Tax planning can often feel like a daunting puzzle, with every piece representing hard-earned money slipping through your fingers. Canadian real estate investors, medical professionals, and business owners are no strangers to the challenges of managing our finances while striving to minimize the impact of taxes on our wealth. That’s why today, I’m excited to dive into a transformative strategy that can help you reclaim control over your financial future: tax planning with other people’s money (OPM). Join me as I sit down with insurance expert Brian Laundry, a seasoned professional with a wealth of experience in helping Canadians harness the power of insurance with specific tax planning with other people’s money to pay fewer taxes, plan for retirement, and create lasting legacies. In this video, we’ll unravel the mysteries of this strategy of tax planning with other people’s money, and show you how it can work wonders for your financial well-being.
We recommend checking out the rest of the videos in this series as well:
Part 2: OPM tax planning strategies to build wealth & save taxes
Case Study: Creating tax savings and wealth using OPM (Other People’s Money)
Video Transcript: Build wealth, create legacy: Tax planning with Other People’s Money (OPM) – Part 1
Welcome.
We’re going to be talking about how to use other people’s money to pay for taxes, plan for retirement succession planning, creating a legacy.
I’m George Dube, saving the world from tax one bow tie at a time®.
Today I’m with Brian Laundry, an insurance expert, mentor, business owner, real estate investor, other types of investments as well. Brian, he, if I can summarize, develops insurance strategies for Canada’s most affluent, and not just the business owner, but that’s certainly the primary example, but as well, families, for example, whether personal or corporate.
Brian Laundry:
Thanks for chatting with me.
George Dube (00:53):
Very, very welcome. Very, and it’s not like this is the first time we’ve chatted by any means.
Well, I guess we can jump right into it in terms of, let’s even talk about that initial resistance. The first time, really, Brian, you brought me on board in terms of, Hey George, I want you to learn about some of this planning. And I was fairly resistant initially, and if it wasn’t for the fact that I knew Brian personally and as well, Brian and I invested in real estate together, I kind of describe it to people as I, figuratively speaking, had Brian kind of sitting on my chest saying, Hey George, I really, really, really need to read this. You need to look at this.
And Brian took the time to coach me through part of the process in terms of one, giving me some case studies where he redacted client confidential information and then put me in front of figuratively, again, some experts from the insurance, the tax legal side of things, and ask me, ask all the questions you possibly can think of.
Why do people hate insurance?
But let’s start off with the most obvious or perhaps one of the most obvious parts is so why do people hate insurance? Brian, why do people hate insurance?
Brian Laundry (02:12):
Well, it’s a great question and it’s been asked many times in my 20 years doing this. I think insurance is grouped into one large bucket. So George, you and I have gone through some insurance related personal issues recently. For me, I had my truck stolen. So I’ve been dealing with my auto insurance provider to deal with the fact that I’m a victim of auto theft for the first time in my life. And I mean, George, certainly you told me the story about having a flood in your basement and you’re dealing with a different version of insurance. So I think it’s safe to say you and I probably right now don’t like insurance.
Brian Laundry (02:53):
So I am like every other consumer out there. We have to pay insurance premiums for cars in the home and it’s mandated and it’s required by law. So it certainly has a lot of negative undertones. I think in the retail basis we’re offered insurance because our TV might break and do you want to buy the extended warranty for your Xbox or something? I mean, everything is insurance and it feels like you’re getting nickel and dimed to death on insurance. So I get why people hate insurance.
I think when it comes to the work that I’m doing, and I do work with the largest Canadian insurance companies, in fact I’m contracted with all of them, or at least most of them that people would be aware of, is that we’re talking about very high quality products and we’re talking about products that are specifically designed for that individual. So it’s difficult because we do get lump summed into this negative feeling of insurance. And certainly there’s a history of life insurance people not exactly being people you’d invite out for a meal.
George Dube (04:04):
And I guess from a tax perspective, I would just add to me now, particularly going through this now for quite a number of cases that we’ve helped clients with, it’s much more of a tool as compared to this insurance expense type of item. Or really just that negative impression is very, very different. If I think of it (insurance) as a tool to get me tax savings and a tool to let other people pay for my taxes, now all of a sudden it’s a completely rosy colored term that I like to use now.
Brian Laundry (04:46):
Well, I mean look at the, sorry. I was going to say that I look at the difference between, I hate insurance, which we just spoke about, and I try to line that up with why do I hate tax? And then ask yourself, which of the two do you hate more? And I mean, it might be a close race, but I think CRA is probably the one people dislike more than insurance.
Tool used for tax planning with other people’s money
George Dube (05:09):
That’s fair. So how can we use other people’s money with the insurance planning and some of the examples I guess, but more so how can I think about this, Brian?
Brian Laundry (05:22):
Well, let’s just start really simply with the product that we’re talking about.
It is whole life insurance, which I’m sure a lot of people have heard about. So there’s been a pretty significant change in the environment the past five or six years. It used to be that whole life insurance, you could make deposits into the policy and you wouldn’t see very much investment accumulation until many years later. And what happened was a lot of the major banks in Canada started recognizing the safety of life insurance, the cash value in particular as collateral for their loans. They do consider it near cash from a risk perspective, and they are giving us a hundred percent loan to value.
So what happened was the insurance companies caught wind of this. They said, geez, the banks desire our products for collateral, so what can we do to make them want more insurance? And they designed products that would accommodate larger deposits in the early years with a larger proportion of that cash value. So whereas before we would put a hundred dollars into a policy, we might have a dollar of cash value, now we put a hundred dollars into the policy and we can have as much as 90 cents. So a lot has changed in the environment, but that’s how we position the insurance in the eyes of the lenders.
100% leverage and tax planning with other people’s money
George Dube (06:51):
And I think for real estate investors and probably other investors as well, Brian mentioned something really key there, I think, and that’s a hundred percent leverage. It’s pretty hard to find assets if we can do anything of that nature with. And so again, I’m not trying to say this is perfect, but that’s a huge check mark.
Brian Laundry (07:14):
Well, you and I have both gone to the banks to get loans for real estate, and most of the people watching this video today have done the same. So the way I have interpreted it, these are my words, is that when I try to buy a piece of real estate and it’s a 30% down payment and they borrow 70, so a 70% loan to value, the bank is saying, geez, Brian, there’s some risk at play here. So you have to put 30% of your money in.
Understood.
Banks don’t take risks.
That’s why they’re formidable dividend paying stocks. They know how to appeal to their shareholders. So ask yourself this, if a bank is prepared to give us 100% loan to value against the cash value, the investment component of the contracts, I think if the bank doesn’t take risk, and it usually passes the risk on to us as consumers in the form of loan to value when they’re taking a hundred percent loan to value on these policies, it assures me that they’re very, very low risk investments and very attractive for them from a collateral perspective.
Tax planning with other people’s money – Practical uses
George Dube (08:28):
That makes sense. So what are some of the things that we can use the insurance planning for? What’s the practical use now?
Brian Laundry (08:37):
Yeah, it’s a very loaded question, but the income tax act, as you know, is punitive. So we can go down the road and talk about all the different taxes that all hover around 50%. At the end of the day, debt is cheaper than tax. Debt is cheaper than equity, right? Business owners would’ve rather invest in money than have debt. So if we take those two principles, and I just finished explaining, the bank prefers this asset for collateral, that is the opportunity. So how do we get access to it? Why do we do it? We can create in some examples, tax-free income and that’s taxed as return of capital. So literally generate an income stream from these policies where that can make the argument that it looks sort of like a pension. We can do that. We can create loans, we can leverage against it, whether that be corporately.
Brian Laundry (09:34):
And when we borrow corporately like you and I have, we take that money and reinvest back in our real estate. We get some really wonderful tax deductions in some cases.
And again, some of our situations that I’ve had and we’ve talked about recently, there’s situations where I need some money right now in my hands personally. And when people call you say, Hey, George, how do I get this money out? Historically, the answer is pay your 50% tax or don’t do it.
Now, the banks, there’s leverage programs where we can get money out of the corporation using the policy as collateral at a very low cost. No tax. There is a multitude of different ways we can utilize these policies. And it’s not only one or the other. Think of it this way, you have the asset that the banks desire, so we can do whatever we want to do with it. Maybe we change paths down the road. And so there’s a lot of things from a tax and tactical perspective where these fit a lot of circumstances.
George Dube (10:34):
And maybe if I can, I’ll just give a couple of examples where we’ve been working together on some projects for what mutual clients are looking to use the money for. And that could be, I’m looking to acquire a cottage, for example, or a large boat, airplane, whatever it may be.
Alternatively, and this certainly jumps out to different people in different ways, but a lot of people just would love to have their personal mortgage paid off and they may have some efficient use out of a Smith maneuver, for example, or some other planning that is being done, but ultimately they just feel better if that mortgage, maybe one of the spouses feels better if that mortgage is done working with one.
Actually, Brian, you and I were chatting regarding a family where essentially there’s a number of siblings and dad’s been terminally diagnosed, he’ll be passing away shortly. There’s a large tax bill coming and a lot of cash sitting at a corporate level and various investments. And so a tool to allow that next generation to borrow against a policy personally to cover off some of the estate taxes that otherwise we’re going to have to draw money from the corporations.
And as you alluded to before, if we’re taking money out of those corporations, we’re more or less going to be hitting in many cases that 50ish percent tax bracket and it was bad enough, we had to pay the tax in the first place. People are thinking, but now I’ve got that extra tax because I needed to pay the tax. And so it’s tax on tax almost. So again, some
Brian Laundry (12:22):
Well financial planners out there like us would, again, this is overly simplistic and broad stroke commentary, but you don’t want to pay tax on money that you don’t need or don’t spend. So why would you pay the 50% tax to take money from a company?
Brian Laundry (12:38):
And as a result of that overarching planning theme, a lot of physicians and business owners and investors have significant money pooling in the corporations and they say, geez, it’s not that I don’t want a boat, and it’s not that I don’t want a car. What I don’t want to do is give CRA 50% of my corporate money to buy one.
Right?
So there’s this commonality amongst the wealthy Canadians and business owners, and whether that be you have a hundred thousand dollars trapped in a company that you don’t need or $10 million trapped in a company that you don’t need, you can’t get it out. And insurance plays a significant planning role in that.
George Dube (13:20):
Yeah, no question. It’s not that we’re suggesting that insurance is the only tool. It’s part of that tool yet, if you will, where there can be some other tax planning ideas that are brought to the table. There can be other things, but the insurance is probably, for many people, a very valuable part of that process. Not the process, but part of and a key element of that process.
Brian Laundry:
Agreed.
Real estate investors: How they can use tax planning with other people’s money
George Dube (13:48):
So we’ve touched on lightly, but for specifically real estate investors, how can we use this insurance planning?
Brian Laundry (13:58):
Real estate investors, generally speaking, are very comfortable with debt. It starts there because I just finished explaining how insurance can fit for collateral, but how about we just oversimplify.
A lot of real estate investors have significant debt and they have income, whether it’s from employment or rental income from the properties, there’s a liquidity issue if somebody were to prematurely pass away. So it’s a traditional simple term life insurance need that, for example, for me, my spouse stays at home with the children. So if something happened to me, there’s a liquidity event. I don’t want her calling George in a panic and desperation saying, “George, sell everything. This is horrible. He’s gone” or she says, “this is great, he’s gone sell everything.” I’m not sure what she’s going to say, but liquidity is key. So a very simple process. It’s a very simple understood methodology. Certainly real estate investors have partners.
Brian Laundry (15:00):
Do you have a shareholder agreement? And when you have a shareholder agreement, that’s wonderful, but now again, going back to the deceased shareholder’s spouse, there’s a liquidity requirement. So ask yourself, if you are a group of real estate investors, you and me and a couple others, and we just leveraged everything to the nine to buy this great building, or what have you and I passed away, you might not have the capacity to get more borrowing to pay off my wife or my shares. So that’s a traditional life insurance need. The last and probably the most common one that we work on are those situations where we have lots of capital in the corporation, people with tax liabilities that you’ve frozen as a result of some reorganizations and implementation of a family trust and or future tax liability because the real estate will continue to appreciate, these are all requirements of liquidity. We need money and it’s a very timely event. We need money when this significant event occurs and there’s no better bang for your buck than it is for to use insurance.
George Dube (16:15):
One tidbit, maybe just to add to that, in chatting with the folks that were helping me with the loan that I have, the planning that we’re doing well, there wasn’t a specific formula provided. There was this concept that they felt more secure from a lending perspective, knowing I had another asset class to lend against. So it wasn’t strictly real estate. It wasn’t strictly the fact that I have my interest in BDO, I have interest in other projects and things of that nature, but here’s this other asset beyond perhaps traditional that again, they could tick a box to say George and his family are in a better spot here, this is something we feel more comfortable lending with.
Brian Laundry (17:04):
But I anticipate the objection from most people would be, well, I don’t want life insurance instead of my real estate. I want my real estate. And I think where we really need to change the discussion of thought pattern is that it’s not an or. It’s not do the life insurance or the real estate. It’s do the life insurance and the real estate, which goes right to your point of using OPM. We can actually do both, and that’s a big part of the work that I do.
Medical professionals: How they can use tax planning with other people’s money
George Dube (17:34):
Well, not everybody’s a real estate investor. So let’s give some examples for some in the healthcare industry, for example. How are they going to use this insurance planning?
Brian Laundry (17:47):
Well, I’ve had the fortune of working with physicians for a very long time. In fact, I learned a lot about tax planning back in 2006 when physicians were allowed to add family members and shareholders and we could do income splitting. And we were fortunate enough that the tax act changed where they were called tax cheats a few years ago, and they implemented these rules called TOSI. So it eliminated that planning opportunity. But as a result, I met a lot of physicians. And the point is there’s a lot of accumulation and even dentists, lots of accumulation happening in the companies. A lot of people aren’t big risk takers, right? Dentists in particular, they take a lot of risk in expanding their practice and as a result, they don’t have or have a desire to have a significant investment portfolio, for example, in the equity markets or what have you.
Brian Laundry (18:39):
So we do see people, I’ve certainly seen a lot of people who have low risk investments. They’re GIC investors; they hold a lot of cash. Those are things that we can certainly use insurance to improve the numbers because that money grows tax free and is also safe. I also look at, and again, you could speak to it better than I, but when corporations earn more than $50,000 of investment income and we start getting some claw backs in our small business tax rate, that’s a significant issue for medical professional professionals. I mean, we’ve been telling them since 2006 to keep saving money in their companies. Is it unreasonable? They’re generating $150,000 of investment income every year that’s creating a tax problem?
George Dube (19:25):
Hopefully not
Brian Laundry (19:27):
All the time. So life insurance has tax attributes. We already spoke about the investment component. It grows tax free. It’s a defacto RSP, if you will, in the corporation with some insurance. It has tax attributes that nothing else has. So there is a lot of use for these sorts of contracts for the medical professional community.
George Dube (19:54):
And I guess spinning off from that, it’s to say it’s not just a real estate investor, not just somebody in the healthcare industry, but a lot of general business, whether we’re talking manufacturing, whether we’re talking a hula hooped industry, whether we’re talking this, that, or the other thing. There’s a lot of commonalities there. Perhaps there are little tweaks, but there’s still an opportunity to talk and see what it’s going to do for you.
Brian Laundry (20:19):
Well, at the end of the day, if you’re having meetings with your clients, the presumption would be, George, I don’t want to pay as much tax. What are my options? Tax is the enemy. It’s the commonality amongst all of us. And as you alluded to when you first introduced me, it took some time to get you over the hurdle. But when you realize insurance isn’t a topic that we often want to go down the road of, but when it has tax attributes that the banks, I mean we’re talking CRA and banks, the two biggies in this country. We’re onto something. We really just need to change our narrative and think from a tax perspective, where do these things fit? And if we understand the tax well, then we can build structures that dovetail really nicely into the work that you’re doing.
Who needs this type of tax planning with other people’s money?
George Dube (21:10):
So trying to pin this down a little bit further, I guess let’s talk about who does need life insurance or this type of planning. And again, from my simplistic standpoint, perhaps I’ll address it and say from a tax perspective, I mean, if you think it’s going to hurt for your next generation to be starting to write a cheque to Revenue Canada when you’re gone, maybe we should be thinking about this, right?
Brian Laundry (21:38):
Yeah. I mean, it shouldn’t be a surprise that the income tax act is designed for people who don’t do any planning to pay the most amount of tax. The beneficiary is CRA, right? Right. So that’s the default option. And a lot of what they do in my opinion, is create complexity and red tape. So people go, it’s just the way it is. The default’s fine with me. But at the end of the day, if I had to choose between my children, my family, you’ve used the analogy of the Easter Bunny, the Santa Claus, it doesn’t matter. I pick anybody, but the default option, and I think if nothing else, we should have that conversation because the default option is one that people often don’t.
No kids – does this planning still make sense?
George Dube (22:31):
Just popping out a little bit further, what if the family has no kids? So I mean, to me, I use, you’re aware, I use that analogy a fair bit, but I can’t imagine even if I got nieces, nephews, church, cancer, society, whatever it happens to be, that’s near and dear to my heart. Surely that was better than Revenue Canada.
Brian Laundry (22:59):
Yeah. The way I’ve thought about this, I do have a lot of people I’ve met with no children and no real insurable interest in that respect. So I look at things on a scale of one to 10. One is we don’t need insurance. We don’t like insurance and what have you, and 10 being nothing will fit better than this. When people don’t have children or those charitable interests that are so common for you and others, it’s really hard to make it any more exciting than an eight out of 10. You’re really leaning on the tax act and the benefits that we’ve already kind of spoke about. They’re all wonderful. There’s nothing wrong with it. It’s just hard to get the 10 out of 10 where you don’t have that emotional interest of children in charity. And a vast majority of the people would choose their family in a charity over CRA, but we don’t have children. Certainly you love your nieces and nephews and charities, but it’s just not so front of mind is my experience.
George Dube:
But again, I think if we keep in mind, eight out of 10 isn’t bad, eight is
Brian Laundry:
Fantastic.
Brian Laundry (24:11):
I mean, look at the alternative is you’re going to pay a lot of tax, and that’s the default. I mean, really anything better than that to me is maybe eight out of 10. And out of context, like a 10 out of 10, I’m a really wonderful example of where insurance fits a 10 out 10. I’m a single income family. I need to provide income replacement. I have a sizable corporate savings. I invest in real estate. I leverage my policy. I want to create a legacy for my family. You could check all the boxes. It’s 10 out 10. There really isn’t a better asset in my view than what I’ve purchased. So I mean, if an eight out of 10 isn’t quite as glamorous, it’s still a really good score.
Risks with Revenue Canada of tax planning with other people’s money?
George Dube (24:52):
So one of the common questions I get, and it may seem a little odd me asking you this, but I’ll chime in with a couple of my comments depending exactly where you go with it, but I’ve obviously now had a number of clients ask, well, how does Revenue Canada feel about this planning?
Brian Laundry (25:11):
Right.
George Dube (25:12):
I’ll let you launch into that.
Brian Laundry (25:14):
Yeah, I mean, you’re the tax expert, but maybe I’ll give you my perspective. I mean, certainly I’m part of enough tax organizations in my industry. The Income Tax Act was changed. So there’s a major update back in January of 2017, and a lot of viewers may have heard about it, certainly in 2016 we were very busy. What essentially changed was there was a series of assumptions that were made back in 1983 that naturally needed to be updated. Mortality tables changed, interest rates changed. Certainly there was some insurance planning that was probably a bit more aggressive than they would’ve liked to see. In particular, it used to be a situation where I could take a million dollars of lump sum and put it into a policy right away. So there were certain things that essentially were changed, but the Income Tax Act was just merely updated, and nothing had materially changed. All the massive tax benefits that have been there since the beginning of time, certainly since the beginning of my time are still there. And everything that had been implemented before that date is grandfathered with the Income Tax Act. So when I look at the investments, the investment component of the insurance, it grows tax free. That’s continues to be the case.
Brian Laundry (26:37):
The deductions that we’re getting by using insurance as collateral. Well, the Income Tax Act is pretty clear about rules on interest deduct deductibility. So we’re not really, the insurance policy is just the asset that the banks prefer. There’s no CRA risk per se. The insurance industry had a strategy years ago called a ten eight where they didn’t like this and they were very clear. They didn’t like some of the planning. And really what made it so offside to CRA was that you can’t get the insurance without the bank loan, and you can’t get the loan without the insurance, and it’s artificially high rates. It was very clear violation of GAR, and they warned everybody, and that was shut down. But the work that we’re doing is tried and true. It’s really not aggressive in any way.
George Dube (27:35):
And I think part of my reluctance over the years with insurance has been, again, as probably a tax nerd, occasionally seeing these budgets and changes that would grandfather, or alternatively, as you described to a little degree there, that ten eight planning where revenue Canada just said, Hey, wait a minute. A practical business person would never make that investment if it wasn’t for the tax and insurance characteristics that made it make sense. Nobody would intentionally lose money to invest. But what gave me a lot more comfort beyond the exercise that you and I went through, Brian, was the knowledge that I could go to websites and whether we were talking your big five banks, for example, larger insurance companies, and you can see the strategy described in a couple of pages, maybe not in depth, but certainly it wasn’t something we were trying as an industry to hide.
George Dube (28:44):
Whereas other planning, yeah, Revenue Canada, doesn’t like it. Now, they have other tools to address the issue, but there’d be non-disclosure agreements, for example, that prevented advisors or clients from describing the policies or getting much information out there.
Whereas this stuff, it’s been around longer than I’ve been practicing, and sure, some of the elements get tweaked over time or the actuaries tweak things to the new realities, but the concepts are there in terms of interest deductibility. The insurance itself in terms of when it’s taxable, when it’s deductible, et cetera. Those have been really a foundational aspect of the income tax act for a long time now. Whereas, sorry, the budget would pick apart little pieces to say “You can’t do that”, but they were picking apart those tangents probably we shouldn’t have gone down in the first place, and I shouldn’t say we because I know we weren’t involved with those. But as an industry, well…
Brian Laundry (29:57):
I will say having been in this industry, in the advanced case market for as long as I have, what you probably didn’t know previously, but what I have known to be true is that there’s a significant amount of tax people in my industry. We have organizations that literally sit at the table of finance as case consultation. I belong to an organization called KLU, which does that. If people only knew the amount of resources these large insurance companies spend on tax accountants, tax lawyers, there is a significant emphasis on tax planning because there’s a lack of knowledge. There’s a gap between your industry and mine, and that gap seems to have widened because of the distaste of insurance, which is kind of where we started. So those individuals are there to kind of bridge the gap, but it’s still very difficult because we only have finite time and certainly not many. There’s certainly not many people in my industry who do the more complex work, who understand the planning work with tax teams. It is the vast minority of people who do that. So you can see why. I don’t know how you would Google who’s the smartest insurance person in the country because all the same. It’s all the same vernacular on Google. It’s difficult. It’s difficult to know who to trust and who you would like to work with and align with.
George Dube (31:32):
Excellent. And people, you’re watching this. I know there’s a lot of information here to digest. Hopefully, it’s kind of in layman’s terms. Again, we’ve removed most of the technical ease, I think, but we’re going to get a little bit more technical and a couple of future videos (part 2). We’re able to go through some specific examples. So what’s the best way for people to get ahold of you, Brian?
Brian Laundry (31:56):
Well, if you’re not email introducing me, I could be reached a very simple email address, brian@brianlaundry.ca. I would encourage anybody to go to my website, which is brianlaundry.ca. I’ve spent a lot of time talking about me and my approach and really how I’m wired. I think it’s really important to philosophically align with few people, but that’s probably the best way. I have a really wonderful team you can reach out to also. But on LinkedIn, I’m available. But those are your key contact points.
George Dube (32:32):
Hey, stay tuned. Keep with us. This has taken a little bit longer than we expected. We have a lot of great content. Hang out for part two coming shortly.
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