This feels illegal to know

Good morning!

I’m not sure about you, but this is my favourite part of Saturday morning: grabbing a coffee and delivering my newsletter to all you fine folks.

First off, I’ve realized that a bunch of people have joined here, but often, they aren’t as familiar with some of my more advanced concepts. And that’s ok, but I was hoping to get a current reading of where everyone at.

So, if you have a few moments, please click the below link and take my one-minute survey. This way, I’ll be able to deliver more relevant information to you all.

Second, I had an Advisor in North Toronto reach out to me, and he is looking for people to join his thriving wealth management practice and do the insurance. If this interests you, message me, and I’ll connect you.

Thirdly, and probably most exciting, I’ve found a charity that loves insurance policies and has some deep pockets. They are interested in unwanted term policies, which they’ll convert and own. So, if you have some clients interested in donating unwanted term policies they don’t want (and getting the tax benefits, of course), send me a message, and I’ll connect you.

This isn’t actually what I wanted to talk about, but I feel this newsletter is more of a town square than anything these days. I’ve met so many people since I started writing it weekly more than a year ago.

Let’s talk about holding and operating companies and how they work together.

So what is a holding company, and why would someone own it?

Building all your wealth in your operating company is dangerous.

First, it creates unneeded risk for a business owner. If that business ever got sued, they could access the owner's personal assets, because those assets are in the company.

Second, if the company was ever sold, you’d have to purify the corp (take all the assets out and pay a lot of tax) or sell it with those assets. And whoever buys the company may not want those assets.

It makes more sense to set up a holding company. A holding company is simply a company that owns other things. It could be shares of your operating company or shares of stock, cash, real estate, etc. It ends up being the owner's personal piggy bank.

But the magic with all this happens is something called “inter company dividends”. This is simply a fancy way of saying - you can send money from one company to another tax-free.

I know, I know. Is it safe money or not? I’ll leave that to the accountants to figure out.

The advice to most business owners is that any money your operating company does not need should be sent to the holding company to shield it from any operating company liability.

When it’s in the holding company, you do your personal investing at the corporate holding company level. That’s where you buy your stocks, bonds, ETFs, real estate, and, of course, your permanent life insurance policies.

Now if you’ve been in this business for a minute, you might get the following objection/concern:

If my holding company owns the shares of my operating company, I won’t be able to claim the Lifetime Capital Gains Exemption (LCGE).

While that statement is true, it may not matter in most cases. And that’s because more than 90% of business won’t need it.

Most companies aren’t sellable. They are just wound down.

For those that are sold, they are usually sold for their assets and not their shares. You can’t depreciate the value of shares, but you can depreciate assets, which makes them more valuable.

But let’s assume they have built a business that will sell for shares. You can still do what I just outlined, you just need to also set up a family trust to utilize the LCGE.

Now, for this next part, you’ll want to consult an accountant, as I may get some of the details wrong here. I’m not an accountant, I only play one on LinkedIn.

In order to claim the LCGE, the business owner needs to own the common shares personally. But, in order to send tax-free dividends to the holding company, the holding company needs to own the common shares (according to one of the statues inside the Income Tax Act).

You’ll need a family trust between them to make both things happen. That way, you can send cash up tax-free and still use the LCGE.

It’s beautiful.

And there’s one more thing you can do with a family trust; it almost feels illegal to know this.

It’s called “multiplying the capital gains exemption.”

Here’s a good article to read up on it:

Essentially, each Canadian gets a one-time LCGE. But, if you run the sale of the business through the family trust, you can set multiple beneficiaries of this family trust. You could set your spouse and children as beneficiaries. For example, if you were married and you had 3 children, you could multiply the LCGE 5 times - giving you $4,000,000 of tax-free gains.

In case you didn’t know all about it, now you do.

And once all this planning is complete, you can own your permanent life insurance policy in your holding company.

I’ve found that walking a business owner through what I’ve just explained to you this morning is incredibly valuable for them. Often, they don’t understand how it all works, and it helps them understand your value and how you can help them achieve their goals. It puts you up there as a trusted Advisor.

If I were you, I’d learn as much as I can about this but also get very comfortable explaining these concepts so that it feels natural to talk about corporate organization and how everything fits together.

So here’s what you’ve learned this morning:

• You can explain holding companies.

• You can explain how holding companies interact with operating companies

• You know why you shouldn’t hold your money in operating companies

• You know that you can transfer funds tax-free

• You know that most companies don’t sell for shares

• But, if they do sell for shares, you can still use a holding company and get the capital gains exemption

• You know that you’ll need a family trust

• And, if you have the family trust, you can also multiply the capital gains exemption.

• And, you can hold all your assets in the holding company including your permanent life insurance.

If you need any help growing your own insurance practice and want assistance. Don’t hesitate to reach out.

Have a lovely weekend,

Andrew