A Different Tax-Free Savings Account in Canada

Mr.

Client, Mr. Prospect. Yeah, the money's growing right now and that is good. It's good that the money's growing right now, but what is it actually doing for you in your life? What is it helping you to achieve? He's like, nothing, really. I said, right now, when an opportunity or a problem shows up and you need to solve that problem with this thing called capital, if you access the money from the tax free savings account, what then happens to that growth that's happening now? What happens to that growth? Oh, it goes away. I said, yeah. And how long does it go away for? Forever. I said, ah, so what I want to do is show you how to grow money. He likes the tax free stuff. Let's show you how to grow some money tax free now, but forever without giving up the actual access to the cash. When you access that capital, we don't interrupt the growth.

We're here for some fun. And today we're going to have a topic. The topic is going to be the original tax free savings account in Canada. And you'd be amazed at how we were able to determine that this was a topic we wanted to go over today. It happened about three minutes ago, right, Vern?

You bet. Yeah. Yeah, it's, it's good stuff. I like the, I like the topic, Rich, that you picked. It's really good.

It, it's fun how these things kind of come up because we're always, I mean, we do produce a lot of content, but, and there's lots of things that we want to talk about. But sometimes until you get on the line with someone and you start, you know, discussing what's been going on with them, you know, what something that's come up in a recent client meeting or conversation, what's a question that you receive, maybe in an email, you really start to think about, oh, maybe what's important for people, what should we be going over kind of today? And so that's sort of what happened as we, you know, settled on this idea of the tax free savings account. Now, Canadians obviously are familiar with the tax free savings account, and, and really, as far as registered instruments go, Registered meaning that it's registered with the government. The government knows about it. They've, you know, you got to fill in a bunch of paperwork to open up one of those accounts, which is basically saying, hey, let's tell everyone at, you know, that we have this account. And although it's free now, maybe who knows what it'll be one day in the future and how much you can put into it versus Not. And they, they, they go and they change the rules every once in a while. So the rules are governed and managed by the powers that be, not by the individual. And so nothing wrong with that account. It just, it just is what it is. And it has a variety of characteristics. And most Canadians are starting to learn and be aware that it's actually not really a quote unquote savings account. It's actually an account that you can, you can invest money in, you can put money into investments. The problem is when we go and invest the money, we're not really saving it anymore. We're investing it with the risk of loss, which means it's not real, true savings. Savings should only be something that is, isn't suspect to the risk of loss ultimately. And so there's a misnomer, a misclassification, as Nelson Nash would say. He says you really begin to understand things much better in the world when you classify them properly. For instance, he would say that dividend paying whole life insurance was misclassified. They shouldn't call it whole life insurance. They should have called it a personal monetary system with a death benefit thrown in on the side for good measure. But that would be a really long obnoxious kind of name. We would need some kind of a creative acronym for it. And so classification is very important. But on that note, you know, Vern, you had a recent conversation with somebody and you know they have a tax free savings account and they're looking at sources and funding and how to get set up with the process of becoming your own banker. They're ready to take that step. They've done their research, they've watched a ton of content, they've read Nelson's book. Walk everybody through how that conversation progressed. Cause, you know, my understanding is that you've had an initial, you know, maybe meeting or two, and now you're really at this point where you're in the planning, design phases of trying to implement something for this individual and their family based on their dynamics, their objectives that they've, they've discovered with you.

Yeah, yeah, that's really good, Rich. First of all, I got to give you a big green check mark there. You took the words right out of my mouth. I love that you touched, based on the misclassification because I always, I always touch base with, on that, with people when I talk about, we talk about tax free savings accounts. What's that other thing? Registered retirement, retirement savings plan like? Hold on a second, wait a minute. Aren't we, aren't we sticking that money into the Big old slot machine called Bay Street. Like there's risk there, right? There's nothing wrong with investing money, but we need to be clear about what we're actually doing. Are you saving for retirement or are you investing for retirement? It's just something to think about. Like, why on earth would they have called it a registered retirement savings plan? But we don't need to go there. It's just interesting to think about. But yeah, so the conversation that I was having with the client is, you know, a lot, a lot of really good stuff. Like he, he is grasping the concept in the possibility of becoming your own banker. He's starting to grasp it and see what, what the potential benefits are for him and his family. And it's all about, to me, what. One of the things that I like to talk to families about is like, let's get creative. You have these big grand goals. Of course, of course we want to pay off the mortgage. Of course we want to enjoy passive income time. Of course we want to help the kids fund their education or finance their first vehicle or whatever those large expenses are. And that's sometimes what happens when people consume content and they hear about the process of becoming your own bank. Or the infinite banking concept being all about, you know, financing the major things that we need throughout our life, like cars and appliances and vacations and retirements. That's true, but isn't like living expenses? Isn't that a major thing that we need to finance throughout our lifetime, like.

40% of where all your money goes?

I eat a lot of gum, Rich. It's a costly habit that I have. Right. So this is an example of like, it is all about all those things, of course, but. And everything. Everything that we do financially today is a function of banking. It requires the process of banking. And that's kind of where we got at a crossroads. Not in a bad way, but where he really had to go and think. And that's what I advised him and his wife to do. It was interesting because he's the, quote, money guy and he's the one who did all the research and he's doing well. It's nothing bad. But what was interesting is she's like, oh, she kept deferring to him a lot. But we're having this conversation and she's the one now who's tipping the scales and really understanding it and she's starting to explain things. No, we have to do this because of, if I'm understanding this right, isn't it this, this and this, and. And he's Going. And he's grappling with it because sometimes when we're armed with knowledge, it's almost like we're too smart. We have to unlearn things, right? So we're talking about, you know, they want to get rid of the mortgage. So we're talking about potentially restructuring the mortgage and finding ways to free up some cash so we have more cash available to put more money to work, to achieve more objectives, and have left less trapped in equity and things like that. Right? And so we, so we get to the point now where it's like, okay, well, let's determine how much capital we want to deposit. Where is that capital going to come from? And so I said, hey, look, I'm seeing this really nice pool that you guys have been able to accumulate in this thing called a tax free savings account. And then he was kind of like, kind of turned his head a little bit and he started. He said to me, he goes, yeah, Vern, I hear what you're saying. He goes, I just want, you know, tax free savings account is doing really well. Like, I don't really want to access that money because it's growing. I said, oh, interesting. This is where the conversation in my mind gets good and where you have to really think. And this is where I started the call talking to you, Rich. I said to him, I said, look, it's good that the tax free savings account is growing. And I made that little joke about, you know, you know, that's a registered account, right? So it means that, you know, do you want the government peeking through your curtains and seeing what's going on in your kitchen, or do you want a little privacy? Right? You got to think about these things, right? And so we just kind of laughed about it. But I said. And he goes, yeah, privacy is good. But he said, but the money's growing. I said, yeah, Mr. Client, Mr. Prospect. Yeah, the money's growing right now. And that is good. It's good that the money's growing right now. But what is it actually doing for you in your life? What is it helping you to achieve? He's like, nothing, really. I said, right now, when an opportunity or a problem shows up and you need to solve that problem with this thing called capital, if you access the money from the tax free savings account, what then happens to that growth that's happening now? What happens to that growth? Oh, it goes away. I said, yeah, and how long does it go away for?

Forever.

I said, ah, so what I want to do is show you how to grow money. He likes the tax free stuff. Let's show you how to grow some money tax free now, but forever without giving up the actual access to the cash. When we access that capital, we don't interrupt the growth. Now the other, I don't, I don't know if I'm going on a rant here, Rich, but the other key point that I wanted to point out to him is how did you actually get the money in the tax free savings account in the first place? This is the thing that I really wanted to boil down. Where a lot of people really struggle with this process is because we're just so conditioned to think about products. Oh, I'm buying this product called a whole life policy. Yeah, that's just a tool that we're using to implement something that you do every single day called banking. Anything that you do financially today requires the process of banking and somebody else is the banker. And do you think banks are doing this stuff for free or are they making some money along the way? They're making lots of money. So to get the money even into the tax free savings account, it's a transaction, it's a function of banking. And that money likely came from your hard earned dollars. It didn't come from your private banking system, it came from your hard earned dollars. And now you're storing it in someone else's bank, in someone else's control. And that's the thing that I really wanted to boil down with him is like, I'm not losing the option to use a tax free savings account. I'm just going to change the process by which I capitalize the thing.

Right.

Or whatever other objective that I have.

What's interesting about a couple of things you, you identified, Vern, is that, you know, in this case specifically, the, the account was growing. And so, yeah, obviously the account's doing well. Nobody wants to, nobody wants to shut down where things are going well. And, and we're not saying that anyone should do that. However, you're, what you're really focusing on is the thinking method, the thinking process. And it's not about that we're going to go and collapse that account. It's that if you have access to the money, what do you want to do with the money where it can be operating in its most efficient way for you? You decide there's multiple things you can do. And if you have, you know, as an example, you've got a bag of a stock portfolio. It's called 10 different stocks in a portfolio. Maybe most of them are doing well. So the account is you know, in an upward trajectory. Well, if you can have a reasonably good amount of timing between things. If you, as an example, let's say you sold them in a profit position so you get to harvest some of your profits, money comes out and it now goes into a policy system. And then you can liberate a bunch of that money again using a policy loan. And then you can chunk it right back into the same account and repurchase the exact same stocks at a similar or close value. If you're watching yourself, you'll have an idea when those values make sense. And if you've already harvested profits now you're just putting it back in so that you can re up for future profits. But you've now stored and contained that value, some of those profits inside of a system where they cannot be lost at a future market turn or market event. You're getting proper tax free protection for your entire family in that situation in the same transaction. And you now have perpetual motion on that money that was once in some other location where it could do the job of one. Now it's actually doing the job of three because it's in the insurance contract. So it's always growing. There's a tax free death benefit included and you were able to access money to go plunk it right back into the other thing. So you've turned $1 or one format of capital where it was located doing the job of one thing into doing the job of three things. And yeah, there's some more dynamics in there and that's, that's more on a one on one specific kind of case with people. But to get your brain wrapped around the fact that you can multitask money in a very efficient way because of the power of leverage. Now people think that power leverage is pretty powerful. Well, it is because it's a lever. You know, you can, you can do a lot of work on a, with a fulcrum. Well, the insurance policy operates like the fulcrum in your life and it allows you to do a lot of things because with, with, with us, with a, with the lever that's in place, you can have your capital growing. Your money is inside the policy. You get to use the insurance company money, which is opm, other people's money, to now access and go put it to work in other places. Yes, the insurance company charges a little bit of interest. While you co own the company, you co own the lender. They do that for the benefit of every single person that's a co owner. No one else can benefit from it quite literally there's not another soul that can benefit from that interest that's charged other than the people that are co owners of that company, period. It's free contract, I repeat free contract with other free people all throughout the country who are voluntarily, no one's forcing, putting a gun to your head, forcing you to do business with his insurance company. They're voluntarily choosing to do business there and also mutually profit in those dividends and profits that are shared. Now we said that this is the original tax free savings account. What do we mean by that? Well, these insurance contracts have been in place dating all the way back to 1847 in Canada. That's before the signing of the British North America act which made Canada officially an independent United States know basically nation. We didn't have our constitution sign until much later than that. But we, you know, so before Canada basically was its was an ind was had some level of independence from the British, you know, empire etc. We've been having these profitable whole life insurance policies. Policies are allowing cash values to grow tax exempt. They're exempt from any accrual taxation, any annual taxation that builds on them. As long as we, we're are not overstuffing the contract with too much money so it stays as an insurance vehicle and it doesn't become an investment vehicle, which it is not. It should not be confused as one. And every day that you truck forward that money can be accessed in a variety of ways which can be tax free as long as you have a good coach who can explain how to do that. And eventually all the money that gets stored in there is materialized tax free. When somebody dies, hey, there's two truths in life. We know for a fact that there's going to be taxes and there's going to be death. Great. If we know these two things are going to happen and they're fundamentally unchangeable basically in our human existence as Canadians, why wouldn't you want to solve for those two problems? Well, one of the ways you can solve for them, you have an absolute known event. It's like man, I know that two weeks from now my transmission is going to blow up in my car, burn. I know I had a premonition in a dream last night that I'm going to be driving down whatever the Anthony Henday in Edmonton and it's just gonna blow up and go into flames. And not in a way that I'm gonna be hurt but I'm gonna be stuck on the road, on the highway, on my cell phone. Traffic's buzzing by me waiting for AMA to come and tow me to some mechanic. Well, if you know that problem's gonna happen, wouldn't you want to go take it to the mechanic first and have them assess maybe what's going on with your transmission? Maybe you need to do transmission flush or whatever. Whatever you need to do to kind of solve that problem if you know what's going to happen. Well, you know you're going to die. I know what, Vern, I'm pretty sure you know it. Right. You're not, you're not going to. You're not going to escape it. You know, you're not Houdini, last time I checked.

Not looking forward to it, but I know it's going to happen.

It's going to happen. Okay, cool. Well, let's just be honest about it. Let's just call a spade a spade.

Boom.

Death is going to happen. It's going to show up. Sorry, you're watching. This is going to happen to you. Sorry. Hate to be the bearer of bad news. Get over it. You know it's going to happen. Plan for it. It's so, it's so simple to just think, oh, well, you know, that makes sense. Of course I'm going to die. What would happen if I just put a little bit of energy in my entire financial life and existence into planning for that event and did it in the most efficient way, and if I can also do it where I can personally be profitable for my entire family and solve for that problem in a way where I get to use all of the money before I die. So it's for living, not for dying. But it also has the added benefit of being there for dying.

Rich. That was amazing. I love the analogy. First of all, you touched on something really important because sometimes things get muddy. Yeah. I was not in any way, shape or form suggesting that, hey, don't do this, do this.

Right.

I was exactly what you're pointing to. I was pointing to the. And process. Right. We're not just, oh, become your own banker and don't put money in a TFSA or real estate or cryptos or whatever it is that you want to do. Pay off debt, whatever you can do all of that. It's just the process, the function that I wanted to point to. So thank you for making that clear. And the other thing is just that, that analogy, like, if you have that crystal ball, like, you actually know something's going to happen. Like if you knew a tsunami was going to hit, you know, in a couple of weeks, maybe you want to take some preparation and leave town. Right. Like, unfortunately, a lot of times people don't know that that's going to happen. But if you know death is going to occur and you know, taxes are going to occur and you can do something today to plan for it, that's such a good analogy of like, if you knew your transmission was going to blow up, you're clearly not just going to run the governor.

Right.

And just hope that maybe it's not going to happen. Somebody already told you it's going to happen, you're going to plan for it ahead of time. So that was really good. I would have liked to know that.

The last time I had a transmission blow up, which, you know, happened in a, the previous minivan that I own. Yes, I'm a minivan guy. I have young kids and in fact I'm a proud minivan owner. But it's, it's exactly. That's a problem that shows up. You, you don't know what happened. So you're dealing with a react, you're being reactionary. When problems show up in our life, usually they're unexpected and we're in a reactionary mode. We're not in a proactive mode. When you can approach things from a proactive standpoint, it's like, okay, every year there's going to be Christmas. You probably need to get some Christmas presents for your family. Well, some of us will be last minute shoppers on the 24th or whatever trying to get the shelves that are picked clean and find something that maybe sort of will work. But additionally, we're also running into the month of December was like, okay, well there's all those Christmas parties, there's the company party, there's this party, the spouse's party that the kids have, you know, parties and they've got the, you know, the recitals and all the things, you know, the Christmas concert. And it's like a super busy, busy time of our life. Plus you also need to go do some shopping, etc. Etc. Etc. And the other thing that happens is your bank account drains because you spend more money than you think you're going to spend in December. Because we don't plan ahead for it. But it happens every year. Every single year. Like Christmas, it's on the same day of every single year. So maybe you could do some planning for that. Make maybe set 150 bucks a month aside or 100 bucks a month, I don't know, maybe as a policy, loan repayment, maybe as capitalization into a policy so that when Christmas Comes, yeah, you can use your credit card, use visa, use MasterCard. And then come January, a policy loan comes out and boom, you pay off those guys, you get all the points. You don't pay any interest to them. You're going to pay a little bit of interest, life company, but not much. And you're saving the same amount of money that you're going to plan to spend for next Christmas as a loan repayment. You're being very efficient, methodical, and you're controlling the dynamic of your life around a known event. Now, it's just one example, but there's many area, other areas of our life that are like that. And because of poor planning, we end up going into reactionary mode which is just, you know, it ends up being a natural status for people in life. And one of the things you identified, Vern, as we're talking about this, this tax free savings account and everything is again, it's, it's, it's, it's an investment vehicle. Most people have it in investments. Some people have them stuck in a D GIC or savings account actually doing nothing, which is, which is completely ludicrous because you're saving tax on, not on no growth, which doesn't make any sense whatsoever. But if, if somebody has an account, they got a, an RSP account, they got a TFSA account, they have a pension account, a lira, these are all fine. There's nothing wrong with any of these vehicles. However, death is coming when it happens. There's a different tax treatment and more importantly, there's a different amount of money that comes out. Now we can't predict the day, but if we kick the bucket. So right now the markets are kind of in the tank. For the Last kind of 30 days there's been like a big shift.

Markets were up.

Now the markets, you know, the stock market, everything is in the tank. Cryptocurrency markets, you know. You know, in the tank. I mean, I personally think it's going to go back, but that's just me as an individual. What, what happens though, if I, if I were to kick the bucket today and I had a bunch of my money in all that stuff, my registered accounts, my tfsa, my, my lira, all this stuff is in this marketplace and it's in the tank and now I die, well, the amount that's going to come out is going to be a lot lower amount. And if I don't have insurance, there's not going to be a tax free event that shows up to solve problems. Whereas if I have the insurance in place because I do know I'm going to die and I know there's going to be a taxable event. When that happens, that's problems now solved. And I can still access money and go do each of the other things that's happening. If I still want to have money in the market, I can do that. If the market's down, oh, well, boom, the insurance comes in and fills the gap. So it's again, we're talking about multitasking, the usage of capital, being able to have a dollar, do more things, more than one job for you throughout your lifetime. And it can expand beyond your lifetime if you have kids or grandkids.

Most people want to have something exit on the back end. It doesn't always happen that way. Often the biggest beneficiary of your lifetime money that's left over isn't your family. It's a legal team probate or the government. Because CRA says, boom, boom, boom, knock on the door, here's how much you owe us on your final tax bill. So who do you want to be the biggest beneficiary? Probably the people you love and care about.