Episode 15 - Secrets of the Canadian Tax CodeMar 15, 2023
Dr. Kevin Mailo and Dr. Wing Lim welcome financial advisor Goran Ogar to the show to share some tax code insights that a lot of general accountants may not know. Goran specializes in complex tax strategies for professionals, the very wealthy, and corporate entities. His understanding of the Income Tax Act is second to none.
Goran first explains why many accountants and lawyers don’t know all the ins and outs of the tax regulations. It’s a very complex thing to study in its entirety. He then explains how corporate taxation works upon a business owner’s death and how 60% of the assets will end up double taxes so only 40% remains to pass on. How can this be avoided?
In this episode, Kevin Mailo and Wing Lim, with guest Goran Ogar, discuss the strategies to be found within permanent life insurance, how to collateralize on the opportunity for loans on insurance investment, and why strategies are necessary for personal businesses earning over $200,000 per annum. As Wing says, this episode is like reading the table of contents of a book you are very interested in, so there will be more in depth insight from Goran in the future. Start here and keep listening.
About Goran Ogar
Goran Ogar is a financial strategist and advisor recognized by his colleagues for having a unique command of the most complex financial issues as it pertains to corporate tax and legal matters. He started his career in the financial industry in 2001 as an independent financial advisor, and has taught over 500 seminars and workshops on various financial topics. He approaches financial planning by first taking time to learn the specific values that his clients hold dear, then he identifies solutions to their challenges, and communicates a clear and concise course of action that is in alignment with those values.
In addition to the financial advisory career, his entrepreneurial endeavours gave him first hand experience in business. He developed and started businesses in the areas of real estate, recycling, oil and gas, and hospitality. His business activities ranged from startups and initial fundraising to public company mergers and acquisitions.
Resources Discussed in this Episode:
Physician Empowerment: website | facebook | linkedin
Kevin Mailo: [00:00:00] Hi, I'm Dr. Kevin Mailo and you're listening to the Physician Empowerment Podcast. At Physician Empowerment, we're focused on transforming the lives of Canadian physicians through education in finance, practice transformation, wellness and leadership. After you've listened to today's episode, I encourage you to visit us at PhysEmpowerment.ca - That's P H Y S Empowerment dot ca - to learn more about the many resources we have to help you make that change in your own life, practice and personal finances. Now on to today's episode.
Kevin Mailo: [00:00:35] Hi everyone. I'm Kevin Mailo, one of the co-founders of Physician Empowerment. And tonight I'm joined by Wing, also one of the co-founders, and he is going to be interviewing an associate of ours, Mr. Goran Ogar. And I'm not going to introduce Goran. I'm going to let Wing do that, but I'm going to introduce the topic. And the topic is this: Aspects of the Canadian tax code that your accountant or lawyer may not be aware of. So a bit of a controversial topic and a very fascinating deep dive. And I'm really looking forward to this one because Goran has a ton of background in tax planning for high net worth individuals as well as businesses and start ups. So with that being said, I'm going to step back and I'm going to let you run the show here, Wing. Take us through this great topic.
Wing Lim: [00:01:26] Right on. Thank you. So I'm Wing. Dr. Wing Lim. I'm one of the co-founders of of Physician Empowerment. And some of you know me very well, some of you I may not know. Anyways, I'm absolutely excited to interview Goran tonight. Goran and I went back 20 some years ago. A past kind of crisscross, and then we're working on some really interesting stuff together. So yes, so the topic is highly controversial, but let me introduce why I would interview Goran? He's one of the most interesting guys I know and we say that our webinar and podcast, we want to interview interesting people and interesting topics. So Goran, of all, he came from Serbia and of all places that he chose to fly to, he chose the Frozen North called Edmonton 25 years ago and he actually became a preacher, went to school, become a preacher, and ended up in the financial world. But not just that. He did a bunch of start ups, different companies. He's a serial entrepreneur. I consider myself one of those too. And it's not open up serial companies, it's serial as a bunch. And he's taken some companies public that's in the oil and gas industry and others, and he's done restaurants and different things. Him and his wife both like they they cook so well, it's like MasterChef, and they fix a meal for me and my wife, it was absolutely amazing. And so Goran is not the type of financial advisor that goes around drumming up clients. He has a select suite of select high net worth clients, and some of them are in this professional space, but some are extremely wealthy. And he, I would call him specializing in complex tax strategies. He's been retained by various companies to do retirement planning, and two of which that is in our city, is University of Alberta and NAIT - North Alberta Institute of Technology. And these are, and they hire him just to help people retire. Right? So without further ado, Goran so tell tell us about your yourself, your journey, like it's really interesting path you crisscross.
Goran Ogar: [00:03:33] Yeah well I came back in mid-nineties to Edmonton to study theology of all things, and when I finished my undergrad studies I continued for the master's degree and had a really good friend who was a financial advisor. He showed me strategies that he was doing - in particular tax strategies that he was doing - for his clients. And I just fell in love with the process of strategizing, figuring out different things. And the bottom line for me was figuring out how to, and learning how to reduce the tax burden. And so that was about 21 years ago. And I decided at that time to join a company, Assante Wealth Management is the company I joined, and became a financial advisor. And one thing that was very interesting for me, because before getting into financial industry, I was a teacher at local college here and teaching was the only thing that I knew how to do at the time. So I prepared courses on financial planning and tax strategizing and approached large companies in Edmonton area. And the University of Alberta was one of them, NAIT was another, Sherritt International, Dow Chemical and dozen other companies. They hired me and I was doing their financial planning, educating their employees for probably about 12, 13 years or so. But in that period, getting to know and meeting lots of entrepreneurs, I myself decided to become an entrepreneur myself and in the process started several companies in oil and gas, in tire recycling, hospitality. That was probably the most painful experience, owning the restaurant. I wouldn't advise anybody, you know, unless you're so passionate, but hey, I did it and it was a fun experience. So, and lots of good stories to tell from that.
Wing Lim: [00:05:23] That's good. The good, the bad and ugly. And so, okay. So with that diverse background, of course you dealt with some really high net worth family offices and individuals, and there are stories that - I don't want to belabor everybody, but there are people worth double digit million - and then their tax advisers goofed. Right? And then as a result, they paid millions and millions of dollars in tax they shouldn't have. So for our level, regular human beings, doctors. So what? So what could possibly, the tax code, what could possibly our accountants and lawyers not know? Didn't they go to school?
Goran Ogar: [00:06:02] Well, they did. The challenge is that the Income Tax Act is about 3500 pages thick. And in order to reduce taxes, you need to know the rules. And to know all the rules is pretty difficult. You really need to have an income tax act as your bedtime read. And very few people do that and on top of income tax, there's income tax regulations as well. That's another 1500 pages. So when you start looking at the whole picture of how the taxes are regulated in Canada, there's lots of material to study. The challenge is, in particular for lawyers and for the accountants, is many of those things are not even being taught during their education as they're getting their certification degrees and being actually accepted to the bar, because other things are more interesting. And there is, there are other things that are more of a focus. So the taxation does ends up being a really specialized field because even every accountant you will come across a tax accountant. So there is a general account, there is a tax accountant and actual tax accountants, very few of them are out there. Most of them are, most of the accountants are general accountants, so they don't focus on strategizing and the strategies that would be applicable both to the individuals and the small businesses or any size business. So the taxation is really narrow field and there are way too few, if you will, specialists in that regard.
Wing Lim: [00:07:36] Right on. And so we, those of us who are married, said the vows till death do we part. It might hold true for marriages. It doesn't hold true for taxes. And sometimes till death do we start, right? And so. So maybe we should start there. So let's start with the end in mind. Right? So what happens when we pass on? We say work all our life, save the money, and then what does this tax man get if we just don't do capital planning?
Goran Ogar: [00:08:13] Yeah. The big challenge is in particular with people who own corporations and most of the physicians are corporate owners. You are a business owner, you run a business whether you feel that you are a business owner or not, you are. That's the bottom line. And essentially, when a person, business owner who's, let's say 100% or 50% business owner, when that person passes away, the corporation is deemed as disposing of all the assets. So the corporation gets taxed pretty much at the highest marginal tax rate when the owner passes away. So the corporation gets taxed at about 50% tax rate. Now, the next step is for the assets to pass to the estate. And as an inheritance, there is another layer of tax that comes on top of that that the estate is going to pay at the disposition of those assets. So unless there is a proper tax planning, there is double taxation at the corporate level and then at the personal level. And that tax could be easily north of 60% of the total assets that would go to the government.
Wing Lim: [00:09:24] So wait a minute, wait a minute. So you say, okay, so we work our butts off over the years. Let's say we save $1 million in assets passes to the next generation. So what really passes to the hands of our children is only 40%.
Goran Ogar: [00:09:39] Roughly 40%, if no planning was done. Right?
Wing Lim: [00:09:43] Wow. So what about what about these RSPs that everybody's racking up? I've known people rack up millions of dollars in RSP and then become whatever Lira. And what happens to those?
Goran Ogar: [00:09:54] Well, when the person passes away, if that's the last person, let's say in a couple, right? So all the assets are considered to be sold. So full withdrawal of the RSPs happens. And pretty much if there is $1 million in the RSPs that's considered in the terminal year, the year of death, that's considered as an income to the person that passed away. So at $1 million, that would be the highest tax rate depending on the province where you are, 2 or 3% up or down from 50% of the money would go to the government depending on the province. So 47, 48 to 53% in Canada goes to the government from the RSPs. Same with Lira, right? The only actually type of account, registered type of account, that would not be hit by that is TFSA, tax free savings account. But unfortunately, with the tax free savings account, there is very limited amount of money that could be invested in it.
Wing Lim: [00:10:56] That's so good that the government has to limit it.
Goran Ogar: [00:10:59] That's right.
Wing Lim: [00:11:00] Yeah. Now, the other thing, the government, is so good that the government have to limit it is insurance.
Goran Ogar: [00:11:06] That's right. Yeah. So there are three types of insurance, actually two categories. There is term insurance and there is permanent insurance. And permanent insurance could be as universal life and whole life. What's interesting is about five years ago, the government reduced the amount of money that could be placed inside the insurance. And when I say placed inside the insurance, permanent life insurance is very different from the term insurance. Term insurance is only insurance that has pure insurance cost in it, plus some administration fees and stuff like that. So it's kind of like people consider it as a cheap, the least expensive type of insurance. It's not, actually it's even more expensive When you look at the net cost of pure insurance, it's slightly more expensive than net cost of pure insurance inside the permanent policies. Now, with the permanent policies, that's universal life and whole life, there is the insurance component, but there is also the investment component. In the past, government used to allow a significant amount of money to go into the investment portion of the permanent policies. And the challenge for the government was that the investment inside the insurance is exempt from the taxation. So it behaves in a similar way like tax free savings account. And essentially a person could put a large amount of money to grow at your discretion. If it's universal life, you can invest however you want - mutual funds, stocks, index funds - whatever you want to have in your portfolio. And that money would grow on a tax free basis and at the time of passing, it would go to the estate on a tax free basis as well. But also a person could withdraw from there in the form of a collateral loan or a straight withdrawal. We can get into it a little bit later, but about five years ago, the government decided to reduce the amount of money that the person could invest inside the universal life policies simply because lots of people were put in a significantly large amounts of money into those life insurance policies and without paying any tax on them.
Wing Lim: [00:13:29] So that's that's actually the wealthy people secret weapon, right? They have so much inside this TFS on steroids which is insurance, permanent insurance, and jacking up just getting fatter and fatter. And at the end the government gets so little tax out of it, they have to limit because it's so good.
Goran Ogar: [00:13:49] That's right. There are certain strategies, we're not going to go into all the details because our time is limited from that perspective. But there are certain strategies that could be used with the, within those policies, and with the corporation where literally corporate money could be withdrawn outside of the corporation without triggering any tax.
Wing Lim: [00:14:10] Yeah. Now so we don't have time to go dive into that. But this is very interesting. So would you, so comparison number one, you have a bunch of assets portfolio. You know usually the regular Joe doctor goes to the regular Joe accountant and they say, okay, pay yourself T5, save a bunch of money in the corp and invest in the corp and build up the portfolio. And upon death, like you say, there's double taxation. There's like 60% gone to the tax man. So what happens if there is an insurance policy?
Goran Ogar: [00:14:41] So essentially how it works with insurance policy, let's say if it's corporate owned insurance policy, so there is no withdrawal of money outside of the corporation. If a person would set up insurance policy, they could dump in a large amount of money as an investment inside that policy. So that money would number one, it would grow tax sheltered. What it means is there would be no taxation. So again, similar to the RSPs or tax free savings account, as compared to regular investment inside the corporation, which would trigger passive income taxation. And at about three, four years ago, the government actually was addressing the passive income inside the corporations. And if your passive income is over $50,000 per year, you lose the benefit of the small business deduction, which means you're getting taxed as a large business. Even on the first portion of a half $1 million. With the life insurance, permanent life insurance policies - so universal life or whole life - you completely bypass the passive income taxation. Now, if the investment inside the policy grows and let's say if it stays there 34 years until a person passes away, the proceeds from the insurance are paid into the corporation, number one, on a tax free basis. So they hit the corporate account on a tax free basis. The corporation does not pay any money in tax and as a result, proceeds from the insurance create something that's called capital dividend account or short, abbreviated CDA. The capital dividend account is a notional account, so it's used only for the accounting purposes. But that account allows the funds from the corporation to be passed on to outside of the corporation on a tax free basis. So which means all the assets that are accumulated inside the corporation within that policy would pass to the heirs without triggering any tax at all. So even if it's corporate money.
Wing Lim: [00:16:54] Wow. So let's dial back a little bit. So same thing, right? So you work your buns off, have $1 million nest egg. Right? So you put it, uh, hide it inside a policy, permanent life policy, which is corporately owned by your place of work or whichever, so upon death is not just the insured amount - whatever 1, 2, 3 million - that goes to your offspring, but also the growth inside it is tax free compound over 30, whatever decades. And it goes down tax free.
Goran Ogar: [00:17:25] That's right. Yeah.
Wing Lim: [00:17:27] So then then so the comparison is we, my wife was a financial planner like 30 years ago, and at that time we read the book The Wealthy Barber, and said, okay, buy term life the cheapest to hold it personally, then you don't have to worry about pulling it out of the corp. Then the difference is a million, you only get 400 down to your kids or 300 versus a million. So for us to believe in that, we have to work 2 to 3 times harder to save a million to the next generation. That's absolutely crazy. But that's, everyday Joe, that's the advice that we got.
Goran Ogar: [00:18:02] Yeah, well, that's the challenge with the advice. That's the challenge with the taxation. Because even I had an opportunity to chat with an accountant, one of my client's accountants - this was about 4 or 5 weeks ago - and the conversation revolved about the taxation and certain aspects, and I mentioned a different accounting firm and certain strategy. I was going to send the documents that I received from that accounting firm, kind of saying that the strategy is okay and that that's what they recommend to the clients. His comment to me was, Well, I don't like what they're saying because they approve of capital gains stripping. I'm not going to go into that strategy. But it's a very unique strategy. It's called, in other words, a pipeline strategy for a corporate tax planning. He was upset because the other accounting firm utilizes that for their clients. Well, the other accounting firm is actually a large national firm. I'm not going to name that firm, but it's a large national firm that has a very good auditors and frankly, CRA does not come against them very often, if ever. So they're utilizing this strategy that the other accountant that did not approve. Why? Simply for the lack of understanding and knowledge of certain aspects of a tax code.
Wing Lim: [00:19:35] Right. Now, so yeah, this is very interesting. So let's move on. So do we have to, all these benefits just from one strategy you're talking about, do we have to wait till we die to benefit from.
Goran Ogar: [00:19:48] No you don't. No, because, so let's say with with the permanent policies, if they're a part of the corporation and if the funds are accumulated inside the corporation, you can either withdraw money from it. Now, it would be taxed if it's withdrawn outside the corporation. Another option is to use those funds and use it as a collateral asset for the loans, and pretty much every major bank in Canada will lend you money against a permanent life policy outside of the corporation for the corporate asset. So the way we structure it often is, let's say if there is retirement planning, so an individual, a business owner, would invest a large amount of money inside the insurance policy. When the time for the retirement comes, they would just have a series of loans outside of the corporation, which would be a tax free money to them. Let's say a series of 20 loans, 20 annual loans for the 20 years. So all the the money is not withdrawn. It's alone. The investment inside the permanent life policy continues to grow. And upon death the insurance policy pays the proceeds to the corporation, as I mentioned earlier, from the corporation it gets on a tax free basis to the heirs or to the estate outside. A portion is used to pay off those loans and the rest stays tax free with the family or with the heirs. So a person can simply use that, collateralized, use a loan as a tax free income in retirement against the assets inside the policy.
Wing Lim: [00:21:38] And in case this makes your head spin, don't worry about it. We'll have future sessions that dive into these strategies. Today is opening, by talking to Goran it's like going to a bookstore and find a very interesting book or novel and you open it and you just look at the table of contents and you're really attracted. So this is, today is one of those because there are so many interesting things. Now, let me recap it in layman's terms. My understanding is instead of going buying a cheapest term life insurance under your personal name and then pay yourself T5, the different advice that that we get here, or different brain wave, different wavelength, is actually put it inside, buy a permanent life policy inside your corporation and stuff as much as you can and build it up, build it up to be tax free. And not just that you collateralize it, right? So you borrow the money out and pay whatever prime rate or whatever. And then, but then now it's a loan under your personal name. So it's not under your corporation. It doesn't have to be in a corporation anymore. So you don't have to worry about this passive income thing. And then so you can invest. So then you have your nest egg inside a life policy that's growing, but you take it out, collateralize it, and you still, and you now you can invest again. So you got two, two piles growing. Is that true? Goran?
Goran Ogar: [00:22:59] Uh, sorry, could you repeat?
Wing Lim: [00:23:01] So your life policy is growing, right? Tax free. But you collateralize, so you borrow the money out.
Goran Ogar: [00:23:07] That's right.
Wing Lim: [00:23:08] Now you can go invest again. So. Have a second pile growing.
Goran Ogar: [00:23:12] Exactly. So what lots of people do is they would have a policy inside the corporation. They would borrow money outside the corporation and not spend that money, but actually use it for the investment purposes. So essentially, it's using a corporate money in the personal environment now, where the taxation is actually lower than inside the corporation, and that's additional benefit that could be used. So the interest in that regard becomes also tax deductible.
Wing Lim: [00:23:44] Right. And then a lot of struggling young physicians, right, we met young colleagues by the time they finish med school, they are $250 to $300,000 in debt. Right? And so they if they have this kind of policy and they do a collateral loan, and so they can pay off a little bit and still sock some money away. Right? Or can sock away for a nice retirement. So this now, this alone is amazing. What... give us another, what else would a regular physician, should should we do if we, now that we have this thinking cap on, what else would you advise? Like what other corporate restructuring strategies would you recommend?
Goran Ogar: [00:24:24] So depending on a personal situation, of course, and everybody's situation is different. But typically when I have my wish list for my clients, when I look at their situation, and that's restructuring the type of income that they draw out, I understand that people have to take out T4 income. But if you're taking T5 income, you can look at reduction of your CPP income to reduce so that you're not paying CPP, because many people are not going to use it. So for me, number one income strategy would be looking at the pipeline strategy. So I would advise many individuals, if you have income of, let's say, $200, $250,000 per year or more, utilizing pipeline strategy or capital gains stripping, would reduce your income by half, literally. Number two is setting up a permanent policy for estate planning, for retirement planning, or for immediate financing for other investments and stuff like that outside of the corporation or for a different corporation. Number three, I would say setting up a family trust, family trust and keeping the assets inside the family trust. Family trust for a reason, there are tax reasons, but also there is a control reason that will help you save money from creditors. If there are certain situations in life, there are many things that can happen that with a family trust, actually you can prevent negative consequences from happening.
Wing Lim: [00:25:59] Like a divorce of your kids.
Goran Ogar: [00:26:00] That's right. Exactly. Yeah. Yeah. Because with the family trust you can avoid even for your kids, you know, prenup agreements and stuff like that, which is often a tough conversation to have. If a person is a donor, if you like to donate money to charities, I would look at setting up a private foundation as well for those purposes, because with the private foundation, whatever you put into the private foundation, you get pretty much about 50% tax credit. But you have to spend only 3% of whatever is inside the private foundation for the charitable purposes in any given year. So those are kind of like four strategies that I would look at seriously considering setting up pretty much every business owner. Now, there are other strategies as well that could be applicable for various situations, but these four, I would say, are the core when it comes to tax savings for business owners.
Wing Lim: [00:26:56] Right on. Yeah. So somebody's already made a comment like we're drinking from a fire hose already, so 30 minutes just came and gone like that. So a couple of questions left from me. Why wouldn't more advisors tell us this?
Goran Ogar: [00:27:12] Well, I would say, number one, there is a lack of knowledge when it comes to these strategies, and I think that's the biggest issue. Number two, there is, from the accounting perspective, there is only accountants, there is always fear that you are too close to the line and that you shouldn't walk too close to the line. So I would say those two things - the lack of knowledge and fear of stepping over the boundaries - are probably the two most the biggest reasons why we don't hear about those strategies.
Wing Lim: [00:27:46] Fair enough. Fair enough. And that's why we're here to empower everyone, right? The empowerment process to empower you to ask smarter questions, write to your advisors. That's then the last question I have, if we have run of the mill advisors, we feel stuck. Do we fire them or what do we do? What are our choices and steps?
Goran Ogar: [00:28:06] I mean, that's difficult to say, you know, because I'm an advisor myself. Right? But the challenge is there are lots of good advisors out there, but there are few in comparison to the number of advisors that are there. So looking and finding a competent advisor who knows his stuff and who's willing to tackle the taxation and the estate planning and the strategies that are involved, who is willing to go extra step, if you will, with strategizing, I think would be probably the most important thing for an individual to do.
Wing Lim: [00:28:43] So what, at what time should one retain a tax lawyer? At a cost?
Goran Ogar: [00:28:50] Yeah, I would say for tax lawyer in particular with the income of $200,000 plus, I think a tax lawyer is a must because the cost for a tax lawyer at that point, percentage wise as a percentage in relation to the income, becomes justifiable.
Wing Lim: [00:29:08] Right. Yeah. Well, that's absolutely amazing. So I can share with people that, that I've learned tons and tons over the years. And when I tell people, when I meet with my accountant once a year is not ask my accountant, what do I do? Is I like do the Vulcan mind meld like Star Trek, but I suck him dry. I drive the two hour conversation and then I would pay the tax lawyer to give instruction to my accountant. Right. So that's, and inspired advisors like you, Goran, right are so, that is so rare. So rare. Well, so I want to thank you for this really, really valuable small lesson. And you definitely will be back many, many times. Let's open up the floor because we want to keep it lively a little bit. So, Kevin, maybe you can take control.
Kevin Mailo: [00:29:57] Yeah, I'll be happy to moderate. And I'll add that Goran is going to be joining us for a portion of our conference May 6th and 7th. So we got those comments, you know, from some of our webinar guests say it feels like drinking from the from the fire hose, listening to Goran talk, I couldn't agree more. And I'm right in that category myself. So if you're feeling overwhelmed or there was a lot here, this is going to be up on the podcast, so you can always listen to it again. But more importantly, just reach out to us, connect with us. Goran is going to be at the conference to answer these questions and explain these concepts in more depth. Because there is a lot here. And like Wing said, we're just glancing at the chapters of a very big book here. But if we do this properly, this can mean hundreds of thousands of dollars over the course of our careers. Right? And we sit there chasing returns on the public markets or other investments. And we're not, we're not really paying attention to the single biggest line item in our lives, which is personal and corporate taxation. So it's worthwhile doing what Wing does. Learn some of this stuff better than your accountant so that your tax lawyer can send instructions over. But that takes time and I'd encourage everybody to come and join us May 6th and 7th for a bit of a deep dive in some of these topics. So with that being said, if anyone has questions, go ahead and ask them or reach out to us via email or connect with us on the website.
Kevin Mailo: [00:31:19] All right. We got one question. We got one question. From one of our master class participants. Thanks, Goran. Is the investment in whole life insurance going to be managed like mutual funds? You sort of touched on this earlier. Do you want to explain that a little bit more?
Goran Ogar: [00:31:34] I did, and I do, yeah. So there are two types of permanent insurance. There is universal life and there is whole life. With the universal life, you manage the portfolio just like your mutual funds portfolio. So you have probably 500 choices, with most of the companies you have 500 choices of the investments. You manage them like a mutual fund. With the whole life in particular, the company gives guarantees. So the insurance companies, they manage that portfolio for you and the income is fixed. So there is no fluctuation like in mutual funds. So they're not phased, but whatever is happening with the market. So the income is fixed on the whole life.
Wing Lim: [00:32:21] Which is amazing already.
Kevin Mailo: [00:32:25] Wow. Are whole life premiums like a corporate rate expense? I'm hoping I'm getting that right.
Wing Lim: [00:32:32] Is it a corporate expense?
Kevin Mailo: [00:32:35] Yeah.
Goran Ogar: [00:32:35] No, it's not. There is a very narrow reason when a life insurance could be a corporate expense. That is, if the bank, let's say if you're borrowing money from a bank, if they require that the principals of the corporation be insured, life insured, only then the premiums end up being corporate expense.
Wing Lim: [00:33:00] So you mean when we buy a life policy, like a whole life policy, for example, inside a corporation is a personal expense not a corporate expense?
Goran Ogar: [00:33:08] No, it's not considered. So it's after tax dollar to the corporation.
Wing Lim: [00:33:14] Okay. But it's still inside a corporation.
Goran Ogar: [00:33:17] It's inside the corporation, that's inside.
Wing Lim: [00:33:19] Inside PC not personal.
Goran Ogar: [00:33:20] Inside PC. It's not personal. That's right. Right.
Speaker5: [00:33:25] Hi. Thanks. Sorry, I can't come online. I can't show my face.
Kevin Mailo: [00:33:31] All right, go for it. Go for it.
Speaker5: [00:33:32] That was very, um, my head is still spinning. So lots of good stuff, right? So I just wanted to be sure that it's like, after you do your tax year and you have money left over, you pay taxes on it. So whatever you do with that, you can buy life insurance with that, just like you would do an investment in your corporation. So it doesn't have to be from the personal side.
Goran Ogar: [00:34:03] Yeah,it's not from personal side. So if it's corporate owned, exactly how you explain. So after you pay corporate tax, then you use those funds to invest money inside the permanent insurance.
Speaker5: [00:34:15] Okay. Thank you very much.
Goran Ogar: [00:34:17] Very welcome. I see the question, what about term life insurance? Same thing with the term life insurance. Only if the lender requires that there is life insurance on the principals, then the term life insurance could be deductible. Otherwise it's not. To the corporation.
Wing Lim: [00:34:43] There's another question. There's somebody raising hand, but there's a question ahead of that. Who would you recommend, like term life insurance versus whole life insurance?
Goran Ogar: [00:34:52] Okay. So where I would recommend the term insurance is, for example, there is, let's say, a startup company and there is a buy sell agreement between the partners and they're planning to build the company and sell it maybe in 5 to 10 years. So where there is an exit strategy that close, then I would say go for the term insurance rather than the permanent insurance for the reason of it's less money to be put in because more money is required for the corporation maybe to run. In that case, I would say term insurance because there is no other plan in a tax planning that's involved. Now, if the desire is to do additional tax planning, then I would look at the strategies with the permanent insurance. Does that answer the question?
Wing Lim: [00:35:45] So in my mind, just my 2 cents worth, we all have cell phones, right? And I would say that the cheap term life is this is a phone you can call somebody. But now people use more than just phone, right? Your whole life is managed. Right? So whole life or permanent life policies is not just a term, but a bunch of other stuff. You can use a lot more.
Goran Ogar: [00:36:05] That's right. Now, what's very important to remember, the premiums for the whole life appear to be more expensive than the term insurance and I carefully use appear to be more expensive. The cost of insurance is actually pretty much the same. Term insurance ends up being even a little bit more expensive, about 5% more expensive, than a whole life insurance because the rest of the money, whatever is the difference in the premiums, so whole life being a higher than the term insurance in terms of premiums, the spread that's here is actually what's going toward your investment as a cash value eventually that could be used for the retirement or as a collateral what we discussed earlier. And so term only appears to be cheaper. But in reality they're more or less the same cost.
Kevin Mailo: [00:37:02] You mentioned a number of strategies like capital gains stripping, whole life, family trust. Is this one after the other depending on net worth? At what net worth would these be applicable? So how do you deploy these? How do you put these together? Or do we need to sit down with someone like you, Goran, who says now's the time to do a trust, now's the time to do capital gains stripping, all that. How do we deploy all these strategies? Right?
Goran Ogar: [00:37:29] I wouldn't say there is - how would I say - there is a rule at the net worth thresholds when you start applying these strategies. With the capital gains stripping, I would say income over $200 to $250,000. That's when you start with the capital gains stripping. With the whole life, you can start at about $150 to $200 or more. With the family trust, I would start looking probably at about $350,000 income. And then with the foundation, the foundation would come after that. So there are certain stages where a person would apply one strategy and then when they hit another threshold in income, then apply another strategy. Et cetera. And beside these four strategies, there are other strategies as well that depend on the net worth of the individual. There is always a potential for the offshore tax planning and stuff like that. So yes, to answer that, it depends on the net worth which strategies would be applied, at what stage in life. Does that answer the question?
Kevin Mailo: [00:38:42] I think it's great.
Speaker5: [00:38:43] Yes. Thank you.
Goran Ogar: [00:38:44] You're welcome.
Speaker6: [00:38:46] Sorry. I'm not sure if we got you.
Goran Ogar: [00:38:49] Now we can hear you.
Speaker6: [00:38:50] Oh, really? I've been typing for the last two minutes of my question there, so.
Kevin Mailo: [00:38:55] No, no, no. Go Fire!
Speaker6: [00:38:57] Okay. Thanks a lot. Like, you've been, like, really enlightening and helpful on really making the tie between the strategy and how it's used in corporations, because I did read about this, especially in the States, and I've asked locally and tend to only get like deer in the headlight looks from advisors. So it really sounds like you've known how to put this thing to use. It's a bit of like a personal scenario kind of question, but one way, well, there's really two questions. One way I saw potentially using this strategy is in 4 or 5 years we wanted to maybe do something like building a house. I understand there's a bit of like a build up to this, the whole life insurance before it starts paying its own premiums. I'd just be curious to see if you've ever used it this way so that essentially those loans can be taken out, taken out personally to do something like to pay for like a house build or a mortgage or something like that.
Goran Ogar: [00:39:59] That's right, it could be. Yeah. So there is a strategy that we called immediate financing arrangement where you can set up a whole life policy and you can literally collateralize that immediately and get 100% of the premiums outside of the corporation as a personal loan immediately, pretty much. So whatever the amount of money is that you would need, structure the premiums for the whole life to be in that range and then you can borrow it outside of the corporation personally right away.
Speaker6: [00:40:36] Wow. Okay. That sounds pretty powerful. And the second piece was like, is it ever too late to implement like working towards like a whole life? Let's say somebody had collected or done the RSP route for many years. Is there a way to to move things around or how would that work?
Goran Ogar: [00:40:59] Yes, there is. Yes. Now, on the personal side, so this would be outside of the corporation, you see. As long as the person is comfortable using loans, what I've done in the past is I would set up an investment loan and I would pay the interest from the RRSPs. You see, because investor loan for the investment purpose, the interest that you pay on it is tax deductible. The income that you withdraw from the RSPs is taxable. So essentially you would be using RSP money to pay for the interest on a non RSP loan so they would neutralize each other from the tax perspective. That way you could freeze the RSP growth and slowly start transferring money into the non RSP vehicle with significantly better taxation than the RSPs down the road. So.
Speaker6: [00:41:57] Okay. I think I'll have to like draw a chart to make that make sense to me. But I think I got what you're saying.
Goran Ogar: [00:42:02] So again, you have RSP, you have a loan, and let's say RSP is, I'll just use round number for for the sake of illustration, the RSPs are $100,000. The loan is $100,000. Let's say the interest is 5%, which is $5,000 per year. You withdraw from the RRSPs $5,000 per year, which would trigger tax on the $5,000 per year. But the moment you pay the interest, the tax is neutralized because the interest on the loan for the investment purposes is tax deductible, you see. So you're feeding the loan, if you will, with the RSP money without triggering any tax.
Kevin Mailo: [00:42:44] Wow. Wow. Absolutely. Wow. Goran.
Speaker6: [00:42:52] Yeah, it's cool.
Goran Ogar: [00:42:54] Does it make sense? Does it make sense now the way I explained?
Kevin Mailo: [00:42:57] Yeah. Wow.
Wing Lim: [00:43:01] Well, there's so much now to do.
Kevin Mailo: [00:43:04] We got another question. Let's go. All right. We'll we'll find some way to cover all this later. Okay. About whole life insurance, as you mentioned, a few years ago the law changed. And this participant wrote in, I purchased one policy prior to that change in the law. But what was the change? Can you explain the change in whole life?
Goran Ogar: [00:43:25] Yeah. So number one caveat. If you bought it before the change, your policy is grandfathered. So the old rules applied, which means what's in insurance industry called MTAR Room. So it's an acronym. But essentially what that is, it's the amount of money that you can invest inside whole life policy for the cash. So the government saw that that amount was being, let's call it abused, from their perspective or overly used. So they decided to reduce the amount of money that could be invested on an exempt basis inside the whole life policies. So that reduction was probably to the tune of about 30% that they cut it down. So back in 2016, you could put significantly more money as an investment portion inside the policy as you can right now. But there are ways to work around that as well. So there are not straightforward as it used to be before, but there are ways to increase that investment portion. So to answer your question, if you purchased yours prior to the changes, nothing would change to you. For people who did not buy it at that time but bought it in 2017 or later, the amount of money that they can invest inside the policy is significantly reduced then to your policy.
Wing Lim: [00:44:59] All right, this is awesome. Now, so I'm aware of the time as well. Now, there was a comment earlier in the chat and that is, oh, this sounds so expensive. So can you go on all these strategies? What kind of cost and is it cost benefit ratio? How do you balance that?
Goran Ogar: [00:45:17] Yeah, the reason I mentioned some of those thresholds is that proportionally to the income, so whatever strategy you implement in proportion to your income, it would be significantly cheaper to implement those strategies. Even if you need to pay a tax lawyer let's say $10,000 to set up one of those strategies for you, $10,000 in that strategy would probably save you $50, $60 or $100,000 in income tax. So it may sound expensive just to write a cheque, let's say, to a lawyer, but when you look at the tax that you would save, it ends up being actually more beneficial to pay a significantly smaller amount to the lawyer than to the government.
Wing Lim: [00:46:08] So from personal experience, okay, so if you don't know anybody, you have no discount pipeline could cost you 35 K, but it saves you if you do $1 million pipeline suck out of your corp, you can save $375,000. So in that savings is 300 K so, right? I've done it twice. So there's always a cost and then a good advisor would help you work that through. Right. So if you only have so little pool, for example, you pull 50 K out, it's really not worth it. Right.
Goran Ogar: [00:46:39] That's right. Yeah.
Wing Lim: [00:46:40] Yeah. So. All right, good. Now, so this is, this is awesome. So now, so I don't want to drown everybody because this is already a whole lot of information. And I think the whole point is to expand your brain, right? I think our brain is like, what do you call it? The airbag driving. Once you decompress it, you need to shove it back and you can't. Right? So my brain, that happens multiple times. And so hopefully tonight that creates this decompression in your brain. This is a good place to wrap up.
Kevin Mailo: [00:47:10] Yeah, I think that ought to cover it. And clearly, clearly we've got to get Goran back on for another webinar, for a podcast episode, because this was probably our longest by far and away because it was so good. We loved it. Wonderful. And I'm going to wrap up here before my busy six year old starts taking up all my time and and space. But again, Goran, we sincerely want to thank you for coming on today. It was absolutely outstanding and we're looking forward to having you at our national conference, uh, this May 6th and 7th.
Goran Ogar: [00:47:46] Yeah. Looking forward.
Wing Lim: [00:47:48] Thank you, Goran. Really appreciate your time and your wisdom.
Goran Ogar: [00:47:50] Thank you, guys. Yeah.
Wing Lim: [00:47:51] Thank you, everyone, for attending. Good to see you all.
Kevin Mailo: [00:47:54] Thank you so much for listening to the Physician Empowerment Podcast. If you're ready to take those next steps in transforming your practice, finances or personal well-being, then come and join us at PhysEmpowerment.ca - P H Y S Empowerment dot ca - to learn more about how we can help. If today's episode resonated with you, I'd really appreciate it if you would share our podcast with a colleague or friend and head over to Apple Podcasts to give us a five star rating and review. If you've got feedback, questions or suggestions for future episode topics, we'd love to hear from you. If you want to join us and be interviewed and share some of your story, we'd absolutely love that as well. Please send me an email at KMailo at PhysEmpowerment.ca. Thank you again for listening. Bye.