The Canadian Wealth Dilemma: Pay Off Debt or Save on Taxes?

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Are you looking to minimize your taxes while maximizing your wealth, but feeling stuck between conflicting financial priorities?

In today’s financial landscape, many professionals and business owners find themselves juggling multiple goals — building wealth, managing debt, and minimizing taxes. With inflation, interest rates, and tax obligations pulling you in different directions, making the right decision can feel overwhelming. 

This episode dives deep into a real-life case study, exploring how a mortgage broker is handling these very challenges, offering insights that may apply directly to your situation.

Whether you’re trying to figure out how to pay off debt, save on taxes, or grow your wealth efficiently, this episode provides strategies to help you balance these conflicting goals. Through thoughtful analysis and practical tips, you’ll gain a better understanding of how to navigate your financial journey with clarity and confidence.

• Learn the strategic trade-offs between paying off debt and minimizing taxes.
• Discover how inflation and interest rates can actually work in your favor when managing debt.
• Gain insights into building a team and business structure that generates income without needing your constant involvement.

Listen now to learn how to optimize your wealth strategy by understanding the trade off between paying off debt and minimizing taxes so you can start making smarter financial moves today!

Resources:

• Corporate Investment Income Taxes 2024 [Ernst & Young]
• Corporate Income Tax Rates 2024 [TaxTips.ca]
• Like this short, “Wealth Secret Sauce” Episode? Tell us in your rating and review on Apple Podcasts. 
• Dig into our Ultimate Investment Book List
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you take the next step in your Canadian Wealth Building Journey!
• Follow/Connect with us on social media for daily posts and conversations about business, finance, and investment on LinkedIn, Instagram, Facebook [Kyle’s Profile, Our Business Page], TikTok and TwitterX.
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon for your Ontario Mortgage needs so he can share some options.

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.

As a business owner or entrepreneur, managing debt while navigating inflation and fluctuating interest rates can be challenging. Whether you’re focused on active or passive income streams, understanding how to leverage Canadian passive income, corporate investment income, and strategies like infinite banking can help you minimize income taxes. From retirement planning to exploring options like permanent or universal life insurance, this episode covers key approaches to optimizing your financial situation under CRA guidelines, keeping tax rates low, and building a secure future.

Watch Now!

Transcript:

Hey there, Canadian Wealth secret seekers. It’s Kyle here with another secret sauce episode. We are not gonna waste any time and we’re gonna dig right into a case study today to overview a particular listener who reached out for a discovery call and provided some context ahead of the call.

I have still not yet met this individual. We’re going to keep things anonymous here, but I’m going to share the context because we can all learn something from each individual scenario. Some of these ideas or challenges may apply to you in some way. Of course, every person’s scenario is different, so don’t take any of this as advice — investment, tax, or legal advice. Use this as a perspective for your own situation, and it might have you thinking differently about some of the things you’re either doing or were thinking about doing moving forward.

I’m not gonna waste any time here. I’m going to bring this up on the screen, and I’ve blanked out all the information, so it’s completely anonymous here. This is a listener who reached out for a discovery call and has provided some context. This person is a mortgage broker, licensed in multiple provinces, and has been doing this for three years. They’ve had some success, funding $22 million in mortgages so far, and this individual is starting their own team, which is awesome to hear.

At the end of the email, it talks about the idea of not worrying about income and being able to take time off and enjoy life. Number one, first and foremost, if you are a business owner, it’s important to find a way to build out a team so that you aren’t always working in the business. For example, if you’re the mortgage agent or broker and you stop working, you stop earning income. But if you build out a team, the business can keep running even when you’re not actively working.

This applies to real estate agents, financial professionals, and many other businesses. If you can build a business that can operate without you physically being there, then you’re in good shape. Real estate is another example where this can work. If you have a great property management team, or work with a great property manager, you won’t need to be there for the day-to-day. You don’t need to worry about how things get done — it’s about who you have to do the work.

That idea comes from the book “Who Not How” by Dan Sullivan, which is on our great investment book list at canadianwealthsecrets.com/books. “Who Not How” is a great business book, and I consider a business to be one of the greatest investments you can make. It’s not tied to stock market fluctuations — you’re focused on cash flow instead.

First and foremost, I’d say that this individual should continue to build out that team and focus a lot of effort on that. This person has been incorporated since September 2023, and they went to an accountant to figure out tax minimization advice. However, they felt that the accountant wasn’t very helpful. They didn’t get clear answers on tax minimization.

As we’ve said before, accountants are there to account for what you’ve done rather than suggest strategies, like “go buy this” or “do that.” They can give some general advice, but they don’t want to be on the hook for giving specific tax minimization strategies.

This individual takes a $2,000 monthly salary and has a spouse who earns a different income. They don’t need a lot of cash from the business, which is great. They take $2,000 a month as a salary, and dividends from the corporation are around $20,000 per year. I might suggest increasing the salary rather than relying on dividends, as there’s still room in the salary tax brackets where it wouldn’t hurt too much on the tax side.

There’s about $50,000 in the corporation that isn’t being used. Their home is worth about $700,000 with a mortgage balance of about $340,000. The loan-to-value is under 50%, so they’re not over-leveraged. Their interest rate is 1.74%, which is fantastic, but it expires in November 2025.

One benefit is that the Bank of Canada has been decreasing rates, and it looks like more cuts are coming, which could work in their favor when the rate needs to be renewed. They have access to a home equity line of credit, which is great for emergencies. I’d argue that keeping the mortgage as-is and continuing to pay it down is probably the best move for now.

They also mention having permanent life insurance policies for both themselves and their children, which is great. The question they have now is about tax minimization and paying off the mortgage. But here’s the conflict: they want tax minimization and they want to pay off the mortgage to avoid paying interest.

Since they’re taking about $3,000 a month from the corporation, there’s room to increase their salary, but paying off the mortgage would mean pulling more money from the corporation, which would result in more personal taxes. The interest they’re paying on the mortgage, at 1.74%, is significantly lower than the taxes they’d pay. Even if the mortgage rate goes up, it still likely makes sense to focus on minimizing taxes rather than rushing to pay off the mortgage.

The money you have is actually losing value faster than the interest you’re paying due to inflation. This means if you hold onto the mortgage, you’re essentially making money, in a way. Paying off the mortgage now may not be the best move if you want to maximize your financial strategy.

For student debt, if it has a higher interest rate, say 6-8%, it might make sense to pay that down first. But if the government offers 0% interest, I’d suggest holding onto that as long as possible and investing the funds elsewhere. If this $50,000 in the corporation isn’t needed immediately, they could consider using corporate-owned life insurance, structured to have a high early cash value, for liquidity or emergencies.

If the money is needed immediately to pay down high-interest student debt, permanent life insurance may not be the best option yet. It depends on the interest rate on that student loan.

In summary, for this particular case, we’re looking at conflicting priorities between tax minimization and debt repayment. They need to evaluate which debts are most costly and use personal after-tax dollars first to pay those off, especially if pulling more money out of the corporation would result in significant personal taxes.

That’s the secret sauce for today. What kind of debt do you have? Does it make sense to keep that debt? Should you invest your dollars to earn a higher rate of return, using the cash flow to pay down debt? If interest rates are high, it might make sense to pay down aggressively. If there’s T4 income in the household, we want to rely on that first before pulling money from the corporation and paying unnecessary taxes.

Hopefully, you found this episode helpful. If you did, please share the podcast and leave us a rating or review. Finally, if you’d like to have your scenario reviewed, visit canadianwealthsecrets.com/discovery to set up a call.

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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