Episode Transcript
[00:00:00] Speaker A: Foreign.
[00:00:11] Speaker B: Welcome to wealth on Main street, where conversations about growing your wealth are fun and entertaining. Wealth isn't just about money. It's the skills and the knowledge that we develop to pass on to future generations.
Tune in each week to grow your mindset and your net worth at the same time.
[00:00:36] Speaker A: Today's episode so Rich and I, we, we love to, we just love to expand on, on certain things, especially when we see conversations that surface or we see, you know, marketing initiatives online that might be painting a little bit of the picture, but not necessarily the entire picture. And so today is, it's going to be a discussion where we're really going to focus on our Canadian listeners and viewers today. But if you're in America, stay with us because the principles still apply. But in Canada, there's some very unique nuances that when you understand it properly, it becomes really, really powerful. And we're so to talk about cash surrender value lines of credit and more specifically how they integrate with dividend paying whole life insurance contracts, whether those contracts are personally owned or corporately owned.
And now Richard and I, you know, we've both spent many years, like I'm going into my 19th year educating the general public about The Infinite Banking Concept and about the tool that's used to, to, to implement the concept.
When you understand the tool itself, this is where things kind of get really interesting in terms of what we've seen over the years in Canada as a policy grows.
The there's something that's sort of happening in the background. The, the adjusted cost basis, or acb, you're going to hear us throw around a few technical terms today, but the adjusted cost basis of the policy plateaus and then gradually declines, while at the same time the total cash value is rising on a daily basis, which means the loan amount available is rising on a daily basis. And when the crossover happens, meaning when your adjusted cost basis drops below the loan amount available or the total cash surrender value, you've now got a situation where accessing money from the life insurance company would trigger a taxable event, a taxable gain, but using a cash surrender value line of credit does not. And that's where the strategy becomes, I would say, I would call it incredibly elegant Rich if I was to use, if I was to try and sort of sum it up.
But what we're going to do in the episode, what I'm trying to get at so we can get Rich to chime in here, is that we're going to break down what a cash surrender value line of credit actually is. What it's not why the banks are willing to lend against dividend paying whole life insurance contracts. Why the loan to value ratios would vary 50%, 75%, 90%, some or even 100% in some cases. How the interest treatment changes the math. Right. Depending on whether you're paying the interest or capitalizing it.
And more importantly, how this fits, particularly when we talk about business owners who are being promoted to very heavily online, that you can access money, you can get it out of your company tax free.
People are telling you there's only two ways to get access. You gotta take dividends or you gotta take a T4 income.
And that if you deploy this tool and this strategy that you can get money out of your corporation tax free.
[00:04:09] Speaker B: But Jason, it sounds too good to be true.
[00:04:12] Speaker A: Well, so let rich. So let's just start right at the foundation. So when somebody hears the words cash surrender value, line of credit, what are we actually talking about?
[00:04:21] Speaker B: Yeah, I mean the best way to think about it is it's the equivalent of a home equity line of credit, except it's not attached to your home, it's attached to an insurance policy.
So a cash value is equity. Yeah, houses have equity.
Banks want to lend against quality equity. Well, the reason they'll give you credit lines against a house and against cash value is because they have a similar element of tangible equity and stability attached to them. There's a lot more stability and capacity in cash to render value line of credits because we know we have it's, it's guaranteed by a death benefit. The life insured person is going to die. The bank knows that, you know that, Jason knows that, I know that, we all know that.
Whereas the house situation, markets go up and down and so they have limitations on how much you can borrow and all that kind of stuff. So they're happy to lend money against quality assets and they don't lend money against crappy assets. If you've ever tried to go and get a loan for something and the bank has said no, it's probably because you didn't have quality collateral. They want collateral and they want to know what they can get access to. Cash surveyor value, line of credits. They want to get access to the collateral of high quality permanent life insurance policies.
[00:05:39] Speaker A: Well, and here in addition to what you described, so the distinction to the life insurance company itself is guaranteeing the collateral for the, for the loan.
And when the lender takes a look at this contract and says, okay, you've got $1 million of total cash value today, we know that that number is going to be higher tomorrow and the day after that and the day after that.
And we are agreeable to setting up a cash surrender value line of credit which dependent upon the lender, it functions just like a line of credit. That's what it is.
And you can either capitalize interest, pay interest. If you agree to pay interest, the lender is going to allow you to access more of the total cash value in terms of what your borrowing limit is going to be on the cash surrender value line of credit because you're agreeing to pay interest on it.
I want to dive right into a quick scenario. So I'm going to position this for you, Rich.
You're a business owner, which you are, and you have corporate owned dividend paying whole life insurance, which I do, and which you do.
And you go to a conventional bank that provides cash surrender value lines of credit and you are the shareholder of the company and you're pledging a corporately owned asset. The business itself is paying the premium.
The business is the beneficiary of the death benefit proceeds.
And the lender says, look, we're going to, Rich, we're going to allow you to borrow against 90% of the total cash value of the policy. We're going to review it with you once a year to see if your borrowing limit needs to go up and how you're coming along in the utilization of this tool. And you say, great, that's fantastic.
And you've been told, Rich, you can get money out of your company tax free.
So you've pledged a corporate asset and now the company accesses the cash surrender value line of credit and takes out $100,000.
And you go into the corporate bank account and you take out that hundred thousand dollars and you take your family, your entire family, on an incredible cruise, amazing holiday.
And you do this every year for a decade and you have not paid a dime of tax and then you die.
And there's somewhere around 1.2 million-plus that's owed to the lender, even though you only took out a million and we've got interest that that's accrued that you haven't paid back and the company hasn't paid back. It's probably a little more than that. But let's just say you die. The death benefit is 2 million bucks.
And the life insurance company writes two checks. They write one check payable to the lender for the $1.2 million balance on the cash surrender value line of credit and they write a death benefit proceeds, the residual death benefit proceeds. They write A check to your corporation for $800,000.
The entire amount that you borrowed, Rich, is treated as taxable on your terminal income tax return because you weren't structured in a way where the collateral was replaced so that the lender would release the assignment on that life insurance contract because the collateral was replaced and there was some form of promise, promissory note, whatever that may be, that you're going to pay the bank what's owed on that cash surrendered line of credit, but that the money's not coming from the life insurance company, they're not stroking you a check for that.
And the amount of times the people, the business owners that I talked to that had been sold on this idea and they have every belief that they're going to access money tax free and they have no idea what the nuclear tax bomb is going to look like.
[00:09:56] Speaker B: Yeah, the moment they signed up, they, they lit a fuse on a, on a, on an unknown. We don't know when the explosion is going to happen because we know when, when you know the maker's going to call you home.
[00:10:07] Speaker A: Right.
[00:10:07] Speaker B: We know that the bomb's coming.
[00:10:09] Speaker A: And a person says, well, you know, Rich, right? You say, well, Jason, I've been paying my company a guarantee fee that does not sanitize what happens when you die.
And so when people are just, they don't have the full picture because it's, it's like, hey, put a, put a whole life policy in your corporation, set up a cash to undervalue line of credit, borrow the money personally or maybe you do an immediate financing arrangement, whatever it is. Now you've created tax free income. On the surface that sounds really amazing, but what I'm trying to do is just slow the car down a little bit because if this is not structured properly, you can unintentionally create a very massive tax landmine. When, when a corporate asset is pledged to support personal borrowing, attribution rules come into play and guarantee fees alone do not automatically sanitize that structure. It's so important for people to be aware of that. And the tax consequences might not show up immediately, but when they show up later at exactly when you don't want tax consequences showing up because you're not
[00:11:17] Speaker B: around and probably your spouse or your exact is dealing with it and they have no earthly idea how to deal with it. And your kids are wondering where's the money?
[00:11:25] Speaker A: Right.
[00:11:25] Speaker B: And there is no money because you have to pay cra. And the Canadian government's like, well, no, actually we're going to get the money and you have six months to pay their bill.
It's not, it's not a nice situation.
[00:11:39] Speaker A: And that's not a small problem. That's a write a very large check to Revenue Canada kind of problem. And that's why we always say be very careful with simplified social media messaging. These strategies can absolutely work when they're structured properly with the right ownership, the right documentation, the right long range planning. But if you just copy what you heard in a 60 second, 30 second reel, you may unknowingly build something that looks really brilliant today but like I said, becomes a nuclear tax bomb later on.
[00:12:15] Speaker B: And you know, we've done a piece of content on this before, Jason, and so what he's talking about here primarily is the difference between the corporation doing the borrowing or the shareholder fundamentally doing the borrowing. So usually those strategies are separated in that way.
[00:12:30] Speaker A: Right.
[00:12:30] Speaker B: And you know, these strategies are very popular in Canada. A lot of people who do don't have anything to do with The Infinite Banking Concept. They just have to do with insurance placement. They're usually targeted and designed for business owners. It's more traditional insurance planning actually really fundamentally in Canada anyway. And these are real landmines and real problems. And so why do we need to talk about these cash surrender value, line of credits? Because there's a multitude of products that conventional banks offer and those products and then the, and then the, so there's the, there's a product itself and there's some characteristics there we need to discuss and there's some myths around that to unpack and then there's strategies. And so what Jason's referencing is a common strategy that people are promoting that has a lot of, well, time bomb attributes to the strategy if it's not well discussed and interpreted. Right. So interpretation, utilization, implementation. A lot of times we hear someone and they give us a great idea and a great plan, but then the person is left to follow through on that plan and that 20 years goes by and they don't remember the conversation 20 years ago. I don't know. Jason, is there a few conversations from 20 years ago you don't remember?
Maybe a couple that have like, you think a few of them have disappeared out of your. Yeah, you know, like we have a, we have a recency bias to some of our memory. Right. Short term memory, sure, we got some long term memory, but you got to activate it and it's not always there. So like you're not going to remember that exact conversation where the little details of that little strategy that maybe the advisor even did tell you, but you completely forgot and then your life has changed and totally moved on like, but you're already knee deep in the strategy. That's where this becomes a real hobby. It's also a behavior based problem fundamentally, but it's an education first followed by your behavior type, type of an issue. So understanding these products is important. And then in Canada there's a, there's a, I wouldn't say a need, but a general desire and a general direction that people will want to take very good insurance and collateralize it with a third party because they think they're going to save money on taxes. Sure. And there's a great possibility of doing that. That's true. But you also need to recognize that there's more than one of these types of lending products. And sometimes they have cash render value line of credit and sometimes they'll try to offer you something called an ifa, which is an immediate financing arrangement. Well, that's a whole nother ball of wax. And it looks like, sounds like, maybe even smells like a cash vendor value line of credit. But the reality is it's a different type of a product and it's more of a demand based loan. And so that type of thing is sold to people a lot as well, especially business owners. And there's nothing wrong with either of these things, but understanding the differences and the distinctions between them makes a big difference. And another thing that you mentioned, Jason, at the beginning, is these, these products offered by conventional banks. Well, first off, not every conventional bank is going to offer it.
And your conventional bank, if you walk down the street and you go to your local branch, they're not going to know what you're talking about because they have a specialized lending department that deals with these things.
And generally in order to set them up, while you can try to initiate yourself, you would usually go through your advisor, your insurance advisor and they would make connections and you would work hand in hand with them on setting up that tool because they would work directly with a specialized lending department with a, with a bank who does this on a regular basis. And it's not like there's a giant pool of everyone in the country is doing it. It's a smaller pool, I think, of lenders that are more apt to do it.
Yeah, you might have more people doing it, but they're going to give you less terms or less favorability. And so there's a smaller group, let's say, that gives you more common attributes to the type of credit facility you're looking at. Right. And then some things like age play a role. Like sometimes, hey, if you're over 55, it's easier to get one and it's less based on your qualifying, it's more based on your age and that you're moving closer to impending death.
Well, that sounds kind of neat. You know, so like the, the qualification methods around these things are still derivative and designed by the banking institutions and they're not the same as the control and criteria you have over say, a policy level. So again, a person needs to become fundamentally aware of these and understand when it makes sense and, and then what degree of it makes sense. You have multiple policies, maybe you're not collateralizing all your policies, maybe you're taking the big kahuna or a couple of them and you're trying to do it that way. You might have some smaller ones and you know, maybe those smaller ones are small enough that they don't even qualify for the limits that the commercial bank requires in order to initiate one. So there's a lot of, there's a lot of potential, but there's also a lot of moving parts. And so at a high level it's important to understand these things and how they're different.
But then, you know, when the rubber hits the road, you need to get more into the nitty gritty for your unique situation.
[00:17:32] Speaker A: Yeah. And I would say, you know, for business owners that are watching or listening and you're seeing social media posts about pulling money out of your corporation, tax free, any professional that you meet with and talk to make sure, be sure to ask, where specifically can this go wrong if it's not structured properly,
[00:17:55] Speaker B: because
[00:17:55] Speaker A: there are tremendous advantages, but if it's not structured properly, a lot can go wrong at exactly the wrong time.
And there isn't anyone that would, that would say, well, you know, it really doesn't matter because you know, I won't be here anymore.
[00:18:12] Speaker B: Right.
[00:18:13] Speaker A: So someone else can deal with the issue.
[00:18:15] Speaker B: You did all the work and all the planning to probably save a whole bunch of lifetime tax and then you're going to end up with a giant tax bomb. It seems like a lot of effort over a long time frame to just watch half of what you spent a lifetime building come crashing down around you or at least around the family members you leave behind.
So prudence is the word that comes to mind when I think of, think about that. Yeah.
[00:18:38] Speaker A: It's just knowing some great questions to ask that trigger some really good conversation with the professional that you're contemplating working with. And because again, I haven't personally and I'M sure there are many circumstances, lot of great professionals where they're setting things up properly. It's all being done well, and credit to them.
I can't say that I've met with a business owner who has already started down the path on this structure.
And when we have the conversation, it's not structured properly, and it's not because anyone intended it to be that way. It's just, again, really important to know what to ask.
[00:19:22] Speaker B: And I think that there's also. Well, it's also, it's great to shout out colleagues who are doing an amazing job. It's also okay to shout out the colleagues who maybe could do a much better job. And there's people who are promoting the strategy, Jason, that don't even know that that's a possible landmine. They have no idea. And because they're not clear on it, they don't even realize that they might be providing incomplete advice. Maybe they're providing good, good suggestions and good ideas, but the problem is they're just incomplete. And unfortunately, that's the case with a lot of this marketing that's out there, is that you, you hear a little bit of information and as Nelson Nash would say, you jump to an observed conclusion. And that's far too common in the financial industry space. You know, one of the things that I want to highlight here, too, is for anyone watching episode 100 of our podcast, it has to do with the taxation of policy loan in Canada.
You know, that's a good one for you to reference. And in fact, in that episode Jason and I went through, and we actually grew out on the screen examples of when this ACB crossover happens. And we talked through a couple of different ideas and variations on how you can deal with this situation, because there's more than one way to skin a cat, as it were, in this scenario. And so that particular episode, we made it 100 so it was easier to remember. And then number two, we drew everything else so that you can always go back and reflect on it. And for me personally, anytime that I work with a new client, that's, that's something that they have to agree to. As an annual homework, we also have it posted in our private membership site. And, you know, I kind of like a broken record on that, because you, you need to know and understand that part of the process, because if you know there's a possibility of a problem 20 years or 25 years from now, well, when do you want to start planning for the problem? Do you want to wait till it's there? And you're dealing with it then, or do you want to plan and adjust a little bit each year as you move closer to that inevitability, it makes a lot more sense. So moving from it, from a proactive approach to a, from a versus a reactive approach is really one of the fundamental elements that we're trying to focus people on in relation to that element of their planning and the implementation of high quality cash value policies that they can use for virtually anything they want.
Like today we were on another recording with, with our teammate Darcy's talking about how he paid off rental mortgages and then had a six month payment holiday while he renovated the property and sold it. And he's going to do that again in the next couple of months on some other properties that power and control.
He didn't need a cash surrender value line of credit to get accomplished and one day in the future he may want to have one, but he doesn't need it today.
[00:21:59] Speaker A: Yeah, I'll tell you man, I, I was chatting with, I was chatting with a business owner recently and the business owner mentioned, well, you know, I, I feel, I feel like, because he had spoken to a few other folks just based on some, you know, marketing that he had seen online and he shared, he said, you know, I feel like I'm being told that if I take dividends I'm somehow doing something wrong. And that he was hearing things like never take dividends, never pay tax, only borrow, structure, everything, so it's tax free forever.
And I said, all due respect, I wasn't part of these conversations that you were having. But that's not how real planning works.
Like taking dividends is normal, taking a salary is normal, paying tax while mitigating tax to the greatest extent is normal. And the goal is to make intelligent decisions in your planning because if you are just sort of tunnel visioned on, I need to eliminate tax entirely.
Nothing wrong with having that ambition. But that's where in my humble experience going into my 19th year on this journey, that's often when people start building complicated structures that can create unintended consequences.
There is, if you're a business owner, I'm telling you, please hear me, there's nothing wrong with taking a dividend, paying the tax, deploying your capital strategically, that's not a failure, that's, that's discipline. Planning and taking dividends for many actually reduces risk. Right? Because you're not, you're not relying on aggressive assumptions or stretching revenue Canada interpretations or setting up something that only works if every single thing goes perfectly you
[00:23:59] Speaker B: know who loves to unpack and stick a microscope up every well constructed program that says you're not going to pay any tax?
Canada Revenue Agency. Right. They quite literally live for that. That's their, you know, so that's why they have legal challenges. And then you have all these interpretations that get done and people get dragged out through years of tax court and sometimes that happens after someone dies. In the scenario that you mentioned earlier, there's, there's cases of people dealing with those tax bills and problems be dragged out through, through court over years of time. You don't want that to be your story.
And the more complexity you add into your planning arrangement, it's not to say that you don't need to add structures and prepare as your life and your business grows, but the more and more of that you do, the harder and harder it does to, begins to be to explain to the people that are left behind when you're gone. Yeah, the instruction set that you need gets bigger. If you think about like, okay, you buy a brand new lawnmower.
You know, lawnmowers are reasonably easy to understand. You put some fuel in, you put some oil in, you sharpen the blades, you prime the pump, you fire it up. It's not super complicated. But did you put the right oil mix in? You know, if you screw that up, then you could screw up the engine. Like there's a lot of things that could go wrong. And so you might read the instructions, especially if to put it together.
Well, the more complex and complicated the instructions are, the harder it is for you to do all those steps and to maintain it. The same thing applies to your financial life.
So consider that and the degree of energy you're putting into overt complexity.
And, and just what could you do to simplify that in a way where, hey, we're still mitigating our tax bill, but we're not creating, we're not spending all of our time trying to, you know, make, you know, build Fort Knox around our life that we then have to unpack somehow. Like it, I think people get a little bit too ambitious and over exuberant in the types of structures that they try to put together.
[00:26:12] Speaker A: Yeah, I agree. And I'll tell you, I mean the wealthiest, the wealthiest people that we're blessed to serve, I can't tell you, I can't point to a single client that has said I'm trying to avoid every dollar of tax, not one.
And it's what the wealthiest people are doing that we work with. They're trying to maximize the advantages that are in the tax code and how they can deploy capital in a way that maximizes deductibility and provides tax deferral and provides opportunity to invest and be rewarded, so to speak, for doing that.
Again, it really just boils down to, for some clients, you know, the smartest moves are the boring ones.
And you know, this particular gentleman said, you know, he said, I was expressing to these people that I was talking to that if I implement this process and I set up a cash surrender value line of credit, that I'm thinking I would probably just take the money out as a taxable dividend.
And, and they're immediately tell him that that's wrong, you shouldn't do that.
And I said, okay, well, did they establish a very clear fact pattern? He said, no. We were just like, it was literally the first conversation that we had. So these professionals didn't know how he was structured financially completely by establishing a very clear fact pattern on how this person is put together financially, what specific objectives they have, how much capital is required to achieve them. It was just very shallow. No, you shouldn't do that.
Might it be a little bit premature to, to be saying, making a statement like that?
I think so.
And yeah, it's just again, when you meet with a professional, always ask the question, what specifically could go wrong if this is not structured properly? Walk me through the specifics and pay very close attention to what you're hearing and just make sure that you're trusting but verifying.
And with the implementation now, with the integration of AI and where AI is headed, you have access to the brightest minds on the planet with a keyboard.
And so trust but verify. Hey, here are some of the questions I asked. Here are some of the responses I got.
What am I missing? Poke holes in it.
If you set things up properly, it can be ridiculously simple.
But when you examine things rich like, you know, a guarantee fee, can that be changed? Absolutely, it can be changed.
Will dividend tax rates change? I would assume that probably at some point again in our lives that may happen.
But if we are trying to circumvent and get money out of a corporation and have the notion that we are going to be in a situation where we pay zero tax and Revenue Canada is going to be okay with that arrangement.
You're just naive.
[00:30:08] Speaker B: I have a feeling they would, they would have a different set of opinion on how that particular situation is going to go down. But you say, speaking of trust but verify, Jason, I think people should trust us that we've got a lot of really good content, but I would encourage them to verify. And so one of the great ways to do that is to just go ahead and click on the video that just showed up so you could verify
[00:30:33] Speaker A: yourself that it's great content.
[00:30:34] Speaker B: So go ahead and do that right now.
[00:30:38] Speaker A: That is, that's really good.
I think what we really, what you and I wanted to accomplish in this episode is to bring a little bit more clarity to something that's often talked about. I think in, in fragments. Like you might see short clip about borrowing against your ever increasing cash value. You might hear someone mention what we've been talking about, right? Tax free access from your company.
But I think barely and rarely rather does anyone sit down and really connect all the dots. And so when you're pledging corporately owned assets and you're borrowing personally, when you're layering in guarantees, when you're thinking about what happens at death, these are not areas that you want to rely on a company named Instagram Finance.
It's, this is not about trying to outsmart the system. It's, I think, Rich, you would agree, it's understanding how to control capital, how to make intentional decisions and how to operate within the rules over a long period of time.
And our hope is that our viewers and listeners walk away with that takeaway like, don't chase shortcuts. Make sure that you really understand the process and that you're asking that, that crucial question. Walk me through specifically, what could go wrong if this is not structured properly.
[00:32:00] Speaker B: One quick search just right now with some AI in here and it's like, hey, in Canada, shareholders can borrow against corporate owned policies. However, it's goes on to explain, like, are you doing it internally or externally? But it says CRA scrutiny. The Canada Revenue Agency heavily scrutinizes value transfers. A guarantor fee, which is what you were talking about, is often necessary if the company pledges assets for personal loans to avoid deemed taxable benefits. However, it's heavily scrutinized. In other words, it could be real challenges and real problems there. So like it doesn't take long to figure out.
Super, I didn't even type the words correctly. Search to give me some basic information about, you know, first thing that comes up is CRA scrutiny.
[00:32:43] Speaker A: Huh.
[00:32:44] Speaker B: I wonder if that's the number one thing that AI can find. It's probably the number one thing that
[00:32:49] Speaker A: CRA is looking for and asking yourself, logically, why would they want to scrutinize that?
[00:32:57] Speaker B: Do they do a crappy job at scrutinizing or are they generally successful at their scrutinizing of said items.
[00:33:05] Speaker A: Well, I.
[00:33:07] Speaker B: Exactly.
[00:33:08] Speaker A: So I would say to our, to our viewers and listeners, what we're all about is, is just helping people to construct that financial system around your business and your family that you actually understand and that you actually control. And with 6,500 plus clients across North America, given that we operate coast to coast in Canada and sea to shining sea in the United states, north of 3,000 plus five star Google reviews entering my 19th year, Rich is a year year or so alongside.
And so when, when you understand that degree of experience and you're thinking, I really like the way that these guys are thinking about this. That's exactly the point.
We're not trying to impress you with complexity. All that we're doing is trying to give you clarity. Because that's I think the primary ingredient in my humble opinion, for confidence. And when you feel confident, I think you make better decisions. And when business owners start making better decisions, especially around capital, that's when wealth on Main street becomes real.
That's some good. I've had some good show closers today.
Like I'm gonna do this.
It's a pretty, pretty mic drop show closers. So thanks for watching and viewing. And like Rich said, just click through the next video, continue your journey of learning and don't hesitate to comment or just reach out. Connect with the right person on our team and ask ask those critical questions to make sure you have clarity before you do anything at all.
[00:34:52] Speaker B: Interested in attending a live event? Hey, you should. They're fantastic. We've got events, webinars, in person sessions all over the place. Register now by visiting wealthonmainstreet.com forward/events.
