Episode 66: Salary or Dividends? How Should I Pay Myself To Minimize My Tax Burden?

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Are you tired of paying more taxes than necessary when withdrawing money from your corporation?

As a business owner, effectively managing your finances and understanding the tax implications of withdrawing money from your corporation is crucial. Whether you’re considering salary or dividend payments, or looking for ways to shelter money from taxes, this podcast episode is tailored to your needs.

Unlock the secrets to smarter financial decisions for your business – listen to this insightful episode now and start optimizing your corporate withdrawals!

What you’ll learn: 

• Gain Insights on Tax-Efficient Withdrawals: Learn the intricacies of choosing between salaries and dividends, and how each affects your tax obligations.
• Discover Wealth Retention Strategies: Understand how tools like permanent life insurance can help you shelter money from taxes and grow your wealth within the corporation.
• Expert Guidance for Financial Planning: Benefit from the shared expertise of Kyle and Jon on creating a compliant, tax-minimized retirement plan that ensures financial safety and maximizes leverage.

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.

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.

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00:00:00:08 – 00:00:17:08
Jon Orr
All right. I’ve got to level with you right here because I just got off a call the other day with our accountant and we brought up the idea of we’ve got a bunch of retained earnings in our corporation and what should we do personally? Should the money come out personally in salary or should the money come out as a dividend?

00:00:17:10 – 00:00:32:05
Jon Orr
And I think I was actually unsure of how much should be in either case or the right combination. And I was left going like, well, what should we do? And so, hey, I thought, this is a great episode to talk about here with you.

00:00:32:06 – 00:00:55:20
Kyle Pearce
Absolutely. And, you know, I think where we made the first mistake is the account reached out to you instead of me, John. And that’s okay. However, it really did spark sort of curiosity in your mind, because up until this point, I’ve sort of handled those types of questions. We’ve had conversations at a high level about them. However, you’ve sort of been doing your work and sort of head down in that area.

00:00:55:20 – 00:01:15:09
Kyle Pearce
So today really we’re going to be a little selfish. Actually, John’s going to be selfish and this episode is going to be about John learning more about why we do what we do. Each year at the end of year, when we’re doing our financials, with our holding corporations, with our active company, why are we doing what we’re doing?

00:01:15:09 – 00:01:33:21
Kyle Pearce
Is it a salary? Is it dividends? Are we taking it all out as a salary? Are we taking it all out as a dividend? Are we mixing the two? And hopefully for you friends, you’re going to learn a little bit more about why one over another might make more sense. And another big takeaway that I hope you’re going to get is, you know what?

00:01:33:21 – 00:02:00:16
Kyle Pearce
This idea of draining your corporation through a salary to try to get it out and get the taxes out of the way might not be the best strategy for you in your corporate wealth building journey. Here we go.

00:02:00:18 – 00:02:05:10
Kyle Pearce
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearce and Jon Orr.

00:02:05:10 – 00:02:19:22
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.

00:02:19:24 – 00:02:40:07
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.

00:02:40:08 – 00:02:59:10
Jon Orr
All right, Kyle, I think I was leveling with people in the intro there saying, Hey, we got to dig here, We got to figure this out. And I think it’s a big question on business owners minds is if I have a business, I’ve been solely relying on my accountant to make this decision for me. This is why we have accountants is to go, Hey, I don’t need to decide that that’s your job.

00:02:59:14 – 00:03:17:19
Jon Orr
Help me minimize my tax. But also I want to be able to live on. I want to pay my bills at my home. I want to pay my family bills. We got to make sure that we live the lifestyle that we want to live. And it brings up the question, do I pay myself through a dividend? Do I pay myself through a salary or is there alternative ways to minimize tax?

00:03:17:19 – 00:03:29:24
Jon Orr
Because that’s what we’re talking about here. What was the secret sauce for this week is to think about and answer this question so that you’re walking away from this episode going, I know exactly what I want to do come the next year.

00:03:30:01 – 00:03:54:23
Kyle Pearce
Yeah, And John, I just want to make sure that we’re being fair to all of our wonderful accounting friends, CPAs. The reality is, is their job isn’t actually to be your tax advisor. I know a lot of us look to them because they have such a wealth of tax knowledge, but their job is to essentially account. It’s right in the name, account for the things that you did and do it in a compliant fashion.

00:03:54:23 – 00:04:15:15
Kyle Pearce
It’s not really their job to sort of go, what is your strategy? What is your tax strategy, What is your wealth skills? What are your. Exactly. There are some out there who do that. I’m going to say that they’re fewer and far between. Simply because, again, that’s not how they are compensated. And in a lot of cases, they actually don’t want to be giving.

00:04:15:15 – 00:04:35:16
Kyle Pearce
You’d call it advice where it comes back and something happens and you change your mind. Or maybe you weren’t clear on what it is that you were trying to do in the first place. And then all of a sudden now it comes back to them. So ultimately they’re trying to give you enough information to kind of make you dangerous rate so that you’ve got enough that you can make some choices.

00:04:35:18 – 00:04:55:17
Kyle Pearce
But ultimately, at the end of the day, their job is just to make sure that this stuff gets filed, it’s compliant, and that the CRA isn’t going to have any issues with some of the things that you’ve done. So there’s some common strategies out there. And one of the decisions that business owners have to make each year is like, am I taking money out or have I been taking money out?

00:04:55:17 – 00:05:13:13
Kyle Pearce
Right. Is there an intent for that money to get paid back? Because again, you can actually take short term loans, we call it from about up to a year to almost two years, depending on where your year end is and when you take that money. So if you look that up, we’re not going to dig into that here today.

00:05:13:15 – 00:05:33:03
Kyle Pearce
You can actually kind of use those funds in between. We’ll call it we’ll call it in between to help you through different things in life. And that’s not an issue. But if that money stays out or if it’s intended to stay out, we’ve got to decide how are we going to take that money out? Is it going to be taken out as a shareholder dividend?

00:05:33:03 – 00:05:54:00
Kyle Pearce
So basically, you’re going to pay it out much like a public traded company pays a dividend out to all the shareholders. So that number needs to be the same for all the shareholders in your corporation. The tax rates are a little bit different. Or do we take it out as a salary? So many people are familiar with salaries for employees who are taking a salary.

00:05:54:00 – 00:06:20:13
Kyle Pearce
Well, you can do the same thing with your company, with your business that you’re doing. But the real question becomes is what’s a good fit for you? And at the end of the day, the real tough part is it’s always depends based on what it is that you need. So we’re going to dig into that here today and we’re going to first start talking about this idea of what is the actual difference of a dividend and a salary.

00:06:20:13 – 00:06:37:10
Kyle Pearce
So, John, I want you to be just open and honest here. Right now. When you think salary and dividend, what are the differences to you right now? It might be fuzzy, but is there one that you feel is better or that you feel has been communicated to you as better? Because maybe it’s the one that we’ve been personally using?

00:06:37:12 – 00:06:39:22
Kyle Pearce
Or are you just sort of blindly following along here?

00:06:39:22 – 00:06:41:07
Jon Orr
Well, maybe, maybe.

00:06:41:07 – 00:06:43:04
Kyle Pearce
But we’re going to find out in a second.

00:06:43:05 – 00:07:14:21
Jon Orr
But yeah, so when I think of dividend, right. So I’m thinking of what you said. I’m a shareholder of this company and I am partaking in distribution of, say, those retained earnings or profits that I’m kind of passing down. I completely understand the tax implications and how much were taxed at that dividend rate. Now when I think of the salary, right, when you think of a salary, if you’re thinking of your salary right now, let’s say let’s say you’re employed by an employer, your employer issues, you say at4 slip or they’re paying your salary.

00:07:14:21 – 00:07:42:14
Jon Orr
Along with that salary, you’re paying the company, you’re contributing to CPI. These are payments that kind of go to the government. They come off your paycheck, they go to the government, the business contributes to that. So when I think of salary, I think about that. T for slip. When you see that t four slip come in the mail or it’s in your mailbox and all of a sudden you’re looking at it and going, okay, well, if I’m a business owner, do I want to treat myself like an employee?

00:07:42:14 – 00:07:59:10
Jon Orr
Because that’s the way I think about it, right? So like I am an employee of my business, therefore I’m taking a salary of that business, but then that means I’m going to get that T for slap on that. I’m going to be paying my keep my contributions. The business has to pay all those as well. So to me it’s saying I’ve got that.

00:07:59:10 – 00:08:20:23
Jon Orr
But then depending on the amount of salary I take, that will put me in the tax bracket for personal income. So that’s where it’s like, okay, well if I go back and go, Hey, I need $100,000 to match the way I make comfortable living, that automatically goes. If I take $100,000 of salary, I’m going to be in these tax brackets, which is more than the, say, the dividend rate.

00:08:20:23 – 00:08:53:02
Jon Orr
If I look compared to, say, I could send some money or issue a dividend to the shareholders and I would have a lower tax rate because of that dividend. So for us, because we’re the owner operators of this business and all the shareholders are the owner operators, then that’s where it’s like, hey, we can benefit from the dividend coming to us because overall if we add up all the money that comes in our pocket versus the money that goes to the government, it’s less if I go dividend route versus salary route move.

00:08:53:03 – 00:08:57:12
Kyle Pearce
That was actually a lot deeper than I thought you were going to go, which I think is really great to make.

00:08:57:13 – 00:08:59:10
Jon Orr
So he doesn’t give me off credit around here.

00:08:59:10 – 00:09:24:24
Kyle Pearce
No, exactly. You’ve done some homework, which is great. Or maybe you listen to some of the things I’ve said in the past. I don’t know. But what I will say is that there is a little bit more complexity to it as well. And everything does depend. John, you and I, back when we were starting our companies and when we did want to or if we wanted to take some money out of the company for our lifestyle or whatever it was, we already had this big T for income that we already had.

00:09:24:24 – 00:09:43:04
Kyle Pearce
So we’re already in the high enough tax bracket and we didn’t want to take out a lot of money out of the corporation. So a long time dividends really made sense for us because there’s something else that goes on here. The government tries its best to try to make either option around the same. It’s not exactly the same.

00:09:43:05 – 00:10:07:11
Kyle Pearce
K A dividend is taxed a little different. They call the gross ups 38%. And then there’s a tax credit of 15% that’s on that. And it’s kind of confusing. But here’s at the end of the day, rather than going saying, hey, which one is better in every case because it does depend. One thing I can say that is a huge benefit for when you want to take out money and it’s maybe not going to be consistent dividend.

00:10:07:11 – 00:10:40:21
Kyle Pearce
Often is really helpful for two reasons because it’s not consistent. Whereas with a salary, there’s a lot more setup that has to happen. Like we have to actually open up an account inside the corporation. The payroll thing has to happen. Here’s the other thing that people kind of miss out when you if you just look straight up tax rates, if you’re just making that comparison and saying, well, if I do a salary, it’s this tax rate based on my current income, or if I do a dividend well, apply the gross up amount, then the tax credits go, oh, it’s going to be a little better for this one or a little better for that one.

00:10:40:23 – 00:11:02:09
Kyle Pearce
The part about a salary that is the pain in the body is that payroll account. Right? Which is a pain. Right. The second part is that with a salary, what ends up happening is the salary actually can be expensed in the corporation, meaning that when I take out a dividend, that means I’ve paid corporate taxes inside the corporation.

00:11:02:09 – 00:11:25:12
Kyle Pearce
If it’s active income, Right. Active income here in Ontario will speak in Ontario, It’s very similar in other provinces, but Ontario’s is the highest. By the way, your active income on your first 500,000 inside the corporation that you’ve earned is going to get taxed at 12.2%. This is like one of the benefits of opening a corporation or an active operating company in the first place.

00:11:25:14 – 00:11:49:09
Kyle Pearce
There’s also that liability protection that it provides you. But most people are thinking lower tax on the active income. When I take a salary, what ends up happening is I’m actually expensing the salary and I have to pay the corporation has to pay CPP on behalf of you, the now the T for employee of this company and II on inside the company.

00:11:49:11 – 00:12:09:19
Kyle Pearce
And then you get paid out your salary, you get your tax on there. But also you personally have to pay II and CPP as well. So a lot of people don’t realize this when they look at how much CPP they’re paying or how much either paying on their T for your employer. Also paid that for you. Right? The same is true for like pensions, Right.

00:12:09:19 – 00:12:28:21
Kyle Pearce
We talked on our recent episode about the Ontario teachers pension plan. A lot of educators and a lot of people in the public don’t realize that. It’s like, hey, when educators put in, first of all, a lot of people don’t realize that educators are actually contributing. Those who are further in their career are contributing more than $12,000 of their pay each year to this.

00:12:29:02 – 00:12:55:01
Kyle Pearce
But so is the Ontario government are matching it. So there’s this matching thing going on on a dividend. It’s squeaky clean. You take it out, it got taxed in the corporation. If it’s under $500,000, that first 500,000, it’s at 12.2% in Ontario. And then you take it out, you pay that 38% minus your tax credit of 15%. And then that works out to somewhere in the low 20% range.

00:12:55:03 – 00:13:16:20
Kyle Pearce
Add on your tax credit and now you’re in the thirties and you go, okay, it’s low, but it’s not super high. And ultimately at the end of the day, if you add it all up, you’re kind of coming out somewhere in the middle. Now the part that I think’s really important is for people to sort of understand, like when should I do one over the other?

00:13:16:22 – 00:13:39:10
Kyle Pearce
And is there is it logical? Because a lot of accountants will say like, let’s try to get this money out if you’re going to take a salary anyway, we’ve set up a payroll account. Let’s try to get this money out of the corporation and into your personal pocket and deal with the taxes and then maybe invest in some respects.

00:13:39:12 – 00:13:51:03
Kyle Pearce
I would argue that there’s some challenges with that. But before we go there, John, based on what I just said, does that kind of make sense? Does it align with what you were saying when you were thinking about dividends and salaries?

00:13:51:05 – 00:14:14:11
Jon Orr
A question did pop into my head. Is that because we were expensing the salary all of a sudden now it feels like there’s a moving target, right? How much salary offsets the income? Because you’re going to pay less income tax at the corporate rate because you’re reducing your revenue by the salary value. That tax at the corporate level is going to be lower because you expense the salary.

00:14:14:11 – 00:14:34:19
Jon Orr
But then you have to offset that with your personal tax rate that you’re going to play. So it’s like almost like my where it goes through my head and I think this goes through a lot of business owners head is probably going like personally, if I give myself an amount of salary that brings me up to this tax bracket, I can offset that with the corporate rate over there as well.

00:14:34:21 – 00:14:37:15
Jon Orr
And maybe I come out ahead. I’m just paying myself a dividend.

00:14:37:17 – 00:15:04:23
Kyle Pearce
Right? Absolutely. So there is a little bit of this playing that you probably want to do, but something that you just said that where I thought you were going with this was the idea that this is where I’m always a little hesitant to quickly jump to the conclusion that a salary is a good fit. Because what I hear a lot of people doing is that they actually look to take a salary that is equivalent to whatever the net operating income is of the company.

00:15:04:23 – 00:15:29:08
Kyle Pearce
Before that salary was taken in order for that income to go to zero. Right on the corporation. Right, Right. And when you think about that, when you look at what’s actually happening with that and mind you, if you have a mindset of like, well, it’s not much better keeping it in there because anything you do with the money in there is going to obviously have the corporate income tax, which again is lower than what you’re going to pay personally.

00:15:29:10 – 00:16:02:18
Kyle Pearce
But then if you reinvest it, the negative of reinvesting in a corporation by itself without sort of like adding some magic pixie dust to it, or a strategy or a structure that can help protect you from this is that you’re actually giving away or you actually give away half of that return on the investment. But before we go there, if I try to drain my company each and every year by taking this big salary, especially if it’s a salary that isn’t necessary to fund your lifestyle.

00:16:02:18 – 00:16:31:20
Kyle Pearce
So what I mean by that is like if your goal is to get it out, to get it taxed, which let’s pretend it’s 500,000 coming out of the corporation personally, you’re going to gift half of that or so away in taxes. Right? And what a lot of people say is, well, I’m just going to like put as much as I can in my RRSP, while if it’s a $500,000 salary every year, your RRSP room is only going to be closing in on $40,000 per year if you’ve been doing this each and every year.

00:16:31:22 – 00:16:52:18
Kyle Pearce
So you still have a problem because now you’re still paying a big amount of tax on $460,000. Right? That is not good. You’re basically going to chop that in half, essentially is what’s going to happen. So to me, and not to mention that you’ve also essentially given up the benefit of the corporate tax rates, which are lower. Right.

00:16:52:18 – 00:17:14:04
Kyle Pearce
12.2% on the first 500,000. So you’ve basically gifted that back and you said I would, instead of paying 12.2%, I’m going to get this out. I’m going to give half of it to the government now and I’m going to try to put some in my RRSP just a little bit and then I’m just going to lose the other half and it is what it is now with this mindset.

00:17:14:04 – 00:17:46:16
Kyle Pearce
I wouldn’t say it’s the wrong thinking if there was no other way. All right. So this is the conversation that I have with a lot of listeners and a lot of clients that I work with on the corporate wealth management side is if that’s your only option, it might not be the worst idea because ultimately, at the end of the day, you’re going to have to get this money out of the corporation, whether you pull it out yourself to use it, whether you pass away, and your estate now has to pay half of that money in tax, you can do it now and just deal with it and kind of move on.

00:17:46:16 – 00:18:05:02
Kyle Pearce
That’s sort of the mindset that a lot of people have. But I’m going to argue that you’re taking that instead of taking it out and giving away half what we can actually do in the short term. For those who have a lot of retained earnings, we can actually help you to use a structure that’s very creative but compliant.

00:18:05:04 – 00:18:26:16
Kyle Pearce
It is very complex. So it’s not something as simple as just going to your local insurance agent and saying, Hey, hook me up with this structure because it’s likely that they’ll only be able to give you one part. The important piece that sort of is at the heart of this structure, but they actually don’t have the details on how you can do this compliantly and many CPAs aren’t really aware of this as well.

00:18:26:18 – 00:18:59:07
Kyle Pearce
The goal would be let’s keep as much of that money that you’re intending to not spend on your lifestyle. Okay. So that’s the key if you’re going to spend it on your lifestyle anyway, this might not be a thing for you. You’re just going in your lifestyle. If you’re taking 500,000 out and you’re using all of that money right now, what I would argue a better fit would be, Hey, let’s shield that money inside the corporate ocean and let’s use a tool, the only tool that’s going to allow us to shelter it from passive income taxes inside the corporation.

00:18:59:08 – 00:19:26:01
Kyle Pearce
So it can continue to grow and compound at about 4 to 5% over the lifetime per year. And the beauty is, is that this tool which we’ve talked about on the show before, permanent life insurance or in this case it’s going to be whole life insurance when that pays out upon death, the vast majority of it is going to pay out to the beneficiaries or the shareholders of the corporation.

00:19:26:03 – 00:19:54:01
Kyle Pearce
So that is one massive tool just out of the box that’s going to be really helpful. But the challenge is, is that it doesn’t help that person who needs the money now. It’s still stuck over there. Well, the beauty is, is that we can use this asset and we can leverage and we can do all kinds of interesting things that can help our actual shareholder with their lifestyle income if we structure it appropriately.

00:19:54:03 – 00:20:25:21
Kyle Pearce
So I’m speaking at a very high level here. There are really only one possible way for us to do this in a compliant way and anything that you want to do. So if you’ve ever heard ideas from folks out there, maybe you’ve chatted with an accountant or you’ve chatted with an insurance agent or you’ve chatted with someone out there, a wealth management manager, you want to make sure that you have all of the layers of protection in place and you want to make sure that that team is going to take you through the entire process.

00:20:25:21 – 00:20:53:17
Kyle Pearce
And that’s essentially what we do with our clients when they’re dealing with this salary dividend issue is we try to determine, okay, does it make sense? Do you have enough retained earnings in there? Is there an opportunity for us to apply this structure and take you through this process, making sure that this is 100% compliant for you to get your money in your personal pocket while your estate continues to grow in value.

00:20:53:19 – 00:21:14:24
Kyle Pearce
So it’s kind of a win win for those who have a lower amount in there. We actually set you up with a longer term strategy. We still don’t want that money coming out. We do not want to gift any money to the government by giving half of it away. Right away. We want to set you up with a different strategy that’s going to allow that asset to grow over time.

00:21:15:01 – 00:21:42:04
Kyle Pearce
And when it’s large enough and you’re ready to take that income at a later date, we can then apply a structure that is compliant, unique and ultimately has independent tax opinions from some of the biggest legal firms in Canada. We make sure that those people are protected. So really the goal here would be if I need a little bit of money in my pocket right now and I don’t have a lot of retained earnings in the company we’re going to be looking at.

00:21:42:04 – 00:22:09:01
Kyle Pearce
Okay, let’s analyze this dividend in salary. Is it worth it to do a salary? Is it worth it to do a dividend? But ultimately, at the end of the day, we’re going to be encouraging clients not to take out extra money that they don’t need for their lifestyle. And we’re going to set up a plan and a structure for them so that it can grow tax sheltered instead of giving away half right now and trying to grow it inside your RSP and then getting taxed later on it.

00:22:09:03 – 00:22:39:20
Kyle Pearce
What we’re going to do is we’re going to go, listen, let’s get taxed in the corporation at 12.2%. Let’s get that money sheltered. Now let’s give you the opportunity to leverage against that asset to buy other assets inside your corporation in the meantime. And when it makes sense, when this structure can actually be helpful to you, we can then put it in place and start getting you some income in your pocket without having to pay that dividend or salary tax like you might currently be doing now.

00:22:40:01 – 00:23:02:12
Jon Orr
Right. So what I’m hearing is like, I think some people have that same mindset that if I was a regular employee, a T for employee for a long time and I transitioned to owning my own corporation, or I’m in that situation now exactly like ours situation, should I continue with the same future strategies of retirement, thinking about making sure that I’m safe?

00:23:02:12 – 00:23:35:23
Jon Orr
And that idea was always like, give yourself a salary, take that money, put it in rupees, maxed out your tax free savings account, get those investments rolling in that all on the personal side so that when you need it, you can have access to it personally. But what you’re coaching our clients to do and when we’re getting on meetings with them, it’s leave it up there, leave it in the corporation because we have so much more flexibility that way and only pay yourself really through dividend or salary, depending on how much makes sense based off your needs.

00:23:36:00 – 00:23:58:15
Jon Orr
But don’t start funneling money down yet for future retirement. Leave it there. Let’s create a retirement plan up at that level that maximizes the amount of money, maximizes your leverage, minimizes tax, that still gives you that safety and still gives you that amount that you really need when you go, I’m ready to retire. That makes sense.

00:23:58:17 – 00:24:17:17
Kyle Pearce
Totally. You know, I think, too, sometimes for clients when they’re using this idea, right, when they’re, let’s say, draining, I call it like draining the corporation and sort of like what you’re doing is you’re just putting your hands up and saying, I’m going to drain all the money out, be it through dividend or salary. It’s usually a salary, right?

00:24:17:17 – 00:24:34:04
Kyle Pearce
Because then this goal is, Oh, the other thing we didn’t talk about, if you take a dividend, you’re not getting any more RRSP room. You only have what you have from any of that for salaried work that you’ve done in the past. So by doing a salary, people are thinking, Well, I get RSP room, so that’s a good thing.

00:24:34:06 – 00:24:56:07
Kyle Pearce
Well, one of the negatives, if I keep draining my company and my goal is to try to stuff as much into my RSP as possible. Sure, I get the tax refund now, but I have to pay tax on it later. I give up my capital gains exemption on any growth rate. So if you own assets outside of an RSP, you’re going to pay on half of the gain, right?

00:24:56:07 – 00:25:30:05
Kyle Pearce
So you’ll pay your personal tax level on half the gains. So call it 25% ish maximum, whereas inside the RSP, you’re giving that away because there is no exemption. You just when you take income out, it just counts as income on your personal tax return. So there’s that issue there. But then think about this issue. If you’re running a business and I keep draining my available capital out of my corporation each and every year, and then I throw it up into an RSP or I throw it into maybe some other assets that are hard to access, right?

00:25:30:07 – 00:25:54:12
Kyle Pearce
And then my business has a down year and I need money. I need capital for replacing assets, for replacing equipment for we just don’t have enough sales coming in. I need it for like lifestyle actually needs some of those retained earnings for my lifestyle. Well if I kept draining my account, like think about this. I take 500,000. I take it out, I basically gift almost half of that away to the government.

00:25:54:18 – 00:26:17:07
Kyle Pearce
I stuff as much as I can in the RSP, get a little bit of a tax credit back. I’m left with probably around half, maybe a little more than half of that 500,000. Whereas if I use appropriate strategy inside the corporation using an asset like a permanent life insurance policy, you’re now going to have access to the vast majority of that capital in year one.

00:26:17:13 – 00:26:40:00
Kyle Pearce
And as every year goes on, you’re going to get access to more and more and more. And then eventually the beauty is when you get to like year five and six, when you put in a certain amount of money each year and you have access now to more money inside the corporation that you can leverage, that you can use if you need to upgrade something in the corporation, if you need an investment, you don’t necessarily have to go to a bank.

00:26:40:00 – 00:26:59:17
Kyle Pearce
I’m still going to try to go to a bank. Right. But it’s nice to know that I have this backstop here in case business gets slow, in case things change for me in life, in case I want to invest in some other types of assets, I have more money to reinvest rather than cutting it down. I like to think of it as like you take a tree and then you like.

00:26:59:22 – 00:27:21:04
Kyle Pearce
I guess trees don’t really work like this, but if you chop it down halfway and then you want to start growing it from there, that’s not super helpful, right? You want to have as much of that capital available to you to start growing and sheltering and then re leveraging as you need it. And once again, for a lot of people are thinking, well, I know the money’s got to get taxed coming out of the corporation anyway.

00:27:21:04 – 00:27:40:04
Kyle Pearce
Like if that’s the mindset, then it makes sense that that’s what you’re doing. So again, I don’t want to say like an accountant’s wrong for saying to do those things because they’re going with what they know and they’re going with what they’ve always done. But if there’s a strategy that you can actually avoid doing some of that to grow this.

00:27:40:06 – 00:28:06:03
Kyle Pearce
And then also if you pick the right team to help support you with structures that are compliant and that you can apply me to actually help you to avoid having to gift half of it away. When you do choose to take out some or all of that capital later in life, that right there is the winning wealth creation strategy for incorporated business owners.

00:28:06:03 – 00:28:29:12
Jon Orr
Love it, Love it. So if you think about in recap we wanted to address should I take a dividend, should I take a salary? We talked about both kind of options. We talked about what makes the most sense as a business owner operator. And you still have to, I think, have to make that call yourself. But our goal here was to give you more insight on options that you may or may not have realized you had.

00:28:29:14 – 00:28:57:15
Jon Orr
And our job here is to kind of fill you in on some of the secret sources that we’re applying in our business is to minimize tax and maximize our wealth generation strategy. So we were kind of passing that on to you and to help you kind of keep that thinking going. And if you need some more thinking, you need some help on that thinking, then reach out to us at Canadian well secrets dot com For such discovery we’d be happy to hop on a call look at your unique situation, your unique constraints, and develop a plan forward for you.

00:28:57:15 – 00:29:09:08
Jon Orr
That’s what we do day in and day out with our clients is strategize their best, move forward and we’d be happy to do that with you so Canadian well secrets dot com for such discovery book a call and we can look at your situation.

00:29:09:10 – 00:29:28:02
Kyle Pearce
I love it I love it friends if you found this helpful do us a favor and share the podcast in the same way that it was shared with you. Maybe you stumbled upon it. Hit the Shane button, hit the share button wherever you found that. Know that we are here to try to help more people solve the same problems that we ran into.

00:29:28:03 – 00:29:48:16
Kyle Pearce
Right? We’ve talked about it before, both John, my business partner and as well as Matt, my real estate business partner as well. We ran into an issue where we were not satisfied with simply taking money out of the corporation and giving essentially half of it away. We knew there had to be a better way. So we’ve gone down this rabbit hole.

00:29:48:18 – 00:30:12:09
Kyle Pearce
We’ve done a lot of work with a lot of other business owners that are a lot like us, but also some that are very different than us. And we look at your scenario, try to figure out what are your goals, because that’s really important. One thing that I’ve never heard on a call, though, John, and I’m sure you’ve heard me say it before, is I’ve never heard a business owner say my goal is to try to give away half of what I’ve earned for my corporation as fast as possible.

00:30:12:11 – 00:30:42:06
Kyle Pearce
So what I would rather and what I think they really want is how do I save more taxes, be it now, if possible, as many times for those with lots of retained earnings, I say lots, you know, over $250,000 in retained earnings or so, the more the better the scenario is for you. We can help you out with a unique structure that is compliant and that essentially will get you a independent tax opinion on the structure.

00:30:42:12 – 00:31:03:17
Kyle Pearce
That’s something that you’re not going to get from a lot of other advisors. They’ll explain something at a high level to you and then they’ll set you off to kind of put all the pieces together. That is a house of cards waiting to fall, be it through right away, having an issue with the CRA being audited. And if that sort of thing happens, then there’s a lot of tax penalties.

00:31:03:17 – 00:31:28:00
Kyle Pearce
So you’re going to find that a lot of accountants out there, they don’t want to go near these types of strategies and they don’t want to advise on them. That’s why we do this work. We bring the strategy, we bring your accountant up to speed and we make you go get the independent tax opinion from a legal firm of your choosing to ensure that you’ve got all the layers of protection ready to roll for you.

00:31:28:00 – 00:31:49:18
Kyle Pearce
So once again, Canadian wealth secrets dot com forward slash discovery and friends we will see you on the next show.

00:31:49:20 – 00:31:58:15
Jon Orr
Just as a reminder of the contact you heard here today is for informational purposes only stock is through any such information or other materials legal tax, investment, financial or other advice.

00:31:58:17 – 00:32:17:24
Kyle Pearce
John or is a mortgage agent with bricks. Mortgage License number m23006803. Kyle Pierce is a licensed life and accident and sickness insurance agent and wealth management consultant with the Pain 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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