When Do You Need to Set up Your Hold Company?

The complexity of our income tax act has gotten so massive that it's just so hard to keep up with all these nuanced little changes that keep happening. And even if just from a basis of not keeping up, you could end up triggering something that before it could be done, now it can't.

Have you ever wondered why Canadians and why people end up getting a holding corporation? Hey, you have an operating company. When do you need to get a holding company and why would you go about doing that? Well, we have a lot of real estate investors, a lot of entrepreneurs who listen to our program. And so I'm joined today, of course with my good friend Henry Wong. We're going to break into some of these components about some of the rationale on when it makes sense or why people consider setting up a holding corp and how that could benefit them and some reasons maybe why not to do it as well. So we're going to have a little bit of fun with this discussion today. And Henry, I'm pumped about this topic because I think this is something that, you know, more of our listeners need to understand. A rationale of all the holding corp and where it's applicable and why you might want to have one.

Yeah, thanks for having me, Richard. And the main part I think I want us to dive into when it comes to the corporate holding company is actually in conjunction with what we talk about, building the family banking system. Now when people think of family banking system or becoming your own banker, they may just think of it in the corporate realm and corporate, sorry, personal realm or the personal environment. But the other component to that may include, depending on where you are in your life journey, a corporate environment which has a whole nother set of ways that you can architect for how you are building your family banking system. And so a family banking system includes a personal and a corporate environment. And a holding company is just another aspect of the equation when we look at building a family banking system. So I thought that this would be a really good topic for us to dive into today.

Yeah, and some of the things that I think people are, you know, you know, we're going to tie into why or where whole life maybe plays a role in the corporate world. But just even separating that out for, for a spec. And just considering what are some of the advantages of having a holding corp. You know, if you're, if you're already in it with an operating company, there's certain risks or liabilities that you may have with that company. And so you may not want to keep all of your, let's say, your proverbial eggs in that corporate basket. You're going to want to move some of those eggs so they can lay, you know, turn into chickens and lay more eggs into a different basket. And, and Holdco to some degree becomes that other bad basket for a lot of people. So maybe should we start more on the. Just some of the generalized aspects of, of where holding companies come into play for people that are, you know, typically you don't just jump in and get a holding company. Right, right. Usually you've got an operating company that's doing some kind of an active business activity and then you're growing that into a position where now you need to consider Holdco as a, as a viable thing to add into your repertoire of financial aspects.

Yeah. And I'll actually take a step back even further just to clarify for a lot of people, because people may hear just on Internet and information, oh, right away they're going to get a holding company, do all this and that and put carts before the horse. So let's take a little bit of a step back in terms of the corporate environment. And the first thing is understanding actually what an operating company is. And an operating company is used for running active business. And we've done a podcast related to earning active income and it goes through a few sets of tests that the CRA will go through in terms of making sure your business is an active business to benefit, especially if it's a small business, to benefit from the small business deduction from tax standpoint. So that's generally an operating business. If I run an E commerce store as an example, where I sell products, or if I run a widgets manufacturing company and I manufacture widgets, those are examples of what a operating company is. Or if I'm an accounting firm, I provide services for accounting, then that's what an operating company does. They're direct generally to the customer and they are direct to the businesses. If you're B2B, so you're direct to the line of customers that you're working with. And the type of income that is generated is in operating in nature. Now, the purpose of a holding company is you've incorporated another company that is based primarily for the usage of holding. I'll say properties because that's the technical term. But holding investments, and that can include things like shares in a public company, investment products like GICs or bonds. Then there's also potentially real estate. Now real estate could be put into another operating company or in the holding company. Again, depends on the situation. Shares in private companies which may include your specific operating companies. So the holding company is kind of the second layer behind the operating companies and the strategic reasons for doing that. And I won't go into today talking about the web of how you can organize your corporate environment, but it's just now introducing another layer beyond the front line of the operating company. And now you're introducing a back line, which is the holding company.

Yeah, and I like how you said the web of, you know, because you know, these things can become more complex and needed. So we're just going to keep it high level today. But I mean from one of the big components I think is liability. That's why a lot of people choose to get a holding company set up. And you know, so just think for a moment if you have all of your stuff, again, eggs in the one basket, the one basket operating company doesn't matter what you do. Like maybe you're a welder and you work with different welding clients or whatever and well, you might have some liability because if you're on a job site and you're welding and you're a B pressure welder and then all of a sudden there's an explosion because you sparked a rod in the spot you weren't supposed to or whatever, you might have a lot of liability. Like they're going to come after that operating company and you're going to have to exercise your liability insurance and they could, you know, sue you for all of the assets that company has, the truck, the welder, you know, whatever other items, the cash in the bank account. And so throughout time, as that bank account with OPCO grows, you may want to transfer some of that cash away from the operating company to a holding corp to kind of more protected or insulated from those type of liability events. So am I on track with that, Henry? Would you say that's a one of the primary reasons why a lot of people go down the Holdco route?

Yeah, that's actually very perfect. And that technical term is called asset protection. You want to decrease the exposure of what your operating company is and you can design connections between the holding company and the operating company where money can move outside of that, operate away from the operating company, move your capital away from that exposure. In circumstances of creditors, depending on what you sign up, when you sign up for loans, what the collateral is, and also legal liability events such as an explosion or a slip and fall or product liability that you have created for a product that you're selling to the market, when somebody has gotten hurt from that product, then they will sue that company because that's the front line in front of customers. And the best way to minimize, if anything were to happen in terms of damages and to limit the cost of those damages to you is, is to transfer or move the capital away from the operating company so it's not exposed in that environment.

And you mentioned capital. I want to touch base on that because capital could take multiple forms. When we hear the word capital, we often think about currency or dollars and cents in a bank account when we log in. But that could be as an example, if you have a business that owns equipment, you know, bobcats and trucks and whatever. Well, if the operating company owns all that equipment, then all of those assets could be. That capital in the form of equipment could be at risk, you know, the printer, the office machinery, the desks, etc. Whereas, you know, hypothetically, let's say holding company leases those pieces of equipment or owns those pieces of equipment and then they charge operating company, you know, some way of accessing them, the utilization of that stuff. Well, now that it's no longer owned by the operating company. So this is just one way of looking at how some people get a little bit color creative on separating the capital assets and offloading them from OpCo's books to some degree so that they can enhance their overall protection on the things that they need to use on, on a daily basis or the things that they're investing in.

Yeah, and I use capital because it is a very broad term. But yeah, there's capital in the sense of dollars, which is also true. You don't want to have money in the bank account for that exposure of idle cash. And also capital in forms of equipment, capital in forms of just that asset. Right. So as much as you can, and you've touched upon a few ways to isolate or minimize that exposure of that capital. So if you have machinery as an example, some people who are sophisticated and had professional involvement may have their holding company or a separate company or own those physical assets so that the production is being leased from the operating company so that they can enjoy those benefits. And again, that's a much more sophisticated setup to go through. But yeah, so basically part of the holding company is to shield anything that is existing in the operating company from having any exposure. And you're moving a lot of the title ownership and money to a holding company as an example, to shield it from the operating. So the operating is generally actually as empty as it can be, so the exposure is not as high.

And then if operating company needs capital, well, then it can Usually, you know, request some from the controlling interests of holding company, whether through, you know, direct movement of capital through some or like an intercorporate loan is another, you know, term that's used a lot. So you know, in that way holding company for many people becomes kind of like home base for where everything is stored and then they access money from that for, for future growth or investments or whatever capital acquisition that the operating company may want to do.

Yeah, and that's what, that's a separate whole scheme, sorry, a whole detail level of professional planning that is involved in how you move money or move capital amongst the corporate environment that requires a lot more of a sophisticated discussion. So the second component in terms of what a holding company is typically used for is also to help claim something called the lifetime capital gains exemption. And there are specific criteria that a lifetime capital gains exemption a company has to meet in order to take advantage of a lifetime capital gains exemption. And the holding company can and help the business owner do that. And to kind of give a little bit of a background of that lifetime capital gains exemption. Every Canadian who owns a Canadian control private corporation can get tax free capital gains in 2022, 2023. The amount is 913,630. Now specifically I'll just round it to a million dollars to keep it simple or 900 to round it down to keep it simple. But you've got to go through three very simplified tests. There's what's called an asset test, a basic asset test and then a holding period test. And if you have too much just to kind of keep it really simple, if you have too much passive items in, in one instance especially like cash, too much cash sitting in an operating company and you have plans in the future to sell that operating company that can prevent the usage of or getting that capital gains exemption. You've got to, you'll hear this term called purify the business so that you can actually take advantage of this tax exemption rule that exists for Canadians who own a company. So that means, and this is very attractive for business owners who want to sell their business because they're going to get to exempt. If you've built a company that started with $1 of shares that you paid for and your business value has skyrocketed to $900,000, you the there would be a capital gains tax of $900,000, which 40, 50% of that would be taxed at your marginal tax bracket, which before 50,000, which would be taxed at 50% at the personal level. But the government has an exemption to exempt $900,000 worth of it so that you don't have to pay tax. So that's why business owners who sell their business, that is a very appealing proposition. But if you have too much cash or too much idle assets, it will taint the ability to exercise that exemption.

Yeah. And there's multiple tests as you identified to help determine whether you can qualify for that or to what degree that you can qualify for it. So often like a, like a, like a spousal situation, husband and wife, let's say, or business partners who each own shares you sell the operating company. If you can meet the qualification of that exempting exempt testing, then you could each potentially qualify for that $900,000 exemption. If you sold the business for $2 million, well then the bulk of all that would be able to exit essentially at a tax free basis and you'd only pay tax on the differential over and above the exemption, assuming you meet the definition of the exemption. So, so how does the holdco come into play in, in, in helping people get to get that exemption in place? If you can speak to that, Henry?

Yeah, so it depends on how it originally got set up. So if your company is, as an example, which is most Canadian entrepreneurs that start off with a business and then somehow have built a very successful one, you'll start out with a holding company that they own directly. And there has to be some very specific tax maneuvers that come in place that can introduce it, because let's say I own that share of the operating company 100%, and now I want to introduce a holding company, I have to do a very specific tax maneuver to transfer my ownership personally into the holding company. And this is where professionals get paid quite well to maneuver this so that you don't trigger it. Because a corporation is a legal entity, and in order for me to transfer that ownership, I actually have to quote, unquote, sell it to that entity. But there's tax exemption rules that allow you to roll it over to the holding company. And once it's rolled over, then you can do maneuvers to transfer and purify the business so that the holding company now has the, the main elements of what is idle. And then the company has already triggered a specific capital gains when, during this whole kind of design process that goes through.

Yeah, fascinating. So in other words, professional help. You need to speak to someone who's knowledgeable about this. But you know, at the high level perspective, you know, we've talked about already two primary reasons why holding companies are popular, at least in Canada, when it comes to structuring your affairs for your maximum benefit, I mean, at the end of the day, you're doing all the work. You should be entitled to get as much of the money as possible for doing all the work. And so we, we're, we're an advocate of that. We're, we're capitalists and we want to see that you as a, as an entrepreneur can maximize the advantage of all the energy and the effort that you're putting in because you're working hard to try and create something of value and add to the, to the world through the work that you do. You should be the primary beneficiary or your family should be the primary beneficiary of all that hard work.

Yeah. And so when it comes to this capital gains exemption, this is the mindset that most people listening, if they are going through this route and building a business or building something of value, this is where most people will run into the question of, should I now introduce a holding company? Should I now have this other plan in place, all those objectives? And this is where that professional help is really needed because, number one, the professional help specializing in these areas will go through those tests, and then we'll do an evaluation to make sure to see which test it is either meeting or not meeting. And when those tests are not met or met, they're going to give you feedback for you to make the decisions that need to be made in the business to clear it up. So it's not something you can actually do by yourself. I mean, you can, but what's going to happen is there's a lot of a higher likelihood that you can run into issues that the CRA is going to call you for that is, is not going to be good in a tax bill. So you want to prevent that. And fortunately or unfortunately, paying for this professional help, in my opinion is very valuable because you want to work with someone who actually has experience doing that in this specific way of practice. Because there's exposure and there's risk coming from doing it improperly, but going back. Oh, sorry.

Well, one thing I would add too is that, you know, one of these exposures or risks as not, not just in the setup of these things, but it's, it's actually there's, there's a risk that's always present, it's ever present, and that is the risk that the primary or a shareholder in a business, whether it's Holdco or whether it's the operating company, they have the risk of death. And, and when that Happens your share value needs to be determined. And so we have another, other content, other videos on that deemed disposition rule that we would encourage people to check out. But you know, so just recognizing that the risks of how you build and grow the business and, or the holding company and it's the different assets is ever present because as the business grows, the problem gets bigger. And, and as you, as the business grows, you're aging and so the probability that sooner or later you're not going to be with us goes up with that. So just recognize that you're, if you're in a business, you have one of these things to contend with and you should be, you know, doing your best to try to maximize your planning around it.

And business owners do know that in order to get money out of a corporate environment, the two most popular options are paying a salary or a dividend. But at death you've got a deemed disposition on the shares that you own directly and through. For when it does get transferred, money still needs to come out of the corporate environment. So you still have to pay taxes. So you get in a sense double taxed on the holdings of the shares that you deem disposal deemed disposed at death. And if the next line that you pass the shares to want to get the money out, they're also going to get taxed. And so that's part of the planning process that you know in a good way you've built a big successful company that does attract more problems. The one that actually should. The unfortunate part of the problems is actually in Canada, as it pertains to the progressive tax system, the more income you make, the more wealth you make, the more taxes you will attract. And now it's part and prudent in your role to start looking and seeking these options to mitigate your tax bills to a, to the legally minimum that you are allowed to do. The next element that kind of ties into the planning for capital gains exemption is really part of, let's say that sale to get that capital gains exemption. That is one option to exit the business. The other is through death, which we talked about in deemed disposition for business owners. Third one is not one that many people really think about until something strikes them either by accident or by good education. And this is actually called generational transfer or estate planning. And part of that is do you want to include other family members into your corporate environment? And there are definitely benefits for doing that. And again, instead of doing it directly through a operating company, you do what's called a corporate reorganization, which may include, let's say trusts or in another case here, including a holding company to take advantage of the situation of how many people you want to integrate. That's why it's not something really simple that you can find on the Internet or read books about. It actually comes from experience and matching the need and objectives of, of how many family members you want to include, how you, how they are participating in the corporate environment and all these other plans and whether you plan to sell the business or not. And so these are actually conversations that you would be engaged with in a professional when you're designing or reorganizing your corporate environment when it comes to taking advantage of passing things to the next generation in a tax efficient way. And part of including the holding company as a very simple example is maybe you want to include your spouse into that holding company to include as part of drawing money out of the company. So a very common scenario is a son or daughter takes over the business going forward. So they go through a corporate reorganization estate plan and then there's compensation paid to the parents in the form of building the business value or however they structure compensation arrangement. And one of that is to include the spouse. Now why would you include the spouse in terms of this arrangement? Well, mainly because personal income. So this is the other criteria of why you would include the holding companies to bring in, let's say your spouse and you may want to, sorry, in the personal environment. Personal income taxes. If you were to receive $200,000 on one, let's say myself, I would be taxed at a very high personal marginal tax rate of 45%. Just kind of throwing out a number out there as opposed to if I could split the dividend or the salary or the compensation amongst myself and my wife, then I would be able to distribute the income. So the concentration is not on me. And then there would be a viable tax split. Again, there has to be criteria that has to be met in order to do that. And these are kind of the components that we talk about in our next book that is being launched. Keep taxes away from your wealth, which is called dividing your income amongst personal environments. And the holding company can start helping facilitate that type of event.

Of course there is lots of rules within there and so we're, we're talking about it from again from a very like 40,000 foot kind of view looking down on the situation. Like so you get in your helicopter and you fly up there and take a look down at what, what's, what's all around you. But, but these things are possible. It's Just a matter of are they possible for you? And that's where that customized knowledge. Again, I like how you said the reason there's not a lot of really good information about this like, like you say online is because everything is so customized. It's every, there's not really like a really good template to say, oh, you've got a family run business, here's exactly how you go and you know, distribute that and move forward. It's not as simple as that. And so, you know, with incorporating that there may come an estate freeze where you're, let's say, let's say you're going to continue running the business. I run the business and my son wants to take over. Maybe we will crystallize our value up to that point and do an estate freeze to say, okay, everything up to this point in time, you know, Richard and his wife, you know, created this value. We're going to lock that value in. Anything over and above that point is where my son Nathan is taking over. So Nathan and his future wife, let's say, are going to participate or share in the value on an ongoing basis. So that's another common thing that, that often forms part of this planning and again would intersect either whether with trusts or holdco, you know, probably being incorporated. This is also very common in farm situations. So you're looking at generational farms or someone's going to take over the farm. Often in that scenario, especially in the world we live in today, you know, if there's multiple children, there's usually not all the kids that want to take over the farm. There's usually just like one kid who wants to take over the farm. And so the parents or the grandparents want to be able to, to kind of create an even distribution of some of that value from a generational planning perspective. But the guy or the gal who's taken over the farm is like, okay, but I'm doing all the work. So like what, how does that work for me? So there's some very customized kind of scenarios that start to take place in those discussions that has to be really planned with, again with that good mentorship and someone who's got true expertise in that specific environment. Which also varies by province.

Yep. And it's, I would also include if they've had audit tested experience. And also just, just because they've designed it doesn't mean it's been tested. So that's why audit tested experience is very, very valuable to find in terms of a professional. And Richard, you've raised another really good point as it pertains to everyone's situation is different. Farmers actually get a special exemption where they can pass down their assets to generations from a, on a tax free basis, provided they meet it. But there's a whole bunch of other exemptions that, you know, just to be very candid with you, that it's, it's really the Income Tax act that is so overly complicated. Why we have to caveat. There's no generalized example that can apply to everyone. It differs by province, differs by industry, differs by amount of people, differs by everything that you can name it. And it's just the complexity of our Income Tax act has gotten so massive that it's just so hard to keep up with all these nuanced little changes that keep happening. And even if just from a basis of not keeping up, you can end up triggering something that before it could be done, now it can't. As an example, since the Trudeau government came into power, they've really ironed and tightened into the rules around tax on split income and really needing to make sure that there is a very, very valid reason. So the window of what is valid to split income now is so small that it has to be very carefully interpreted and used when you are going through this process. And farmers, as an example, have their children working on the farm since they're really young, before they're like, while they're 12 or whatever age. And under the Income Tax act, if you have a 12 year old working in a business or sorry, you're paying them a salary, some officials may not believe that and that that is where you've got to really have an ironclad process written to defend when something like that were to happen.

Yeah. And I could tell you from growing up on a, in a farming environment, if you don't have kids before the age of 12 working on the farm, they're gonna have a difficult time taking that farm over. There's some things they gotta learn along the way, some responsibilities they gotta learn how to get up early, you know, get some stuff done, build a few fences to be able to know what to do if they want to take that farm over. One thing I want to touch on here, you know, you, you, you mentioned, I want to circle back a little bit to a word you mentioned called purification, which is, you know, I, I don't know if that's like an official tax term or not, but you know, I'm, you know, I'm not a tax professional, of course, so I'm, I'm learning these things as I go as, as we all are, we're all growing and learning and developing. There's no such thing as having arrived at knowledge. You know, and recently I was working on a case with a, with a colleague who is a tax and estate professional and we have a dental client and that dental client is, has a professional corp. You need to, you know, if you're a, a practicing dentist or a doctor, whatever, you have a professional corp. And they also had a, a holding corporate. That holding company was actually a kind of like an administration company and, and they were using all older rules around income splitting that were available, which you know, have kind of gone the way of the wayside. So this, this corporation that was being used primarily for an income splitting perspective is now transitioned into more of a holding co environment. And there's been an offer on the table for the dentist to sell the practice for something to the tune of around $6 million. Got a very viable practice in Ontario. The issue is they want to buy the professional Corp. And they don't just want to buy the building and the assets and the chairs and the equipment. They actually want to buy the corp which owns all that stuff. One of the problems is that with some previous planning from done long ago, this, this professional has a cash value insurance policy with like almost $900,000 in it in the Professional corp. And so it's good that he had that protection. But the plan of selling that corp was never really thought of in the past when that policy was implemented. So now the new purchaser that they're looking to buy this corporation, they don't want to buy the insurance policy that has no value to them. So he's not going to get the value of that. He has to separate that asset from that corporation. Well, to separate it is actually not very easy. The transfer of that asset is, is not a particularly great scenario to be in. So instead there will be now a period of time of considering purifying the corporation. Meaning he would set up a new professional Corp, transfer or reorganize the assets that, that the old corp did under the new name. And then this Professional Corp becomes a hold co essentially, you know, morphs in form to become a holding company. And then he can sell off the, you know, kind of the pure structure of just the business itself. So that's kind of an example and I'm, maybe I, you know, butchered that to some degree, Henry, but from a, you know, I don't want to clean up what I said a little bit about that, but that's kind of the idea or the concept of what this purification might look like if I'm on track.

Well, that explanation is actually really good. I just wanted to put out there that during that time, I believe the, this initial placement and setup of that policy, those considerations were not taken into hand and part of the process that we go through at Ascendant Financial, especially when I discuss with my clients who are looking to place a policy in their corporate environment. These are the conversations that we review because the placement of where these policies go is also a very important equation as part of the corporate environment and the family banking system environment and the usage of it. It's not as simple just to say I'm putting together a life policy for you. Here you go. It's that, I mean, maybe it's because we're very well trained professionals in what we do and we make it sound so simple as you just described. But that process that you're going to, that that client is going to go through, it's going to be paying quite a significant amount of professional fees to transfer the policy to the next corporation. There's also potential triggering of taxable events from that transfer that can be so much managed and mitigated and all of that could have been prevented if it was set up properly at the time in, in that discussion. And that's again part of a thorough process of what we go through when we evaluate our client's situation.

Yeah. And so to tighten that up a little bit is, you know, often we're helping people getting their policies, whether it's at the personal level or the corporate level. In fact, in most cases, if you are a corporate owner, you're probably looking at a combination of those things. There's personal planning and corporate planning because ultimately the corporation feeds everything that you do personally anyway. So, so there's an overlap that does happen there naturally in the conversation. But recognizing that, again, you know, for many people, maybe they're looking at getting started and they only have one corporation now because that's all they've. They've had, which is, I think far and wide is probably the most common situation for the bulk of Canadians. They have a. Whatever their business is, they might have one corporation and that's where everything runs out of. You know, they're trying to get their small business deduction, etc. So they haven't really gone through the extra cost and implementation of setting up a secondary corporation, a holding company. Definitely. There's usually not a lot of structuring that goes into that thought process. And you know, that's at least been my experience. I can't say that's across the board, but because it costs, it costs money for that help and it costs money to set up a corporation. It costs money to file annual tax return. So there's a number of decisions that need to be made to implement that secondary corporation. But if, if you're placing a corporation or a policy, let's say, in the operating company, you really have to get clear as the, as the owner of that business, what is your liability risk? What are your concerns around liability that could threaten any of the assets that that corporation owns? Whether it's the trucks that you drive, the building that you own, the real estate that it has, like whatever those items are, you already have those risks. If you're adding a new asset class in there, it's going to have the same exposure to those risks. So what degree of risk do you have and how confident are you in that? So that's where the personal decision making kind of matrix comes into play. But then there's a next level questioning around what's the probability, you know, low, medium or high that you might be selling this business or, or, and if you do, how, how would that sale look like based on the type of business it is? You know, I mentioned the dental corporation. Well, it's, it's pretty common for the corporation itself to be sold versus maybe the, the, the chairs and the machines and the X ray equipment and the building that it's in. You know, so, so the method of sale, which can change depending on the type of business, the size of the business, the scale, those types of things have, have an aspect there. So that does need to be discussed. Ultimately the, the client has to make a decision, but they need to understand that, hey, even if you set it up, let's say an operating company, there may come a time where life changes and it veers this direction. Maybe for a positive reason, maybe you got an offer to buy the corporation. You have to consider that purification process and hiring competent professionals to help implement that strategy so that you can maximize the outcome.

Yeah, and the last part that I just wanted to share is pretty much similar to a regular corporate environment which we talk about in some of our previous podcasts, which is tax deferral. A corporation is really good in the form of a tax deferral, not a tax. It does minimize taxes. But there is a very big time bomb if it's not planned properly where you do have taxes paid at deemed disposition when you pass away. So the other part of a holding company does help the tax deferral equation. And it does help generally the dividing component, again it's as when we talk about our the book that we're going through. Keep tax away from your wealth to the five Ds, defer and divide. The holding company can facilitate that. And it all depends again on your corporate web of what you've organized and architected with your team of professionals in the circumstances that you go through. But the dividing can help in terms of taking instead of taking money out of the company. Or if you're a real estate investor, let's say a lot of investors own their properties personally. So once the trigger of a sale happens inclusive of their income, all of that gets compounded all in one year. That's a lot of taxes for someone to pay as opposed to if you had it stored in the corporate environment, at least you can melt it into your personal income in a more strategic way. So it gives you a lot more control and options. But you still have to remember it's still a tax deferred basis one and.

And this maybe not be outside the scope of our conversation today, Henry, but perhaps this will lead us to another great episode that we'll record around passive income tax rules. And not so much to dig into those, but to talk a little bit about like overlapping or conjoined assets. So, and I, and I don't know the exact terminology of this, but my understanding is that, you know, once you're over at $50,000 of passive income, income generated from investment oriented assets or even like a GIC or a savings account, let's just say then you now attract a much higher tax rate at the corporate level. But there's some measure of association between multiple corporations. Is that something you could speak to just briefly on that?

Yeah. So when you start introducing a web of other, let's say operating companies or other corporate entities into your corporate environment, so there's already what's called a small business deduction available for operating companies at, let's say if you earn 500,000 or less and other tests that need to be met to meet that, you will get in Ontario about 12.2% in taxes for the operating income. Now if you introduce other corporations in that environment and they are also operating, actually that small business deduction is shared amongst all of those organizations. Now one of the ways that can that have to be tested and gone through is with the small business deduction, the passive income, if it all goes into one corporation, will taint that environment. But you can generally you can also manage and isolate Passive income from tainting your small business deduction if again structured and planned appropriately. So kind of speaking at a very high level on that aspect, I can't really dive into concrete details because everybody's situation of association can be very different. How each corporation can get associated is something that has to be very carefully monitored in that corporate environment.

Yeah, thank you for clarifying that. And I think, you know, the reason that that's helpful or something to tie into when it comes to Holdco is because we are talking about in general associated corporations now and, and introducing them if they haven't already been been done. And then additionally, of course one of the advantages of dividend paying whole life insurance in the corporate environment is that it does not attract any of that passive income tax. And so that's one of the areas where it becomes a highly viable location to store and warehouse ongoing and increasing capital reserves for the deployment in the growth of a business or the, or ongoing investment of a business, whether it's operating company or the holding company. And, and to be able to, you know, for lack of better terms, we'll call bypass the, the incrementally abhorrent tax that, that builds on something like passive income that basically is almost like a detriment. It's like, it's like a success tax. It's like, sorry, you're doing, you're doing well enough that we're going to penalize you for continuing to invest in the local and broader economy to, to, to grow. So, so you want to make sure that we can protect not only your assets, you know, your, your livelihood, your business, the people that work within it, etc. But you also want to protect yourself from that, that ongoing incremental tax, you know, machine that's reaching in to try to get more of your hard earned effort.

Tax creep. But very, very true. The most common misunderstood thing that I would just put it as from a lack of awareness, understanding or education is a dividend paying, participating dividend paying whole life insurance policy. Because with excess profits a lot of business owners will move their money into something that they deem safe as like a GIC as an example product that pays them 5% of interest. But they don't realize that the interest is a passive income in a corporate environment and that attracts 50% of taxes on that income as opposed to if you took the same amount of money and you put it into a properly designed policy, cash values as part of a legally binding contract will increase. That doesn't attract tax and you have ever increasing availability to access A pool of money without triggering, without that similar consequence. So that's why it's actually a very important element in which we've recorded a podcast specifically on active income versus passive income in a corporate environment.

Yeah, these things tend to overlap with one another very quickly. So, you know, when we think about final thoughts on the whole co environment, I want to make sure that we churn through as many bullet points that you had in mind today. Henry, is there anything additionally that you want to make sure that our listeners can capture before we, we bid them a beautiful day as we close out this session?

Yeah, I would just kind of wrap up with maybe in a note to be aware of that. This is not telling everyone to jump into starting a Holdco right away, but understand the possible disadvantages for Holdco, which is the incorporation costs. You've got to have a lawyer draft documents of incorporation. That's not free. Lawyers are, you know, a wonderful bunch, but they definitely are not easy on the wallet sometimes. So you've got to take that into consideration. The second is that's the setup of the company and then there's the ongoing cost of holding a, of maintaining the company. So annual legal filings, like meeting minutes, annual corporate tax return, which in a corporate environment, accountants will charge a lot more than what you get charged from a personal environment. Then there's bookkeeping. So not only do you have to do all of this stuff for your operating company, you also have to do all of this stuff for your holding company. So all of these administrative costs and administrative burdens come into play when you do that. And the other part, again is that I also want to dive into is when you do a hold, when you introduce a holding company into your corporate environment, you're introducing another layer of complexity. And typically how you started with was just initially a plain vanilla operating company. You want to optimize the tax structure that's going to involve professional fees to reorganize and optimize that. And that is also not a very friendly budget to dive into at the beginning. For a lot of people it may be a sticker shock, but in my opinion it's the good long term investment in terms of setting it up so that you are able to take advantage of paying legally the minimum amount of taxes that you're required to.

Yeah, I guess a way to summarize that is if is if a $5,000 investment in some professional guidance could save you 50, 100, a million dollars in future taxation. That's a pretty good exchange on your dollar. If, if, if that is the case. So amazing stuff, Henry. This is fantastic. I think our listeners are going to get tremendous value out of this because these are types of questions and topics that we do get asked about a lot. So if you're a corporate owner, make sure that you gobble all this in. Maybe go back to hit the, hit the replay button and go through it one more time. Take a few notes, connect with your coach to, to talk more about your own circumstances and and see where some of that professional guidance may be required. Required. And for everyone else, make sure you check out that video that just popped up down below. Go ahead and continue your journey of learning. There's always something new to learn. And we thank you for being a part of this amazing session where we've got our special guest Henry Wong talking to us about the corporate world and how you can keep more of the money that you work so hard for in your pocket where it belongs. Thanks so much.