tax rate over time, that’s definitely something worth doing. And what you’ll notice is something that we may look to do is whether it might be wise for us to push back, you know, push back our government benefits like OAS and CPP until age 70. You’ll notice here I’ve done it by default, assuming that the business owner or the individual, the employee as well, assuming that they’re healthy as they’re approaching age 65, if we’re able to, and if it makes sense due to all the other accounts having enough, you know, enough assets in them.
It could make sense for us to push that off and to try to pull money out of other buckets. So you’ll notice here, if we don’t, you’ll see that by age 66, all of a sudden, stops taking income from the corporation as a salary. And all of a sudden, the effective tax rate basically goes to zero here. And what that does is it opens the door for us to look over at things like our RSP over here. And it gives us the opportunity for us to consider start taking money out, taking funds out of the RSP, which has now grown from way back, you know, in current time at about 200 and change, $230,000. It’s now grown by age 65 to over $3 million. And that gives us an opportunity to start taking money out in order to bump up this effective tax rate. Now, some people see zero and they go, that’s amazing. Like I want zero percent tax.
Jon Orr: Hm.
Kyle Pearce: That’s fun for these first couple of years. But then what you’ll notice is that all of a sudden, once he hits age 72, he’s now getting forced to take out a minimum withdrawal from the RSP, which is now a riff. And you’ll notice that all of a sudden it jumps to 22%. Then the next year it’s 26%.
Jon Orr: Which is the highest tax he’s ever paid.
Kyle Pearce: It that’s the highest tax he’s ever paid in his entire lifetime. His effective or sorry, his marginal rate by 73% if we leave things the way they are, jumps to 43%. Now, a lot of people are like, this is why I don’t invest in RSPs. No, this is why we plan so that we can utilize the RSP as optimally as possible. I want to grow that thing as big as I possibly can. And I want to find a creative way to deal with it. We can help to offset that by doing smart things.
And the goal here for us would be trying to get this effective rate to get as smooth as possible over time. And therefore, we can start getting pretty creative about things. So just by pulling some money out a little earlier, we’ll be able to get that effective tax rate to change and we’ll get to smooth it out. And it’ll also allow us to not have to pull from other buckets like the tax-free savings account so early. So that one can just grow and compound as best as possible. And then secondly, our corporate accounts, which currently are just really GICs, those corporate accounts can blow up as well. And we can use other strategies to deal with the tax issues that they’ll generate later down the road.
Jon Orr: Right. Yeah, let’s go into that because I think there was, you know, the GIC sitting there growing over time. You said if it you know, the passive income that it’s gonna be generating is gonna be fifty percent taxable. Like there I feel like let’s look at optimizing on the corporate side right now as a move that we could answer. Could I do better on the corporate side? ‘Cause he had concerns about like what do I do corporately. I do want to make sure that I have cash on hand for my business, but I did want that money to come out to me personally. But let’s talk about the moves you could be making to optimize on the corporate side and then let’s compare that to the base case scenario.
Kyle Pearce: Right. Now, like one thing I must say is that understanding risk tolerance for each individual, and I would argue that this particular individual in this household tends to be more conservative. Some of the clues, these are only clues and they need to be verified. But one clue is first of all, they have no mortgage on their home. So no debt. They have no debt in the business. So again, usually like you know, debt adverse individuals oftentimes are a little more conservative. Again, a very blanket statement, and we have to confirm these things. But then we go into the corporation, we see GICs.
Noting we haven’t gone into the nuances of the RSPs or the tax-free savings accounts, but those are all fairly balanced as well, like more like a 50 50 fixed income to equity split. So again, fairly conservative from an investment standpoint, especially at late 30s when they’re planning to work to 65. So I would argue that if they do not want to increase their risk. And they want something like GICs. An easy move here is that over time, we introduced a corporate-owned high cash value policy to represent that GIC bucket. I don’t think it’s optimal from a growth perspective.
Jon Orr: A life insurance policy.
Kyle Pearce: This is a life insurance policy, but important to note this would be based on their risk tolerance. Okay. The insurance is going to have a similar risk profile to a GIC without the tax drag of the GIC. It’s going to have similar returns in terms of cash value. But it’s going to have a net benefit on the estate when that death benefit pays out tax-free to the corporation and then tax-free out through the capital dividend account. So net net, that’s going to be an easy win.
What I’d rather see here, and again, they have to be open to it. They have to, you know, their risk tolerance has to be able to permit this to happen. What I would rather see is I’d rather see us open up an investment account in the corporation for that bucket. And that’s what we’re going to look at here. We’re going to keep everything the same as is for now. But what we’re going to do is we’re going to make a shift for those GICs over to what we’re going to call a corporate investment account. Now, in that corporate investment account, so for example, if it’s getting managed, we want to make sure that whoever’s managing it isn’t creating that unnecessary investment income through interest or even dividends. Canadian dividends, not so bad. We can deal with those a little bit more. But we also don’t want to be too heavily concentrated in Canada.
So ideally, what we want to do, and with this individual, they’re opening an account with our team to help them manage their corporate investments here so that we can keep the risk under control, but we can push for better rates of return, specifically looking to grow the capital gains. Okay. We want this to be growth instead of income. And we’re gonna just use a very conservative 7% average rate of return. This is not advice. This is not, you know, anything we can’t guarantee anything with investments, but with a well-diversified portfolio that includes some alternatives in it, includes the public market, and has hedging strategies, which our team does do. This is a way that we can safely grow at a better rate of return and also help us from a tax efficiency standpoint later. When we do want to take more income at a personal level, because remember, capital gains, only 50% of the capital gain is taxable. Not 50% tax rate. 50% of the capital gain is taxable. The other 50% is credited to the capital dividend account so that they can take tax-free capital dividends at any stage once those capital gains are realized.
So this is a really important move that they could be making instead. It does increase the risk a little bit, right? We have to recognize that the GIC is going to be super safe and it’s not going anywhere, but it’s also a huge return drag and it’s also a huge tax drag that is unnecessarily restricting their compounding benefit over the longevity of their lifetime.
Jon Orr: Right. So I guess the question is if yes, you can do better if you make this move on your corporate investment side and moving it from the GIC like you’re in a better tax optimization position. But it’s hard I think sometimes it’s like this is where the decision making has to come in because like, yes, I could do that, I can be better, and it will be better over the course of my life. And but if I’m already okay with my large net worth at the end of my life now, is it worth it? You know? Is it worth it for me to make that move? And sometimes when you look at the difference between those two scenarios, it’s hard to say it’s not worth the move.
Kyle Pearce: Yeah, exactly. Cause like if we take a quick little peek here and we do, you know, we’re not gonna go through again, there’s so much optimizing that can be done here in this case study. Like we are nowhere near done. But just to show this one scenario, I just want to compare having the original base case to having an investment account to replace the GICs. Nothing else has changed. The expenses have changed. The business has grown the same. Everything has stayed the same. The only difference is we shifted from tax inefficient GICs for that million-ish dollars of capital in the corporation. We pushed it into an investment account and we’re only showing a 7% average rate of return.
Can’t guarantee it, but on average, if we are doing equities and high equities, we’re probably going to see a higher average rate of return over the long term. We don’t know what happens tomorrow. But when we look at this, what you’ll very quickly see, and some people might even highlight, and you and I kind of like, you know, laugh at this because we go, wait a second, our if we do this, this move with the investment, we actually pay more in lifetime personal and corporate tax. But the reason why is because our actual estate value before tax ends up being, and actually, if we just look at total assets at a personal level, like we’ve got 70 million dollars of personal assets instead of 48 million dollars of total assets based on current spending. Like you’re looking at almost a doubling of that.
And when we look at the estate before tax, instead of 68 and change million dollars, almost 70 million dollars. Your estate would be at 200 million dollars. Now, again, a lot of people are thinking about this, going like, this is like ridiculous. Like, I don’t need that much. And that’s not really what this discussion is about. It’s about opening the door now for other choices that we might have, like working less, like maybe not working as hard now. Like maybe the business doesn’t have to grow as much as it is right now. Maybe you’re working 70 hours a week and you only want to work 35. Like these are decisions and modifications we can make along the way to make sure that based on spending, based on your wants now and what you want in the future, that we are going to quote unquote be okay based on the assumptions that are being made about returns, about taxes, about all of these different things, which again are dynamic and we know we can’t guarantee, but at least giving us a general sense of like, are we going to be okay? Clearly, this couple is going to be okay based on these assumptions. Now the question is, what do you really want? Because most people don’t really want to work till 65, or they don’t want to have to work until 65.
Jon Orr: Right. Yeah. So I guess a couple points of recap at this point is they came in kind of wondering, like, am I okay? We’ve shown them they’re gonna be okay. Then they said, could I do better or could I be more optimized? And we said, look, through income smoothing throughout the process, without doing any major strategy changes, what we can do is help you navigate what pulling from what bucket at what time can help income smooth over the course of that time so that you pay less tax overall on the personal side.
Then on the corporate side, we said look a low hanging fruit here to do better and be a little bit more tax optimized is to take some of the GIC, shift them over into an investment account that’s got some safety built in, some hedging
