Episode 65: Maximize Capital Flexibility & Minimize Income Tax When Designing Your Wealth Building Strategy Inside Your Canadian Corporation

Listen Now!

Are you wondering if incorporating your Canadian business is the wealth-building powerhouse you expected, and how to navigate the complexities of corporate wealth management and tax saving strategies?

This episode directly addresses the dilemmas faced by incorporated Canadian entrepreneurs and business owners, delving into effective wealth management strategies within a corporation. It’s particularly relevant if you’re seeking to maximize your company’s financial potential while minimizing tax liabilities, a common goal for savvy Canadian business and investment professionals.

Listen to this episode of Canadian Wealth Secrets now to transform your approach to corporate wealth management, unlock strategies for minimizing taxes, and learn how to effectively grow your wealth within your corporation.

What you’ll learn: 

• Uncover wealth management strategies specifically tailored for your corporation, guiding you beyond mere incorporation to effective financial growth.
• Learn how to significantly reduce your corporate tax burden, allowing more of your hard-earned money to contribute to your wealth. 
• Discover methods to withdraw corporate dollars tax-free for life, a game-changer in personal and corporate financial planning.

Resources:

• 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!
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.
• Follow/Connect with Kyle Pearce on LinkedIn for daily posts and conversations about business, finance, and investment. 
• Dig into our Ultimate Investment Book List
• Download our Wealth Building Blueprint

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 corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

 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.

Let’s Connect For A Discovery Call!

For those interested in having a review of your financial wealth plan, learning more about potential joint venture (JV) opportunities, or a mortgage review, book a free discovery call now.

Watch Now!

00:00:00:06 – 00:00:31:00
Kyle Pearce
He their Canadian wealth secret seekers. I don’t know about you, but both myself and John, we incorporated a number of years ago and actually for myself, I started as a real estate investor. I remember it being a big question, whether it was the right time to incorporate whether I should hold off. Why am I incorporating? I think for many people, one of the main reasons why they choose to incorporate a business here in Canada is for some tax incent tips.

00:00:31:02 – 00:00:54:03
Kyle Pearce
However, what you probably learned after you incorporated was that the taxation rules are not simple. They’re not cut and dry. And you might start wondering, am I making the right choices with my wealth building strategy? Should it be inside my corporation? Should I be taking money out of my corporation and stuffing it into my RRSPs? What should I be doing?

00:00:54:04 – 00:01:03:08
Kyle Pearce
Maybe you’ve heard about IPRs or individual pension plans. Or maybe you’ve just been sweeping it all under the rug.

00:01:03:10 – 00:01:22:15
Jon Orr
Yeah. And what we’re going to dive into in this episode is how to maximize your flexibility when designing your wealth building strategy inside your corporation. Because if you were like Kyle and I, we were like, We’re going to stuff all our money in here. We’re going to keep it in there. We’re going to compound it, we’re going to put it into and this investment and this investment.

00:01:22:15 – 00:01:47:23
Jon Orr
And then we’re like, Oh, wait, we’re getting taxed at a different rate than we thought. We didn’t know it. We thought it had to change our strategy. We’re going to talk about how to not change the strategies that you have in mind and minimize that tax burden. Here we go.

00:01:48:00 – 00:01:52:15
Kyle Pearce
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce and Jon Orr.

00:01:52:15 – 00:02:06:04
Jon Orr
We are recovering high school mathematics teachers and education consultants whose entrepreneurial spirit led us to begin multiple businesses in real estate investing, digital courses and coaching and consulting after the bell rang at dismissal time.

00:02:06:04 – 00:02:41:08
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we can now help entrepreneurs, business owners and investors just like you to grow their wealth into a legacy that lasts generations through hidden investment and tax secrets. Your financial advisors won’t believe our true John. This episode that we’re digging into today, it hits close to home for me because I was all for incorporating back when I started my real estate company back with Matt.

00:02:41:13 – 00:03:09:24
Kyle Pearce
Matt hasn’t been on the podcast for a little while, but we were all for it, and the thing that was bright on top of my mind was this idea of, well, I guess it was too. There was liability having a little bit of that protection, but more importantly to me was trying to set myself up for the best tax minimization strategy moving forward for those who would listen to the podcast before you know that my primal question is, am I secure or am I financially secure?

00:03:09:24 – 00:03:37:11
Kyle Pearce
And one of the ways that I wanted to make sure that I was maximizing that security for myself, for my family and for my business partners was by taking every step I could to try to minimize the amount of taxes that would be leaving me either now, but more specifically in the future as these portfolios grew and as our success grew in other areas of our active businesses.

00:03:37:11 – 00:04:11:17
Kyle Pearce
But, John, as you mentioned in the intro, we learned that, you know what corporate income isn’t taxed as simply as personal income. Now, don’t get me wrong, even on the personal side, here in Canada, we have a pretty complex tax system with lots of traps set, lots of nuances, lots of unknowns. And when you go from the personal world into the corporate world, I think a lot of us just see this idea of lower tax without recognizing that, you know what, it’s only lower tax on certain types of income.

00:04:11:22 – 00:04:39:15
Jon Orr
Right. And I think this is where our strategy, if we roll back to thinking about incorporating, like when we ask the question, is now the right time to incorporate, do I have enough here or do I need to start thinking about setting that up for us? And when we started to roll into the business that we created for math educators and consulting and coaching and our digital coursework that we built years ago, that business we incorporated because we were like, All right, we’re making enough over there.

00:04:39:21 – 00:04:56:19
Jon Orr
And the goal was, we don’t need to pull a ton of money out of that to maintain. We had full time jobs. It was a psychic for a long time. Our strategy was to leave the money in the corporation and create a compounding effect. If we can create a compounding effect inside the corporation, the corporation only impacts that income of what.

00:04:56:19 – 00:05:16:15
Jon Orr
Kyle, you’re the tax expert. 12 point something percent, right? So it’s like, hey, that makes a lot more sense than having to not if we didn’t incorporate. We’re now pulling the money. We’re making the money as income, as a partnership. That’s now we have to pay whatever our tax rate is, which was one of the higher tax brackets because we were making over $100,000 a year as teachers.

00:05:16:17 – 00:05:32:00
Jon Orr
And it’s okay that can save us tax, leaving it in there and we can only pull out what we need when we need it. And that was going to be a great strategy. And then we’re like, Well, what do we do with this money while sitting over there right? It was like, okay, well, we’re not pulling because we need it.

00:05:32:02 – 00:05:50:24
Jon Orr
Then let’s make it grow better. Let’s invest it, let’s put it over here, let’s buy properties with it. And when we started to go down that route, we realized they were like, Oh wait, if we invest it, then any investment income we make, it’s not taxed at that. 12 point something percent is taxed at like 50%. And so wait a minute.

00:05:50:24 – 00:06:08:01
Jon Orr
And then we start to go like, does that change our strategy? I remember our accountant at the time going, I don’t want you guys to have too much passive income in that act of corporation because you’re going to pay more in tax. And we’re like, Well, now what do we do with the money? And that led us down to go like, how do we do that?

00:06:08:03 – 00:06:38:00
Jon Orr
And also not have to have that tax burden? Can we figure this out and still maintain that same compounding strategy inside that corporation? So we’re going to talk about that now. But also, what are some typical things that some of our listeners might be doing inside their corporation right now with thinking about pulling money out of their business and where do they put it, and what are some of those kind of strategies that you see people doing on all the meetings you’re having with people who are trying to save in tax?

00:06:38:06 – 00:07:17:12
Kyle Pearce
Yeah, well, one thing I will say as well, and I sort of alluded to it a little earlier, was this idea of starting as a real estate investor. And I had sort of this push to incorporate and I remember the conversations I had at the time, this was many years ago before I had done my deep dive. I’ve spent more than 10000 hours researching and doing this work, and now this is what I do essentially full time right now is helping other business owners in order to maximize their wealth management strategy, because most actually don’t have one, or they’re doing a half baked one based on just a simple recommendation from the account, like, Hey,

00:07:17:16 – 00:07:55:04
Kyle Pearce
get that money out. And the best option they think of is, Hey, RSP. And that seems to be the most common strategy. But having an understanding of how the taxation works inside of a corporation is really important. And for real estate investors, folks like myself, we were like, I want to have a real estate portfolio. And in your mind, I speak to a lot of people who are like, I have three investment properties, they’re all in my personal name and they’re they’re asking me on a call saying, I want to scale up, should I change the title on these properties and put them inside of my new corporation?

00:07:55:04 – 00:08:12:16
Kyle Pearce
And I always say like probably not, right? I would say probably because there’s always potential nuances. This is what makes this work so hard, is that you have to look at the entire picture. But straight up, we’re going to switch title. There’s going to be costs associated with that, right? There’s a lot of things that can go wrong.

00:08:12:16 – 00:08:34:16
Kyle Pearce
But the real reason I think people want to get it into the corporation, oftentimes is they think it’s going to be at a lower tax rate. And the reality is, is that active income is not being generated from your real estate property unless you’re like full time property managing. And like you can make a case for how this is like your active income.

00:08:34:16 – 00:08:57:19
Kyle Pearce
The reality is, is that rent from real estate is not looked at by the CRA as accurate. It’s looked at as passive. And in all provinces and territories except for Alberta, Alberta, hey, I’m coming your way eventually, and all provinces and territories except for Alberta, the investment income that you generate inside your corporation is taxed at over 50%.

00:08:57:21 – 00:09:29:16
Kyle Pearce
Here in Ontario, we get the worst of everything. As per usual, our active income rate is 12.2%. Quebec is also 12.2 all the way down. So Manitoba is like 9%, whereas Alberta on that list, I think Alberta is just slightly lower than that as well. So up to 12.2% is active income. But when you put a property inside of a corporation, you are not benefiting from that 12.2 or less active income on your first 500,000 is what makes it even more complex.

00:09:29:16 – 00:09:55:16
Kyle Pearce
It’s only on the first 500,000 of profit that you generate inside the corporation after that, it bumps up. So there’s that credit you’re getting. So in Ontario, you’re bumping up to 25%, 26%, depending on where you are. But it’s the investment income that’s really causing a problem. So, John, you had talked about this idea of creating what we like to call as the compounding machine.

00:09:55:16 – 00:10:14:19
Kyle Pearce
Right. And we want to create a compounding machine that compounds and that spits out more money and compounds. And we’re like, man, if we can get our money to work for us in multiple ways instead of just compounding once, we want to continue compounding it. And that was our thinking here. It’s like, Hey, keep the money in the corporation.

00:10:14:23 – 00:10:45:06
Kyle Pearce
We’re getting taxed at a lower rate. Optimally, write a lower rate actively, which means more money for reinvestment, which makes a ton of sense. If you have an active operating company. You and I had an active and still do have an active operating company. So it generates a lot of active income, which is fantastic. But it still brings us to the problem of when that money goes into the next machine for compounding.

00:10:45:08 – 00:11:07:04
Kyle Pearce
It’s like whatever comes out of that thing as it stands right now would be taxed at over 50%. So I use see as the easy example because it’s just simple to understand. I was on a call just last week with a business owner who had over $500,000 of retained earnings inside their Holding corp and they’re like, You know what?

00:11:07:04 – 00:11:27:06
Kyle Pearce
I take on enough risk in my business. I don’t want to go into more risky investments. I just want a guaranteed return, sort of like I’m just going to put it into a GI, See? Well, that’s great now, but his 5% or so that he was getting in GI C’s, he thought he was keeping the 5% in his retained earnings.

00:11:27:06 – 00:11:54:19
Kyle Pearce
He’s not really monitoring it. It’s just over there doing its thing. And he’s really only getting about two and a half percent on that JIC inside that particular corporation. So there’s a lot of things going on here. There’s a lot of nuances and it’s not as simple as saying, Well, okay, instead take it all out because now you have personal taxation issues and then sure, you can get it back by putting it into an RSP, but now it’s all stuck in the RSP.

00:11:54:21 – 00:12:32:01
Kyle Pearce
And as a business owner, that’s not super helpful. It doesn’t make me feel safe. What if I have a down year and I need to get access to my money? Well, I’m going to have to maybe pull from my RSP or try to get a loan or do something. I like the idea of being able to create my compounding machines or my series of compounding machines inside my corporate structure so that I can grow it as big as possible and also make sure that I have the exit strategies in place so that that money, more of that money can go into my personal pocket, whether it’s now or down the road in the future when

00:12:32:01 – 00:12:35:04
Kyle Pearce
I’m ready to start pulling income out of my corporation.

00:12:35:10 – 00:12:55:16
Jon Orr
When you say exit strategy, do you mean like, I just want I think this is what we also want as business owners, right? Is I want to be able to minimize my tax, but I also want the flexibility of being able to access that money. You have mentioned that one strategy many corporate owners are doing is they’re issuing, say, the dividends to themselves and they’re dumping it into an RRSP.

00:12:55:16 – 00:13:16:20
Jon Orr
But then that’s locked away, right? It’s in money jailed, as we’ve said here on the podcast. Lots of times it’s over there. It’s protected for now. You got that tax deferral right now, but you can’t borrow against that if you need it. Like you said, it’s like I could withdraw, but then I can’t access it. But it’s like if I want to invest over here, if I want to take it and do this over here if I want to, or if I have a down year, I can’t do that.

00:13:16:22 – 00:13:30:20
Jon Orr
And you’re saying I want to be able to have access to that. I want to be able to do both. It’s like I want my cake and I want to eat it, too. I want to be able to like, save and tax like the RSP. It’s almost like I want to create my own tax free savings account where there’s no limit.

00:13:30:22 – 00:13:52:07
Kyle Pearce
Yeah, exactly. No limits. Yeah, totally. And I want to back up because you brought up the idea of being compensated from the company through, say, a dividend and something that’s really important to note as well. And when we first began this journey, I didn’t know this. Maybe John, you might not know this because you fully trust me with our corporate management strategy that we have, like our corporate wealth management strategy.

00:13:52:07 – 00:14:18:08
Kyle Pearce
That is the work I do day in and day out. And the reason why I do it and serve others is because I spent so much time and energy making sure that we were set up and made as well so that we had the optimal situation going on for our particular situation and our goals and our wants. So let’s talk about dividends for a second because you can be compensated through a dividend or you can be realized through a salary.

00:14:18:08 – 00:14:35:15
Kyle Pearce
Yeah, there you go. I knew you knew it. I knew you knew it. But it’s really easy for us to use these terminology interchangeably. And something really interesting for our business owners out there is that when you actually take money out of the corporation, if you take it through a dividend, so the company is now paying you a dividend.

00:14:35:21 – 00:14:59:13
Kyle Pearce
There are some tax advantages to that. However, you are not gaining any new RRSP room. So for those now you might have already had some from maybe a past job or whatever it where you were getting a salary, a T for a job, whatever it might be, and that’s fine. So you can take that dividend money, you could put it in the RSP and you could receive the benefit of tax savings.

00:14:59:13 – 00:15:23:13
Kyle Pearce
In that case. Now, something to be cautious of depending on your strategy and depending how much money you’re pulling out, you have to be cautious that you’re not taking money out of the corporation and then funding an RSP, which we like to call a little bit of like money jail until you retire. But also it’s really important that you’re in the bracket or better or or higher than where you will be in retirement.

00:15:23:13 – 00:15:53:22
Kyle Pearce
And we’ve said this before on our show, we have no intentions of being put into a lower tax bracket or at least a lower lifestyle bracket, because, of course, we’re trying to strategize ways that we aren’t going to have to pay income taxes or we’ll pay a much lower income tax rate without changing our lifestyle. You have to be cautious because if you’re putting money in and there’s a lot of people who put money in on the way up the ladder when their jobs and so forth, and they start stuffing their RSP because it’s a good habit rate.

00:15:53:22 – 00:16:22:06
Kyle Pearce
It’s great from a habits perspective. But I mean, hey, if you’re in a 20, 25% tax bracket and you’re stuffing your RRSP and then in retirement, you’re in a 30% tax bracket, that’s actually not great, right? Like a tax free savings account would have been better in that particular case for our business owner. Friends. When you take a dividend, you don’t get more RSP room, but you also on the other end, your corporation doesn’t get to count that money as an expense.

00:16:22:06 – 00:16:46:03
Kyle Pearce
So this means this money’s coming to you after the corporate income taxes that have already been paid. So if it was active, then I’m losing my 12.2%. I put it in my pocket. Of course, the Canadian tax system has this dividend tax and exemption and rebate and all this stuff, and it ends up working out to about what you would pay if you were to take a salary anyway.

00:16:46:08 – 00:17:07:15
Kyle Pearce
So that’s how you and I have typically taken any money out of our corporation in the past. However, if you take a salary, the company gets to expense it. So now this is before we’re paying corporate dollars, except you’re paying more taxes on the personal side. So at the end of the day, somebody’s paying it. But with that salary every year, you pay yourself a salary.

00:17:07:15 – 00:17:31:21
Kyle Pearce
The corporation has to pay your CPP and your E.I. and you have to pay your CPP and your UI. So you’ve got both of those ends of the deal happening. The corporations getting it, they get to deduct it, of course, in the corporation, but then you’re also paying it and you’re paying the income tax on that salary. And then a lot of people will start subbing it into their RRSP.

00:17:31:23 – 00:17:55:03
Kyle Pearce
However, the way you and I like to do it right and the way we had intended right from the beginning was, Hey, how do we take more of this money inside the corporation and how do we create our compounding machine such that I’ll be able to not only protect this money, save on taxes in the near term and the long term, and grow it over time.

00:17:55:03 – 00:18:14:21
Kyle Pearce
And that’s ultimately the journey we’re on. And one of the strategies that we want to make sure that business owners are aware of at the surface level, we’re not going to be able to get to the in-depth strategy today, but we will on a future episode on how we can actually use this strategy as a means to have tax free income essentially for life.

00:18:14:21 – 00:18:15:20
Kyle Pearce
On the personal side.

00:18:15:24 – 00:18:35:01
Jon Orr
That sounds like something like, Wait, sign me up to learn more about that, which like you said, we’ll talk about more on an upcoming episode, but fill us in. I think if you’ve listened to more than one episode, you know, the tool that we use to utilize it, create this flexibility, minimize our tax burden, but fill us in.

00:18:35:03 – 00:18:51:15
Jon Orr
Give us some of the details. What’s something that I’m listening right now? I’ve got this issue as well. I also want to minimize the tax burden that I have currently. What could I do right now to help kind of set up a strategy that can be this long term that helps me out?

00:18:51:17 – 00:19:24:21
Kyle Pearce
Yeah. The only real strategy that I could find and this is over the last decade, right, was doing all of this work, all of this research. And what I landed on was this idea of permanent life insurance being a place. It’s like a safe haven. Now, on the personal side, there can be many benefits. We’ve had episodes where we’ve shown how on the personal side, permanent life insurance can make a lot of sense for a lot of people if if they’re in a good position to do so.

00:19:24:21 – 00:19:47:20
Kyle Pearce
I wouldn’t say it’s for someone who’s just starting investing, unless maybe it’s to build up that emergency fund. I wouldn’t necessarily advocate for people to get into infinite banking if that’s their only sort of strategy that they’re using. Right? So there’s a lot of pushing out there towards it, towards home life and universal life insurance that probably doesn’t fit for a lot of people.

00:19:47:22 – 00:20:10:22
Kyle Pearce
But in this case, I want to talk about how important it is for Business Inc. business owners to be leveraging and here’s the crazy part. The vast majority of business owners are not aware of this. First of all, the vast majority of business owners aren’t even aware that their retained earnings when they put it into other investment income generating investments that they’re paying 50%.

00:20:10:22 – 00:20:34:10
Kyle Pearce
So that’s like an issue right away. They they have a problem that they didn’t know they have and therefore they’re not looking for a solution. Right. Whereas you and I, we were aware of this and going, okay, we need to find a solution. And the beauty is, is that when we buy a permanent policy inside of the corporation, that means the corporation is going to own this permanent life insurance policy.

00:20:34:12 – 00:21:11:17
Kyle Pearce
That means for guys like you and I, who have active income being earned inside that corporation. Right. So we’re paying 12.2% on the corporate income on the first $500,000. What you and I do is we take those call them 88 cent dollars and we put it into a permanent policy. And the reason we do that is this policy, even though it’s a life insurance policy and lots of people think negatively of them and people have this sort of I don’t like the idea, it’s supposed to be bad, it’s not good for me, and so on and so forth.

00:21:11:19 – 00:21:37:11
Kyle Pearce
The reality is, is that we don’t use it specifically for the life insurance we use it for. It’s tax neutrality. Whoa, big word. Tax neutrality. Because what happens is when we put money into that permanent life insurance policy, it’s like an account. It acts like an account. We put all that money in there and it shield us that money from ever paying taxes.

00:21:37:17 – 00:21:57:13
Kyle Pearce
Whoa, A vast majority. And we’ll talk about why it’s the vast majority and not 100% of it over time. But that money goes and I take that 88 cent dollar. I put it into this policy and it acts like a tax free savings account because by itself Now we already talked about how you and I have this idea of compounding, right?

00:21:57:13 – 00:22:18:18
Kyle Pearce
So this isn’t going to be where all this money stays for us, but it might be for someone else. I’m thinking about that business owner that was investing in GI sees a permanent policy over time is going to be earning at around 4 to 5% compound annually for the rest of your life. Right now, mind you, that rate is way higher.

00:22:18:18 – 00:22:38:04
Kyle Pearce
If, let’s say you die in the first ten or 20 years, Right. Because the death benefit you get is so massive. But just in and of itself, tax free, this money is going to grow at 4 to 5% just like a similar, say, GI C or other type of fixed income type. Yeah.

00:22:38:06 – 00:23:05:08
Jon Orr
So just to be clear, it’s like it’s like it grows at that rate because what it is, right? The cash value of your insurance policy is the present value of the future death benefit. Let’s say you live to 100 years old. That cash value has to grow to that value at 100 years old. So it’s the present value and it has to go up every day to reach that value by the time you reach 100.

00:23:05:10 – 00:23:24:24
Jon Orr
So that’s why it’s like it’s not really an investment. It’s not going to go up and down because it’s not an investment. It has to account for getting to that value by that age. And so it’s the present value of that. But that’s why it’s like you can think of it, it’s got to grow to get there and you’re going to contribute in each dollar you put in is not the full amount, right?

00:23:24:24 – 00:23:49:05
Jon Orr
The insurance company is going and they’re putting in the investments to ensure that it grows to that value and then they can pay it out when needed. So it’s not an investment, but it’s the tool that acts like that. And remember, when you’re putting that money in there, like you’re paying your premium and then you also get access to that cash value in a way that you get to borrow against as collateral.

00:23:49:07 – 00:24:09:08
Kyle Pearce
Exactly. Exactly. So now thinking about this, if let’s say we’re comparing we use the example of someone who’s taking a salary from their company and then they’re taking money and putting it into an RRSP, right? They get a little bit of a tax benefit there or at least a refund. But really all it is is a tax deferral.

00:24:09:08 – 00:24:40:02
Kyle Pearce
It’s not tax sheltered because you will eventually pay tax at your income rate or at your income bracket when you pull money out of that RRSP. Now over here we have this tax sheltered tool that if I don’t touch it, which you and I are definitely going to touch it because we’re going to use it and leverage it to compound into our next investment, the next investment that we feel strongly about and feel that is low risk for us, which oftentimes is real estate.

00:24:40:02 – 00:25:03:03
Kyle Pearce
That’s what we know best and that’s what we put our money into. But in the meantime, this money is over here growing at a rate that’s fairly predictable. I say fairly because every year the insurance company has the right to pay or the option to pay a dividend, even though, for example, some life spent around 150 years and they paid a dividend every single year.

00:25:03:09 – 00:25:21:13
Kyle Pearce
But that dividend amount is announced just like a company dividend would be announced each year. And of course they want to make sure that people feel confident that these policies are going to do what they’re saying they’re going to do. So the beauty is it doesn’t go up and down, like you said, John, once it’s locked in on a year, it can’t go below.

00:25:21:13 – 00:25:43:17
Kyle Pearce
That number can only go up. And as I put every dollar I put in there, that dollar and more will go in and it’s more and more each year. All right. So the beauty is this. I have this asset, it will appear on my balance sheet. It’s owned by the corporation and I have the ability to leverage against it in the rights in the contract with the insurance company.

00:25:43:17 – 00:26:05:17
Kyle Pearce
I can borrow at any point up to 90% against the cash value of that policy. Now, here’s the crazy part. You can go to a third party lender. Third party lenders may choose to lend up to 100%. Right. And they might give you a better interest rate. There’s all kinds of different scenarios here, but we’re going to go with the basic one for now.

00:26:05:19 – 00:26:31:13
Kyle Pearce
And that for us, the beauty is, is that when that dollar goes into that place, it’s like under an umbrella and it’s sheltered from those passive investment income taxes that the corporations would be charging. So the gypsy friend is netting two and a half percent. Over here, we’re able to safely get about what you’d be getting in a C plus.

00:26:31:15 – 00:27:03:18
Kyle Pearce
You can leverage against it to start your next compounding machine for us tends to be real estate, but for you it might be something different. For some people, it might be leveraging against it to reinvest into their business so they can grow their business. It’s up to you. These are things that you can’t do. Once you bring that money out and you put it in an RSP, for example, or for those who have explored IPRs or an individual pension plan which you can open up in your corporation, you can do the same thing, but you have the same challenge, right?

00:27:03:20 – 00:27:30:17
Kyle Pearce
You have the same challenges. And RSP a little bit better over here. However, you can’t leverage against it or I shouldn’t say you can’t. Some third party lenders may allow you to leverage a portion of that, but most people don’t feel comfortable or confident in doing so. Whereas with this policy, the beauty is, as we know, like you said, John, if I live to 100 that buy year, 100, that’s how much that policy’s going to pay out.

00:27:30:19 – 00:28:00:20
Kyle Pearce
And the beautiful part is, is that inside a corporation there’s a thing called a capital dividend account that keeps track of any of the capital gains that your company has benefited from over time, the tax free portion and a life insurance policy also contributes to the capital dividend account. And like I said, it’s not 100% of the cash value of the policy, but it’s pretty darn close or I should say, of the death benefit of that policy.

00:28:00:24 – 00:28:34:18
Kyle Pearce
But it’s pretty darn close. It’s like in the 90% ish range. And what that means is if you have a permanent policy and it’s worth, let’s say, $1,000,000 upon death, you’re going to have almost $1,000,000 worth of death benefit paid to the corporation, which can then be paid out to the shareholders or the estate tax free. Again, not 100% of it, but it’s in the like we’ll call it in the 90% ish range and it gets paid out.

00:28:34:20 – 00:29:01:17
Kyle Pearce
So when you think about this and go just on its surface without even applying some of our compounding principles that you and I are all about, the reason we’re doing this is to give it a first stop in the compounding machine and then to allow us to borrow against it to purchase real estate, which again, the capital gain on real estate is not going to be taxed at the passive income rate, but the income from rent will be after expenses.

00:29:01:17 – 00:29:22:24
Kyle Pearce
Right? So if there is a profit, that still will happen. But I have this other tool right here that continues to grow, continues to grow. And I know that the vast majority of that death benefit is going to pay out to the corporation, to the estate tax free, and it’s going to solve a lot of the taxation issues that are created.

00:29:22:24 – 00:29:36:00
Kyle Pearce
If we were to use our original strategy, which was, hey, take this active income, pay the 12.2% and then throw it right back in to, say, dividend paying stocks or any of those other tools. Right? Yeah.

00:29:36:00 – 00:30:03:21
Jon Orr
What I love about this strategy is it gives us two uses for the same $0.88 in our corporation is that it’s over here. It’s got a purpose inside that structure. But then we can use that same dollar or let’s say we can use 90% of that $0.88 and borrow against that as collateral and invest it as well. You’ve created your own capital account or capital account that’s sitting there.

00:30:03:21 – 00:30:29:18
Jon Orr
This capital bunch of money that you can go and invest back in your business or keep it there or that’s what I really love about it. And then even to supercharge it more, which we’ll talk about in another episode, is that there is other strategies, other structures that you can add as a layer on top of this that eventually allows you to pull or give you personal money from the corporation tax free.

00:30:29:20 – 00:30:50:03
Jon Orr
So we’ll talk about that on another episode. We’ll dig in a little bit more. But that’s like you can’t do that with any other structure. But this structure, if you’re going to meet some criteria and you kind of do a little bit of maneuvering, it is completely compliant and you can still pull that money out tax free from your corporation.

00:30:50:05 – 00:30:51:13
Jon Orr
But you got to use this tool.

00:30:51:15 – 00:31:14:24
Kyle Pearce
Absolutely. And for those who have some experience or have done some exploring, you might be thinking, Oh, John’s talking about an IFRS. Well, really an immediate financing arrangement or agreement is a structure that you can use within the corporation, which essentially is kind of what we’ve been describing so far. And what John’s describing is actually not an IFB, it’s not any of the other strategies that you’ve seen.

00:31:15:01 – 00:31:37:10
Kyle Pearce
It’s actually using the nuances of the Canada Income Tax Act and actually putting it to use in your favor. So for those who are listening and maybe your ears perked up, essentially what will be describing in a future episode is how we help two types of individuals. The first one is those who have a lot of retained earnings each year.

00:31:37:10 – 00:32:09:08
Kyle Pearce
We like to say like over 250,000 in retained earnings each year. We can actually help you to get personal income in your pocket now while growing the net worth or the net value of your estate simultaneously without triggering the personal taxes that you typically would just give an example easy numbers. You take $1,000,000 out of your corporation, be it dividends, be it salary, you’re going to be gifting almost 50% of that to the government, right?

00:32:09:08 – 00:32:44:02
Kyle Pearce
That’s what’s going to happen if you take $1,000,000 out. And with this strategy, what we do is we actually use the very, very nuanced strategy and the details that need to be put in place so that you’re able to not only get the same after tax income in your pocket, but then also have capital for reinvestment. So we’ll call it almost taking what you’re putting in your pocket and then reinvesting it so that you can also grow your net estate, your net value, your net worth of yourself, your corporation.

00:32:44:04 – 00:33:24:00
Kyle Pearce
And of course those people who are listening are going. That’s really interesting. For those who aren’t doing that right now, what we do is the strategy we described today is we try to set you up such that when you are looking to start taking income from your corporation. So John and I, we don’t really take much out of our corporation each year, so we don’t apply that specific strategy yet, but we’re setting ourselves up with these compounding machines so that when the time is right, we can start turning on our personal income tap and not have to gift the money to the government that we typically would through taxation, through personal taxation.

00:33:24:00 – 00:33:58:13
Kyle Pearce
So if that’s intriguing to you, maybe just the straight up strategy we described here today, we really encourage you to reach out. I hop on calls. I actually have a call right after we hang up this call with John, where I’m going to be working with business owners to help them through their wealth management strategy, how to figure out what is best for them, look at what they’re currently doing, and devise a plan that makes sense to them so that they actually understand the impact of what it is that they’re doing currently versus maybe how they might want to alter that.

00:33:58:17 – 00:34:27:13
Kyle Pearce
Whether it’s using a strategy like we described here or something else that makes more sense for their individual situation. You can head to Canadian wealth secrets dot com that’s Canadian wealth secrets dot com forward slash discovery and you can book a short call so we can learn more about your situation and see if there’s a strategy that you might want to be implementing once again Canadian wealth secrets dot com forward slash discovery folks.

00:34:27:15 – 00:34:57:02
Jon Orr
Well secret sauce from today was all about how to maximize flexibility in designing your wealth building strategy inside your corporation and the tool that we utilized you talked about to make that happen to create those flexible options is that permanent whole life insurance? And Karl just gave you the link to reach out if you want a personal walk, dig into your exact situation to see how you can set that up in your corporation.

00:34:57:02 – 00:35:16:08
Jon Orr
Reach out to him and us and we’ll kind of hop on that call. But we want to thank you for listening to this episode of Canadian Well Secrets Podcast. And if you have listened before, we encourage you to leave us a rating, a review. And if this is the first time you’re listening, hit the subscribe button so you can get notified of the next episode as we put them out each week.

00:35:16:10 – 00:35:51:11
Kyle Pearce
All right, my friends, once again over on Canadian Wealth Secrets dot com, you can check out all of the resources, transcripts and more. This was episode 65 so that’s Canadian Wealth secrets dot com forward slash Episode 65 And it’s that time my friends Canadian Wealth secrets seekers keep on searching.

00:35:51:13 – 00:36:01:04
Jon Orr
Just a reminder of the content you heard here today is for informational purposes only, you should not construe any such information or other materials legal tax, investment, financial or other advice.

00:36:01:06 – 00:36:23:07
Kyle Pearce
Just as a reminder, John, Or is a mortgage agent with bricks Mortgage That’s license number m23006803 and Kyle Pierce is a licensed life and accident and sickness insurance agent and corporate wealth advisor with the Pan Corp. team that includes corporate advisors and pan financial.

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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