Can Corporate Owned Whole Life Insurance Help Business Owners Pay Less Tax?

And taxes aren't something that happen to you once a year. They happen when you make all of those financial decisions every day, and every single one of those decisions has tax consequences. They don't discover those consequences until after the decision has already been made. The real question is, did I know all of my options before I made the decision? Tonight is not about taxes. It, it, it's, um, it's all about creating better options. And that's why Ascendant Tax Advisory was born. Think, think about it. We buy assets, we, uh, we sell assets, borrow money, expand our businesses, invest capital. We plan for retirement, we plan for our kids, and every single one of those decisions has tax consequences. And so what if that could change? What if instead of looking backward, you begin making financial decisions with a coordinated strategy before the decision is ever finalized? Let's— what I want to do is I want to talk a little bit about the, the missing piece in terms of why some people build wealth faster than others. And the best way for me to introduce this, I just want to invite you into a story. And now you can replace two business owners with— think of your own profession, whatever it is that you do. Two mechanics, two different futures. Two attorneys, two different futures. Two doctors, two different futures. I want to invite you into this story, but I really want you to replace business owners with what's applicable to you. And given that we have a large number of business owners on tonight, this is really going to resonate extremely well with you. Now, I want to talk a bit about Mike and Mark. So each of these two business owners, they own businesses generating $250 grand in annual surplus cash. Now, Mike, so he follows a path that, that feels real familiar. He accumulates cash in operating accounts. He's deploying money into traditional investments. And when there's high-caliber opportunities that track him down, he's withdrawing or he's partially or fully liquidating assets to, to take advantage of those high-caliber opportunities. And he just repeats that over and over and over again. And when he needs assets for his business that have a shelf life and have to be replaced periodically, His, uh, his accountant had encouraged him to create a sinking fund where he would pile up money in an account and have just the right amount ready to go for when the asset needed to be replaced in his business. He could simply withdraw the money from the account, pay cash for the asset, and carry on in growing his business. Now Mark, he took a different approach. He built a system that was primarily— the objective was to preserve liquidity. Uh, he wanted to reduce friction in the utilization of money in the business and personally, and he wanted to keep capital compounding without any interference or any interruption. He wanted to do that on demand, on his terms. And the caveat that he agreed to was that he would not trigger a taxable event when he needed access to capital. He wouldn't reduce the asset's value, and he would be able to take advantage of the high-caliber opportunity or acquire the asset he would be able to do all of that on demand, on his terms. And you'll notice I haven't told you what Mark did, and that's intentional because tonight isn't about a product, it's about a different way of thinking. Am I going to share what Mark did? Yes, just not yet. I, I want you to think about your thinking as we work through this. Now, Mike and Mark had the very same amount of net income, the very same amount, that cash surplus on an annual basis, $250,000. They're both earning the same profit. They've got the same accountant. They just made different decisions. And 10 years later, looking at what Mike and Mark had achieved, one of the two of them had accumulated significantly more wealth. Why? Every single dollar that flows through your hands or flows through your business, it has 4 possible destinations, okay? It— you can either spend it, invest it, pay tax on it, or drum roll, you can position it. What did Mark buy? It wasn't better investments or a better business or, or higher income. He created better options. The difference wasn't income. But imagine trying to fill up your bathtub when someone keeps pulling the drain plug. Most people think they need a bigger hose. What if you just understood how to get that plug in there and keep it there? That is just a different option. The difference for Mark is where the money resided, and, and your money must reside somewhere. The difference for Mark was how he accessed capital. The difference was how much friction it removed, created a very peaceful, stress-free way of, of life financially. Whose future do you want? Here's the deal: Mike wasn't trapped. Mike just didn't know the path that Mark took even existed. And this is— I'm referring to everybody. If we had an opportunity to go into business together and I sat down with you and I said, um, here's the deal, we're going to go into business together and you're going to put up all the capital, you're going to take all the risk, and at some point now you can liquidate some or all of the business at any time that you choose. But before you do that, each time. You have to get in touch with me, and I will let you know at that time how much of our business I own. If you would go into business with me under those conditions, I know that's not a business arrangement I would want to go into. People, uh, you know, they, they, they go down that road of registered tax-qualified plans, retirement accounts. Is there anything wrong with that? No. There isn't anything wrong with that. But here's, here's something that so many people that I talk to don't really have a deep understanding, is that if you think about, think about from this perspective, and Bob can certainly expand on this, I think personally that a real deduction is one that you keep. That's just my perspective. A real deduction is one that you keep. And if you're putting money into these tax-qualified plans, it's not really a deduction, it's an exclusion from income. And, and from my perspective, that's a loan that you're taking from the government that you'll have to repay at the worst possible time. And, and you don't even know what the tax calculation is going to be. Bob doesn't know that either, and nobody on his team knows that either. But let me ask you a question: do you believe that taxes will go lower in the future? You may not be aware, in the United States, you're, you're, for example, you're in the one of the lowest tax environments you've ever been in. And so even if Canada, America, doesn't matter, even if The tax situation remained exactly the same. If the taxable account is growing, the tax problem is growing. Actually, Kai, I actually like how I phrase that. And so when you think about it from that vantage point, if you can get growing and compounding in a taxable account and you can get growing and compounding in a tax-free account? Where do you want the capital to reside? It's a logical question. And do you know that if tax rates went up, tax-free becomes instantly more valuable? Tax-free is always better. I am absolutely convinced that Bob would wholeheartedly agree with me. Tax-free is always better. And when you think of the future that you want. Please know, the, the wealthiest business owners that we are blessed to serve and work with, they don't just focus on making money. They focus on keeping more of the money they make because they want more freedom of time. That is the desire. That's the pursuit. There are two different possible paths to two different outcomes. 2 different possible paths to 2 different outcomes. How many financial decisions have you made in the past 12 months in any one of these categories? Just pause for a moment and think about that. How many financial decisions have you made just in the past year? Every one of those decisions has tax consequences. And of all those decisions that you've made in the past year How many of those decisions were made with coordinated tax planning? Because Govero Accounting, Ascendant Financial, connecting two lanes of professionals, and outcomes Ascendant Tax Advisory. Coordinated tax planning. This is absolutely true. Like, what people do have, rather than a tax strategy, they have a tax season. They have a tax reaction. How many of you have ever had an allergic reaction, whether it was environmental or otherwise, and your skin just went crazy? How many of you have ever experienced that? How did that feel? That is a lot of people at tax time. They're having a, a reaction. And let me show you a conversation. That happens thousands of times a year. Has that ever happened to you? How much do I owe this year? Insert the number. Did we do anything to lower it? Well, we filed everything that you sent to us. So no planning at all? It's not really what we do. That's not a criticism of accountants. It's a criticism of the way most people think about taxes. Bob and I are— and our teams are going about this differently. And so which would you rather have, a historian or a strategist? Primarily, if you were to look at the accounting profession, they're hired to accurately report what already happened, and tax planning is really about influencing what happens next. There is a distinction between preparation and planning. There's a distinction between compliance-related tasks and wealth-creating tasks. This is why Bob and I are fully aligned on Ascendant Tax Advisory and how we want to serve the people in the function of both preparation and planning, because the planning piece is what is, um absent for the most part. And there certainly aren't two agencies like ours that have come together that I'm aware of. When you deploy capital in whatever it is that you're deploying capital in, whatever financial decision you're making, if the decision means that you're triggering a taxable event— taxable means always, tax-deferred means not yet— whenever I hear the words tax-deferred, I think of that one 3-letter word: yet. Does tax-deferred mean exempt? No. Does it mean it's not going to happen? No. Does it mean it's been forgiven?

No.

It just means not yet. Tax-free means never. And so one of the planning tools that Mark Incorporated was corporate-owned dividend-paying whole life insurance. His preference wasn't taxable. His preference wasn't tax-deferred. His preference was never. He did not want to trigger a taxable event. Clients, again, they kept asking, can you refer me to an accountant who understands infinite banking? No, we are experts in the infinite banking concept and the implementation of it, and Bob and his team are exceptional. Uh, underscore, bold, italic, highlighted. Bob and his team are exceptional in the function of accounting in both preparation and planning. That's why we're collaborating. And I, I think that, um, the majority of people not only think about taxes one year at a time They only look at the tally, how much taxes they've paid one year at a time. They don't look at the cumulative. Wealthy people do. And when you think about that over the course of your lifetime, the amount of taxes that you've paid up to this point in your lifetime, that's the drain being pulled out of the bathtub. And what Bob and his team are exceptional at in the preparation And the planning is helping you to make sure that that drain is plugging that leak wherever possible. The better decisions, the better options, the better coordination is where Ascendant steps in. And we have both professional teams in two side-by-side lanes of traffic driving in the same direction. In service to our client, our mutual client. And the wealthiest families that we're blessed to serve, they don't make financial decisions and then ask, "What are the taxable consequences of the decision that I just made?" They're understanding the tax consequences first and then making the financial decision. Big difference. The real question is not how much tax did I pay? The real question is, Did I know all of my options before I made the decision? That's where we step in. And we know that if you've got tax-qualified plans, you've got registered retirement accounts, there's two considerations there. Wouldn't you want to know what percentage they own? The IRS or Canada Revenue Agency? And wouldn't you want to understand that the worst inheritance is a taxable one? And the moment tax rates change in the wrong direction, tax-free is instantly more valuable. People that we talk to every single day, some of which have spent decades growing these plans, they have never calculated what their silent partner's share of that plan is. It's just, it boggles the mind. So the problem isn't bad advice, it's uncoordinated advice. You've got an accountant, a financial advisor, a lawyer, a banker, They're all acting independently, and it's not that they're, they're, they're not smart people. They're remarkably intelligent professionals. But yet we see time and time again with our own clients that so many opportunities are being left on the table. Why is that? Because intelligence doesn't create coordination. You can have remarkably intelligent people who are helping you That doesn't mean the coordination exists. And so that's the birth story of Ascendant Tax Advisory. If you're even the least bit effective at accumulating wealth, I promise you it doesn't leak all at once. It's one financial decision at a time where it's leaking. And so before you make your next financial decision, ask yourself this question: Do I know all of my options?

So here's some things that I want to focus on. Every single tax plan, it has to include these things. The first one, and this is maybe one of the most important, is the most efficient tax structure. Okay. And I'll quickly go through some of these structures as well, but we need to understand that corporations are taxed different than proprietorships. Proprietorships and partnerships are taxed Similarly, um, in the US, S corps, LLCs tax differently than C corps. Um, and self-employed individual tax filing is different than a C corp, than an LLC. So I'm going to walk through those, but I got to tell you, the number one reason people pay too much tax is because their structure is wrong. And a lot of times it's not necessarily in their business, but it might be their non-tax-free investments are in the wrong spot. That, that entity is being taxed in the wrong structure. The next one is the most efficient source of income. Okay, we talked about there being tax-free income, tax-free access to capital, tax-free growth that you can have inside a policy. Fantastic. If you have a diversified portfolio and you have a business, you have some other investments, uh, maybe have some real estate, um, they're taxable and they're taxed differently. Um, if you're taxed as an individual, business income is taxed high. Um, in a corporation, it's taxed low. Investment income is taxed the same as self-employed income personally, but taxed significantly higher in a corporation than business taxes. So that's a problem too. We need the most efficient source of income as well, and we can actually convert sources of income. So passive investment income inside a corporation taxed at about 50%, we can convert that to active business income down to 12%, um, if we do it right and if we have a plan. And I love that Jayson Lowe talked about plans and strategists. And truthfully, that's all I am now. I am a strategist full-time, which is super cool. Thirdly, income splitting. Income splitting is essentially when you have multiple family members and there's a discrepancy, uh, between multiple individuals in the family in their income. Some people's income is higher. Some people's income is lower, which means some people's tax rates are high and some people's are low. Income splitting helps smooth some of that situation so that we put less income on the high tax person and we put more income on the low tax person. As far as a good tax plan goes, asset protection has to be part of it. Okay. So yes, it's not necessarily saving tax, but it's optimizing the asset, um, making sure it's protected because for many of you business owners, out there. You've worked so hard to build your business. You started accumulating assets, and this could be policies or non-policies that are in there. We don't want those in an operating company. We want to make sure that they're protected outside of that. Tell me, and I want you to put this in here, and I want you to think about this for a second. Are they inexpensive, or are those kids expensive, right? Um, they certainly do Right. And they are valuable assets, you know, the best assets, you know, I couldn't be more of a proud dad. I love being a dad, but those kids are costly, like university this year. Um, residence, the meal plan. Damn, that's expensive. So here's how we do this, right? We pay our kids again. We come up with a strategy to say, hey, we want to, in those cases where the money is in the corp and we have to take it out to live. We can't get it tax-free necessarily, although we've got other strategies where we're putting it in our policy, we borrow against it. We may or may not have tax implications on it. Let's chat. Um, but in many cases, when we pulled that money out of the corporation, uh, to live, they said, you can't do that anymore. And we said, that's probably fair, but we can pay salary. And it's important to understand this, right? So if the kids aren't actively working in the business 20 hours a week, We can still pay them a salary. Now, salary has to be a reasonable wage for a reasonable return, right? Reasonable work. So minimum wage is expensive now. So even suggesting that they do 20 hours a week worth of work, that gets them a fairly decent salary. How much do we want to pay them? Well, we want to pay them at least $15,000 a year, $15,000 a year. They have a personal tax exemption that wipes that right out. Business gets a $15,000 deduction. We're saving tax there. Kids claim the salary, no tax on that. No Canada pension plan in the US, no Social Security. And it's a straight check. I put it into a joint savings account for the kids. Jayson Lowe can talk to you and his team can talk to you about how maybe you can get a policy set up young for the kids, um, to have that grow tax-free for life, which would be super cool. Um, But even just having a joint account for them to pay for their own expenses saves a lot of money. $15,000, me taking it out costs me $7,500 in tax. That goes away. My kids take it out tax-free. My company gets a business deduction. Bingo, bango, bongo. Everybody's happy. So people will say, how young can we have the kids doing work? As soon as they are capable of delivering value to the organization. Then you can do it then. You know, we've paid kids as young as 6 and 7 years old who work on the farms. Now, there's colonies and communities where it's a farming community, that makes sense. Those kids are working hard on the farm. It's legit. Uh, I've seen it, I've witnessed it, we've paid it, everybody's happy. Typically, I like to say double digits. If we want to say the kids are cutting the lawn at a rental property or They're doing some paperwork, but here's, here's one justification, and this is not to devalue anyone who's in the videography business because I have a full-time videographer on staff. One of my favorite people, super valuable. I take my daughter when I go to speaking events. Her and I go, we go on a little trip together. We spend some time together. She takes photos, she sends them to my marketing team. I would pay somebody $15,000 a weekend to get on a plane to come do that work for me and to submit that to my marketing team. Instead, I pay my daughter a fraction of that, which is justified by fair market value of what I would pay someone else. She does it twice a year, $15,000 a year. Excellent. No tax on that to her, deduction for me, no extra tax to get money out of the company for me. Pay your kids. Okay. Um, income splitting too, looking at different ways. Um, we want to make sure that if there's spouses that have different income levels, that we're equalizing that, um, to a certain way. We can— there's, there's lots of different things that we can do as far as strategy goes. Um, and typically we will do these sort of behind the scenes once we know the family situation of our business owners and make sure that we're taking advantage of these tens of thousands of dollars. So for those of you with more than 2 kids, lots of you had kids in there, 2 kids, $15,000 each. That's $30,000 of a deduction at at least 12%. Um, so there's a good chunk of change in savings already. Plus on the $30,000, you would pay $15,000 to take that out. Now you don't have to. They pay zero tax on it. There's $15,000 back in your pocket. Put that towards a good policy, get that earning tax-free and accumulating your wealth. Okay. This is the power of this collaboration leading up to December 31st. Maybe you get an invoice from the dealership on December 31st so we can claim depreciation of the vehicle, we can get any of the sales tax back, those sorts of things. We can claim that timing-wise now in this period, get a deduction now, save the taxes now, put that money back into the tax-free environment and get it rolling for us. Okay, so don't spend money just to save tax. Let's have a really good strategy and let's try and minimize it the best we can. Let's be strategic with our timing and then let's get it into a tax-free environment. I'm not going to necessarily talk about expense and capitalize with you guys right now. Um, we will talk about maximizing the interest deductibility. I'm not sure if you guys have heard of the Smith maneuver. Um, it's a fairly common practice and there's been a few questions that came up, including the first one that I answered., that talked about a structure. I've created this. This is the ultimate structure. And it's, this is your structure on steroids. And people may look at this and go, I don't need that much. And it's like, it's okay. This is meant to show you the expansion, um, of what an entity could look like. Okay. So we call it the ultimate structure because everything that's in our initial objectives of what we wanted to take care of. It's, it's included in here. So if we look at Property Management Co, let's go. That's our operating company. So whatever business you have, it just consider that Property Management Co. All right. So Property Management Co is our operating company. That's where we get access to our 12% tax for the first $500,000 of our business income. Anything above that is 26%. Now, when we pay 26% tax and we take money out, we get a reduced dividend rate because we've already paid more tax in the corporation. It's called an eligible dividend. Um, I won't get into that too much, but Property Management Co, this is our active business. We might have real estate, we might not. Okay, what I want to talk about is Property Management Co, our active business. We want to have it owned by a family trust. This is specifically for businesses that are growing and scaling. Right? It's worth maybe $1 million now, but it's going to be worth $10 million 10 years from now. And we want a family trust in place. Why? I talked about the lifetime capital gains exemption, $1.25 million of proceeds tax-free on the sale of your business. That's for every beneficiary in the trust. So this is me. I'm, I'm B in the ABCD, um, and I've got my wife and my 2 kids. So I get $1.25 million times 4 when I sell my company. So that's $5 million of tax-free money that I get, um, on that, which would be at capital gains rates. So $5 million at 25% is a lot of money, right? So we put that in there. The reason we can't have property management co-owned by a holdco, right, this is old school thinking. If a holdco owns property management co, our active business, The lifetime capital gains exemption is only for individuals. So if Holdco owns the shares and we go to sell it, we aren't getting that exemption because the whole co-owns it. The only way to do it is to sell your shares of the Holdco. But what's in Holdco? Probably our insurance policies, right? Probably any of our investments, maybe our real estate. And because we have all those things in there, we want to keep those. Um, but also because they're non-active business assets, it eliminates our ability to claim the capital gains exemption anyway. Poor planning. And that's how a lot of people— so if you have an operating company owned by a holding company and you've got assets in your holding company, we've got to talk. We've got to change it because you're going to leave millions of dollars on the table. So let's fix it now. Okay. We put family trust in here. We get access to the lifetime capital gains exemption. Times however many beneficiaries we have. Um, you can put parents in here. You can put siblings, you can put cousins. You can put me if you want. Um, nobody's entitled to anything, but at the discretion of the trustee, which is you, you can pay beneficiaries out. So if you want to multiply that capital gains exemption, you can really do it. We have InvestCo up top. You can see, okay, this is your traditional holdco. We don't have it owning Property Management Co. We have it as a corporate beneficiary.

Why?

Because one of the things that we can do when a corporation owns another corporation, they own more than 10%, dividends can go up to them tax-free. In this case, there's rules with trusts that say every beneficiary of the trust is deemed to own 100% of any of the assets. So here, Property Management Co. is deemed to be owned 100% by InvestCo. When we issue a dividend to pull our cash out so that we can fund our tax-free policy, we send a dividend out of Property Management Co. up to Family Trust, up to InvestCo. Tax-free money up there in our policy. No tax to get that money out. It allows us to crystallize our lifetime capital gains exemption. It's a beautiful, beautiful, beautiful thing. Super clean, super easy. If you have investments or a company in the US, we need to have a separate US entity. This is our preference where we have a US holdco that owns all of our US investments. In Canada, if you're a Canadian resident and you have an LLC, it's deemed that that's all personal income. The LLC is not treated like a corporation in Canada. So what we do is we, we own any of your US investments with a Canadian holdco. And then we start a US C corporation. Now I know the top box says an LLC, but it's an LLC election to be taxed as a corporation. I prefer it to just be a straight C corporation. This avoids double taxation. From there, you can invest in any LLCs, any sort of investments in the US, and we pay our 21% tax and we get that money back into Canada. Um, this is super important. So it avoids double taxation. Absolutely. Um, we pay 21%, then we get that money back into our investco. We get it into our tax-free money again, into our policy, and away we go. Right? So this is a way to get earnings and investments in real estate, if you like, in the US. This accomplishes everything. It's very scalable. So we've got these. Multiple entities. You see these LLCs at the bottom. You can invest in multiple LLCs. You can invest in one. You don't even have to have it. You can have your investments in your C corp. No problem. On the Canadian side, all you need is the one corporation. But if you buy another business or you invest in another business, you buy another corporation, you just have the family trust buy it. And it's very scalable. We can keep putting corporations in there. Once you have the family trust and invest co in place, Very scalable model. Um, super easy to set up. Someone was asking me how much it costs to set up a family trust. It's about $3,500. If we set up a corporation underneath it, that's another $3,500. Um, if you have an existing entity and we have to get the family trust on top, that requires a lot more work. We're going to have to have a meeting and discuss, um, you know, the pricing of how that works. And if it's valuable and beneficial, we don't want to do it if it doesn't make sense for you. Um, but we're happy to do it. And that's my favorite. Those are my favorite kids again on that tax group. This is what they do all day, every day.

Beyond the definition of good fortune to be mentored by him for so many years. I miss him. I think about him every single day. And, uh, he shared a story with me once. He said, I want you to picture You're in the middle of the Sahara Desert. So I'd like everybody in attendance, if you just humor me, just picture this. You're in the middle of the Sahara Desert. Now you've got a tent, and inside your tent you've got air conditioning, you've got all the food, you've got baskets of fruit and cold water, and you and I are sitting in that tent together. And I say, Bob, don't look now too quickly over your left shoulder, but a camel just poked its head into our tent. So Bob goes, oh my God, you're right. Now if Bob and I don't do something very quickly to get that camel's head out of our tent, what do you suppose is going to happen in very short order? The whole camel will enter. There you go, James, that's it. Before you know it, we got the whole camel in our tent. And Nelson would turn over to Bob and I and say, "Do you know that camel is the IRS or the Canada Revenue Agency? So keep the camel out of your tent." And there's ways to do that. And here's something that I just I want to take you back to where we begin. Okay? So we began with Mike and Mark, same business, income, profits, accountant, just different decisions. 10 years later, one had substantially more wealth. And it wasn't because he worked harder or that he was smarter or that he found some magical investment. He simply understood more of his options before he made his decisions. And then Bob stepped in and took us one step further, right? He showed us what proactive tax planning actually looks like and that taxes are not something that you think about once the year is over. There's something that you think about before decisions are made. And that is— it's a completely different way of operating. And so what I hope you take away from the time that we spent together is that your financial future isn't— it's not determined by one big decision. It's determined by the options that you weigh against thousands of smaller decisions every year, every month, every week, every decade. Those decisions compound. And, um, so does money. Tax-free money compounds a lot better. And, um, I think better decisions compound into better businesses, right? If you're a business owner. And what do better businesses compound into? Greater wealth. Greater wealth compounds into more freedom. More freedom gives you more choice. The more choice you have and the ability to build the life that you want. And I think that's what this has always been about. It's not, again, Bob and I would both tell you, it's not taxes, accounting, or dividend-paying whole life insurance contracts. It's freedom. Because even to Bob and I, money is only valuable to the extent that it gives you greater control over your time, your opportunities, your family, the legacy that you'll someday leave behind. So, I want you to think about this. There isn't anybody in attendance here tonight that can change a financial decision that you made 5 years ago, but you can change the next one that you make. And, and sometimes that one better decision, it just changes the trajectory of everything that follows after that. That's why Ascendant Financial and Govro created Ascendant Tax Advisory. We didn't create it because the world needed another accounting firm. It amazes me how much effort— and credit to all the hardworking people that are here, whether you're working as a T4 or W-2 income earner, you're a business owner— it just amazes me how much effort people put into making money and how little effort they put into keeping it. Money flows. Once you begin to observe the pattern of flow, you start seeing something that most people miss. Money is always being stored somewhere and borrowed from somewhere. You've got car payments, credit card payments, loan payments. You're paying cash for things.