financial planning seminar presenter: franca matsos date: july 30 th, 2008
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Financial Planning Seminar
Presenter: Franca Matsos
Date: July 30th, 2008
MD Mission Statement
We will assist CMA members, their families and sponsored clients to
achieve their financial well-being by providing professional,
objective financial advice and competitive, quality products and
services throughout their lifetime.
‘For physicians…by physicians’
MD Financial Group provides advice to over 100,000 clients
and over 30,000 physicians.
Over $22 billion of assets under management.
Over 200 investment professionals in 47 offices across Canada
to serve physicians and their families.
About MD Financial Group
Products and Services:
MD Management Financial Planning
Risk Management, Estate Planning, Portfolio Analysis and
Optimization, Cash Flow Analysis, Retirement Planning,
Incorporation Analysis Mutual Funds Fixed Income Discount Brokerage
Stocks, Bonds, GIC’s, Mutual Funds, Equity Research, Online trading Family Trust IPP’s
Products and Services, Continued
Physician Services Group Practice Solutions Healthcare Software Tenant Lease Services
MD Private Trust Estate Planning, Professional Executor, Trust Management
MD Life Tax planning, tax deferral, estate preservation, corporate
savings
MD Private Investment Management Strategic and Tactical Asset Allocation, Discretionary Money
Management
Life as a Resident
Financial Issues You Face As You Start Residency
Possible negative cash flow
Start repaying debt
Possible relocation
Possibly starting to contribute to RRSPs
Additional issues that will differ from person to person
Scope of Financial Planning
Debt management
Cash management (budgeting)
Retirement planning (RRSP & Non-RRSP)
Investment choices
Tax planning
Life and disability insurance
Estate planning (Wills, POA, Executor)
Role of Financial Consultants
Assess your overall financial health Gather and review data related to your finances
Practice preventative financial health Create and monitor your personal financial plan
Know when to refer to a specialist Advise regarding needs for accountant, lawyer, insurance
broker, practice management, etc.
Financial planning includes family members
Evaluating Insurance Needs
Resident Contract (PAIRO)
2x annual income (life insurance) 70% of gross income (disability insurance) Limitation of disability coverage = any occupation definition PAIRO coverage ceases upon completion of residency
Insurance needs likely to increase with increased income and lifestyle
Life & Disability Insurance
The primary purpose of insurance is to protect your most valuable asset
- your earning power
Is a very important aspect of every financial plan
Insures you against the risks of: becoming disabled - unable to work / earn income premature death
FAQ - Disability Insurance
When do I need it? Regular occupation vs Own occupation? What elimination period should I choose Why is a FIO important? What are the other essential riders? Private vs Group medical association plans
Portability? Quality? Cost vs value?
Disability Insurance - What & How Much
What if I become disabled?
y Income Replacement: Insurance benefit should replace 60-70% of pre - tax
income
y Office Overhead Expense Pays for overhead expenses (rent, utilities, wages)
incurred during disability period More important for GP than a specialist
Recommendation
In most cases, it makes sense to start with a 30 day elimination
period, especially if you are:
single have substantial level of debt / high loan payments have a young family
Once your practice is established and you’ve paid down your
debt / built an emergency fund you can request a longer
elimination period to reduce your premium
Definitions of Disability
Own Occupation:
The benefits are payable as long as the insured is unable to
perform the major duties of their own occupation. The insured
may choose not to work in another occupation, even if able to do
so.
Better suited for Specialists
Definitions of Disability
Regular Occupation:
y Is a much more restrictive definition. After two years of
receiving benefits, if the insured is able to perform his/her
regular occupation, the insurer can stop / reduce benefit
payments.
Benefit Period
Is the length of time benefits are paid during the period of
disability
Usually expressed in years i.e. 5, 10, to age 65 or lifetime
The longer the benefit period, the higher the cost
Benefits to age 65 is recommended
Must have Options
Riders & Benefits
Cost of Living Adjustment
Fixed % or linked to CPI
Guaranteed Future Insurability
No further proof of insurability required if you buy additional coverage in the future
Retirement Protection
Funds to supplement RRSP
Disability Insurance Options
Association plans (such as OMA)
y Advantages: Group Insurance (savings of 40-50% in premiums)
y Disadvantage: limited portability among provinces, premiums
increase every 5 years
y OMA Essentials plan - no evidence of insurability required - limited
coverage available
Individual policies (Unum, Canada Life, etc…)
y Advantages: unlimited portability and flexibility, premiums are fixed
to age 65
y Disadvantages: higher premiums (initially)
FAQ - Life Insurance
Life Insurance:
y Who needs it?
y How do I calculate how much I need?
y Term Insurance - pros /cons?
y Universal Life - pros / cons / when to buy?
y Mortgage Insurance - Is it good? Options?
y Where can I get objective unbiased advice?
Life Insurance
Insures against the risk of pre-mature death
Can be used to provide for financial dependants, payoff debts
(credit lines, mortgages) & estate planning purposes
Your needs will vary throughout your life stages
Types of Life Insurance
Term Insurance
For ‘temporary’ needs (short-term)
Lowest initial premium level
Premium increases at the end of each term
Offers terms of 1, 5, 10 & 20 years or to age 99
‘Face value’ only
Types of Life Insurance
Permanent Insurance - Universal Life
Lasts for life (estate planning)
Includes insurance plus tax sheltered investment
Greater flexibility
How Much Do I Need?
Payoff household debt
Mortgage, Credit Lines, Student loans, etc.
Provide for capital requirements
Funeral expenses, legal fees, income tax, child care & education,
emergency fund
Replace income
On average, 70% of gross family income less surviving spouses income
Index for inflation
Life Insurance Analysis
Step 1: We help you review your cash-flow & net- worth, family
dynamics
Step 2: Analyze existing coverage
Step 3: Determine your goals - short & long term
Case Study #1
Dr. A is married and has 2 young children. Both he and his wife
are 30 years old and the children are 6 months and 2 years old.
He is a resident making $60,000 and his wife earns $40,000 for
a total household income of $100,000. They have a total debt
of $320,000 including a mortgage. Their lifestyle currently is
$70,000 which will probably double to $140,000 within the next
5 years. They would like to ensure that their children’s
education needs are accounted for. They plan to retire at 65.
For illustration purposes we have used 2.1% inflation and 6.0%
rate of return in our calculations for insurance.
Case Study #1 - Solution
Therefore, the need is calculated at $2,500,000
insurance for the doctor to cover debt and income
replacement. A recommendation for OMA insurance for
the maximum of $1,000,000 and $1,500,000 term policy
with a third party insurer would be made.
Insuring the spouse for $1,000,000 is also recommended
to cover the additional household costs and allow the
doctor to take some time off work.
Case Study #2
Dr. B is married and has 2 young children. Both he and his
wife are 30 years old and the children are 6 months and 2
years old. He is a resident making $60,000 and his wife is not
employed outside the home. They have a total debt of
$320,000 including a mortgage. Their lifestyle currently is
$50,000 which will probably double to $100,000 within the
next 5 years. They would like to ensure that their children’s
education needs are accounted for. They plan to retire at 65.
For illustration purposes we have used 2.1% inflation and 6.0%
rate of return in our calculations for insurance.
Case Study #2 - Solution
Therefore, the need is calculated at $3,500,000
insurance for the doctor to cover debt and income
replacement. A recommendation for OMA insurance for
the maximum of $1,000,000 and $2,500,000 term policy
with a third party insurer would be made.
Insuring the spouse for $1,000,000 is also recommended
to cover the additional household and child care costs
and allow the doctor to take some time off work.
Case Study #3
Dr. C is single. He is 30 years old. He is a resident making
$60,000. He has a total debt of $320,000 including a
mortgage. His lifestyle currently is $50,000 which will
probably double to $100,000 within the next 5 years. He
plans to retire at 65. For illustration purposes we have
used 2.1% inflation and 6.0% rate of return in our
calculations for insurance.
Case Study #3 - Solution
Since PAIRO insurance is for double his income there is
no need for additional insurance, unless there is a family
history that would be a concern for qualifying for
insurance in the future.
The Real Estate Market: Should You Buy A Home Or Rent?
Mortgage Fundamentals
Mortgage Pre-Approval
What is a mortgage pre-approval?
Why should you have a pre-approval?
What is the difference between a mortgage pre-approval and
actual financing?
•
Mortgage Fundamentals
Term Time during which your interest rate is locked-in and will not change
(3 months to 10 years)
Amortization Period over which your loan will be repaid (up to 25 years)
Pre-payment Annual over-payment that you are entitled to make directly towards
the principal balance
•
Mortgage Fundamentals (continued)
Payment frequencyMonthly is most commonYou can also choose to “accelerate” your payments
either weekly or bi-weekly
Types of Mortgages
Variable rate mortgage Loan which carries a floating interest rate, similar to your line of
credit
Capped variable rate Same as above but with a ceiling or pre-set limit on the maximum
interest rate you would pay over the term
Fixed rate mortgage Loan which has a set interest rate that will not change over the term
Open mortgage
Open loan, payable in full at any time, available for 6 months to 1
year
Closed mortgage Closed loan with a pre-determined maximum annual overpayment
amount (usually between 10-20%)
Types of Mortgages (continued)
Finding the Right Mortgage
Determine your tolerance to risk
Over the long term, a variable mortgage could save you thousands in
interest payments, but you need a cash flow that can tolerate
payment fluctuations
Alternatively, fixing your payment at a higher $ value/month, still
gives you lowest rate & allows you to budget payments
Four steps to help determine what you can afford
1. Prepare a statement of your Net Worth and Cash Flow To help establish your debt ratio & determine your capacity for a
mortgage
2. Debt Ratios - 2 different calculations
GDS - Gross Debt Ratio 32% of gross income towards mortgage debt service
TDS - Total Debt Service Ratio 40% of gross income towards total debt service
A debt ratio calculation alone does not take into account all of
your short- and long-term financial goals!
Buyer Beware!
Four steps to help determine what you can afford
2. Determine how you will finance the down payment
20% or more for a conventional mortgage (no mortgage insurance)
Less than 20% will require mortgage default insurance (between
0.5% and 3.10% of the value of the mortgage loan) from Canada
Mortgage and Housing Corporation (CMHC) or Genworth Financial
Canada
Four steps to help determine what you can afford
2. Determine how you will finance the down payment (cont)
Home Buyers’ Plan First-Time Home Buyers can borrow up to $20,000 tax-
free ($40,000/couple) from their RSP For all the details, speak to an MD Financial Consultant
Four steps to help determine what you can afford
3. Estimate all of the other one-time and ongoing costs
Appraisal, inspection, water quality, survey, lawyer
Land transfer tax, PST, GST (new house) First-time Home Buyers’ are eligible for a refund of up to $2,000 of the land transfer
tax paid
Moving costs, pre-paid bill reimbursement, utilities/services hook up
Ongoing costs include property taxes, house & life insurance, maintenance; condo fee
(where applicable)
•
•
Four steps to help determine what you can afford
4. Establish your objectives for price & housing requirements
Price - Use the goals established in your MDM financial plan to buy a
house that you can afford & ENJOY
Housing Requirements: What type of home - single family, condo, town home? What features are important - # rooms/bathroom, size of kitchen? Where do you want to live - close to the hospital, out in the country? What amenities are important - shopping, schools, recreation? Build or buy?
If you buy, what is excluded/included - appliances, lighting fixtures? If you build, what is excluded/including - front walk, driveway, deck,
landscaping, air conditioning?
4. Establish your objectives for price & housing requirements
Four steps to help determine what you can afford
Assemble a team of pros that you trust
Real Estate Agent
Are they experienced in type of home/location of choice?
Lawyer or Notary
To review offer, do title search, draw up mortgage documents, tend to closing details
Insurance Broker
For property insurance
MD Insurance Consultant
Reassess your life insurance requirements
Building Inspector
To conduct “physical” on the property
MDM Financial Consultant
To integrate home buying into your personal financial plan
Debt Management
Resident Debt Analysis
Common medical student / resident
debt load:
$100,000 - 200,000
Debt Management
Student loans / Credit lines
y What is the interest rate? (fixed or variable)
y When does the repayment schedule start (blended payments)?
y What is the amortization of the loan (repayment period)?
y Will the credit line remain revolving or converted to a term loan?
Debt Repayment Strategy
Variables to consider:
Cash-flow (discretionary income)
Other debts (mortgage, higher interest credit cards)
Short / Medium term goals
Interest rate environment (increasing or decreasing)
Interest rate expense
The Cost of Debt
$100,000 Debt Mo Pmt Int Cost
Amortized 3 yrs @ 6.25% = $3,050 $9,797
Amortized 5 yrs @ 6.25% = $1,941 $16,472
Identify Financial Needs
What is the best use of my spare money? (discretionary income)
RRSP contributions
Debt Reduction
Additional insurance coverage (life & D.I.)
Saving for short-term goals (vacation)
As a Resident, what should I do...?
Maximize my debt repayment?
Maximize my RSP contributions to avoid the “high cost of
delay”?
A combination of both?
Consider...
Long-term growth of RSP
Interest expense of carrying debt
Tax savings created by RSP contributions
Short, medium & long-term goals
Current economic trends & conditions (i.e interest rates, market
cycle, estimated ROR)
Bottom Line:
This is one of the trickiest questions to answer
Everyone is under a different set of circumstances
We meet with you one-on-one to determine how best to direct your
discretionary money
Tax Planning
Resident Issues
Filing a tax return as a resident
How to increase discretionary income
Incorporation
Questions & Answers
FILING A TAX RETURN FILING A TAX RETURN
AS A RESIDENTAS A RESIDENT
(An Employee)
62
Tuition Fees & Education Credits
Creates a non-refundable tax credit Means you save the same amount of tax (i.e. 21%)
regardless of “when” and “who” claims
Need to obtain a T2202A slip (most Universities now providing on-line rather than mailing)
Provides “education” credits of $400 per month
Contact post-grad department for letter to accompany tax return as many residents are being audited
Consider potential transfer to spouse or parent
Improve your cash flow – Tax forms to be aware of
There are two forms you need to be aware of: TD1 and T1213.
If you have significant tuition and education tax credits being
carried forward, you can indicate on these forms that the
credits be applied to your current income rather than applying
for them at the end of the tax year. This results in less tax
being taken off at source. This allows you to apply this money
towards debt repayment and/or lifestyle needs. It usually
translates to about $10,000/year assuming a $50,000 income
and assuming sufficient tax credits being carried forward.
64
Moving Expenses
Claim for school or work
y Against corresponding income including scholarships,
fellowships, research grants
y Need to move 40kms or more closer
Type of Expenses that can be claimed
Movers, travel costs, meals, lodging
Need to retain receipts
Government typically asks for these
65
Scholarships and Bursaries
Typically reported on a T4A slip
Residents and fellows should benefit from tax-free status of all
scholarships and bursary income if they are, in fact entitled to
an education tax credit
Qualification for the education tax credit will be detailed on the
respective resident or student’s Form T2202A
66
Employment (Residents)
Income - report on the cash basis (T4)
Expenses - very restricted - employer pays for most
Deduction for employment expenses - must be authorized via
T2200 form signed by employer - generally includes automobile,
parking, dues & fees
67
Employment (Residents)Can I deduct…?
Exam costs vs. membership fees
Travel costs during interviews
Moving expenses
CMPA coverage
Medical library and equipment
Personal computer, cell phone, palm pilot
Incorporation – the Right Choice for Your Practice?
Agenda
Tax deferral
Integration, examples, maximizing the benefit
Income splitting
Different income levels, different family members
Important considerations
Questions for your financial planner, accountant and lawyer
The Tax Deferral Advantage
All tax calculations are for illustrative purposes only and are based on tax legislation enacted or proposed as of March 1, 2008 (unless otherwise indicated).
All calculations are based on average 2008 tax rates. Actual tax amounts will vary according to your specific facts and circumstances.
MD Management does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained in
this document is not intended to offer such advice, nor is it to replace the advice of independent tax, accounting and legal professionals.
2008 Ontario Tax Rate Comparison
Corporation Individual
Active Business Income
<$400,000 16.50% 46.41%
$400,000 - $500,000 25.00%
46.41%
>$500,000 33.50% * 46.41%
Investment Income
Interest 48.67% 46.41%
Non-eligible dividends 33.33% 31.34%
Eligible dividends 33.33% 23.96%
Capital gains 24.33% 23.21%* In addition to the general rate of 33.50%, a provincial surtax of 4.25% will apply on income in the range of
$500,000 to $1,500,000. The impact of this surtax is to gradually claw back Ontario’s small business deduction, completely offsetting any benefit of the deduction at an income level of $1,500,000. The increase of the Ontario small business limit from $400,000 to $500,000 is only a proposal and is subject to change until it is enacted into
law. Tax rates are current as of May 1, 2008.
For internal use only
2008 Ontario Tax Rate Comparison
Corporation Individual
Active Business Income
<$400,000 16.50% 46.41%
$400,000 - $500,000 25.00% 46.41%
>$500,000 33.50% 46.41%
Investment Income
Interest 48.67% 46.41%
Non-eligible dividends 33.33% 31.34%
Eligible dividends 33.33% 23.96%
Capital gains 24.33% 23.21%
Total tax example: Corporate small business rate x Personal non-eligible dividend tax rate
1- ((1-0.1650) x (1-0.3134)) (1-0.5734) = Total tax of 42.66%
For internal use only
Integration
A general tax policy which aims at ensuring that income
earned and distributed by a Canadian Controlled Private
Corporation (CCPC) bears virtually the same amount of total
tax as would apply to the same income earned by an
individual taxpayer directly.
Simplified Case - In Favour of Incorporation
Mary, a single GP, is considering incorporating her medical practice
In order to meet her current lifestyle needs, Mary, along with the help
of her accountant, has determined that she would need to pay herself
a salary of $117,000 from the corporation
This salary level also allows for continued RRSP contributions
Illustrative Tax Rates
Personal Tax Rates
first $38,000 25.00%
over $38,000 up to $76,000 35.00%
over $76,000 up to $123,000 40.00%
over $123,000 45.00%
Corporate Rates
first $400,000 16.00%
over $400,000 34.00%
The Numbers
TaxedCorporately
Deferral advantage 6,000 8,500
Income (after expenses) Salary
Professional fees (for the Corp)Net income
Unincorporated Year 1 Year 2+
150,000 150,000 150,000 (117,000) (117,000)
(4,000) (1,000) 150,000 29,000 32,000
Corporation
Income
Corporate net incomeTaxes - corporation
After-Tax Income (Retained in Corp.)
29,000 32,000(4,600) (5,100) 24,400 26,90
0
Personal incomeTaxes - personal Net salary
150,000
117,000
117,000 (51,400)
(36,800)
(36,800)
98,600
80,200
80,200
TaxedPersonally
Combined Personal & CorporateAfter-Tax Income
98,600
104,600
107,100
Calculations are based on illustrative income tax rates noted on Slide 8.
PROVINCEOntario
NON-INCORPORATED INCORPORATED
Net Practice Income 150,000 Net Practice Income 150,000RRSP Contribution (enter as neg.) 0 Required physician salary (estimate) (117,000)
Yearly Incorp. costs (enter as neg.) (1,000)Taxable Income 150,000 Corporate Taxable Income 32,000
Federal Tax (33,100)Federal Tax Abatement (Quebec) 0Provincial Tax (13,700)Provincial Surtax (5,000)Total Tax Payable (51,800) Corporate Tax Payable (6,000)
Lifestyle Needs (enter as neg.) (80,400)
Yearly Non-reg Investment 17,800 Yearly Corporate Investment 26,000
The Numbers – MD Tax Deferral Worksheet
Annual Deferral Advantage 8,200
Calculations in worksheet are based on 2007 income tax rates proposed or in effect as of Sept. 1/07
Mary Considers Incorporating
Conclusion:
Mary will benefit from a tax-deferral on savings retained in the corporation
RRSP contribution room will allow for additional tax deferral which affects the salary vs. dividend decision
Incorporation is a valid option for Mary
Simplified Case - Against Incorporation
John is a young GP, married to Julie. They have 3 children and a large mortgage on their principal residence.
To meet John’s cash flow needs, the corporation pays him a salary of $117,000 as well as a dividend distribution equal to the funds remaining in the corporation.
John is not eligible for the spousal tax credit (due to Julie’s income level).
The Numbers
Increase (decrease) in savings 100
Unincorporated Incorporated
(1,600)
24,400
26,900
(44,400) (45,200)97,000 98,700
Personal salary income
Taxes - personal Net income
150,000 117,000 117,000
(51,400)
98,600
TaxedPersonally
Personal non-eligible dividend income
Income (after expenses)Salary
Professional fees for the corporation Net income
Year 1 Year 2+150,000 150,000 150,000
(117,000) (117,000) (4,000) (1,000)
150,000 29,000 32,000
Income
TaxedCorporately
Corporate net incomeTaxes - corporation
32,000 (5,100)
29,000 (4,600)
24,400 26,900 After-Tax Income Dividend Distribution (non-eligible) 24,400 26,900Funds retained in Corporation 0 0
Combined Personal & CorporateAfter-Tax Income 98,60
097,000 98,700
Calculations are based on illustrative income tax rates noted on slide 8.
John Says No to Incorporation
Conclusion
No savings retained in the corporation means no tax-deferral
Due to additional expenses related to incorporation, there are minimal tax savings
Incorporation for John would mean more administrative work and very little (if any) tax savings
Key Considerations
In order to defer taxes, earnings must be retained within the corporation.
The tax deferral advantage is greater when funds retained in the corporation are taxed at the small business rate rather than the general corporate rate.
Should still consider RRSP contributions and the new Tax Free
Savings Plan (TFSA).
Realizing the Benefits of Tax Deferral
Reducing tax now so you can invest the money and make more money can be, at least partially, a temporary benefit.
Turning tax deferral into tax savings
y To maximize the amount you will receive personally, drawing the money out at the right time is essential.
y It may be possible to withdraw a certain level of funds and incur little or no tax.
The Income Splitting Advantage
All tax calculations are for illustrative purposes only and are based on tax legislation enacted or proposed as of March 1, 2008 (unless
otherwise indicated). All tax calculations are based on average 2008 tax rates. Actual tax amounts will vary according to your specific facts and
circumstances.
Share Ownership Regulations
Legislation governing incorporation differs between provinces and
includes restrictions on who can own shares of your medical
professional corporation Can family members, trusts, or even other corporations own
shares?
Speak to your legal advisor about the regulations in your province.
Simplified Case - The Income Splitting Advantage
Back to our example with John who has high cash flow needs
which prevent him from realizing deferral benefits.
Again, we assume the corporation pays John a $117,000 salary
so that he can maintain his RRSP contributions
Julie, John’s wife, earns no income
The Numbers
Unincorporated Corporation
Year 1 Year 2+
150,000
150,000
150,000
(117,000)
(117,000)
(4,000)
(1,000)
29,000
32,000
(4,600)
(5,100)
24,400 26,900
Available for deferral (or paid as a div.)
Professional fees for corporation
Income (after expenses)Salary
Corporate net income
Taxes - corporation
Income
TaxedCorporately
150,000 117,000 117,000(49,000) (36,800) (36,800)
26,900
24,400
Salary - JohnTaxes - John
Non-eligible dividend income - JulieTaxes - Julie - -
TaxedPersonally
101,000 After-Tax Income
104,600107,100
Increase in After-Tax Income 3,600 6,100
Calculations are based on illustrative income tax rates noted on Slide 8.
The Numbers – MD Income Splitting Worksheet
ProvinceBritish Columbia
Client Spouse Adult Child Other
Net Practice Income (after expenses and salaries paid to family members) 150,000 Salary from Medical Practice - Other ordinary income
Total Income 150,000 - - -
Federal Tax (33,100) - - - Federal Tax Abatement (Quebec only) - - - - Provincial Tax (15,700) - - - Provincial Surtax - - - - Total Tax Payable (48,800) - - -
After-Tax Income 101,200 - - -
Current Situation - Non-Incorporated
Calculations in worksheet are based on 2007 income tax rates proposed or in effect as of Sept. 1/07
Corporation Client Spouse Adult Child Other
Net Practice Income 150,000 Incorporation Costs (enter as negative) (1,000) Salary (117,000) 117,000
Corporate Taxable Income 32,000 Corporate Tax (5,600) Available Cash for Distribution 26,400
Non-Eligible Dividends Allocation (26,400) - 26,400
Eligible Dividends Allocation - - -
I ncorporation
Total Income 117,000 26,400 - - Taxable Income 117,000 33,000 - - Federal Tax (23,600) (3,700) - - Federal Dividend Tax Credit - 3,700 - - Federal Alternative Minimum Tax - - - - Federal Tax Abatement (Quebec only) - - - - Provincial Tax (10,900) (1,400) - - Provincial Dividend Tax Credit - 1,400 - - Provincial Surtax - - - - Provincial Alternative Minimum Tax - - - - Total Tax Payable (34,500) - - -
After-Tax Income 82,500 26,400 - -
Client Spouse Adult Child Other TotalCurrent Situation 101,200 - - - 101,200 Incorporation 82,500 26,400 - - 108,900 Potential Yearly I ncome Splitting Advantage (Disadvantage) 7,700
SUMMARY OF AFTER-TAX INCOME
The Numbers (other examples)
Unincorporated Corporation
Scenario 1 Scenario 2
200,000
200,000
200,000
(150,000)
(125,000)
(1,000) (1,000)
49,000
74,000
(7,800) (11,800)41,200 62,200Available for deferral (or paid as div.)
Income
TaxedCorporately
Professional fees for corporation
Income (after expenses)Salary
Corporate net income
Taxes - corporation
200,000 150,000 125,000(71,500) (51,400) (40,100)
62,200
41,200 (2,000) (6,300)
TaxedPersonally
Salary - JohnTaxes - John
Non-eligible dividend income - Julie
Taxes - Julie
128,400
137,800 140,800After-Tax Income
Increase in After-Tax Income 9,300
12,300
Calculations are based on 2008 illustrative income tax rates noted on slide 8.
Key Considerations
Income splitting with a spouse and/or adult child who is in a lower tax bracket than yourself could provide for very attractive tax savings.
Provincial rules on share ownership in a medical corporation may impact the ability to split income with family members.
Kiddie tax rules negate the benefits of income splitting with minor children.
Speak with your tax advisor about attribution rules which could also negate the benefits of income splitting.
Important Considerations
Incorporation Myth #1
Greater expense deductions? No — same general rules for deduction of expenses Expenses incurred to earn income Amount of expense is reasonable Proof of payment required
Other Considerations:
Medical / Dental expenses (Health & Welfare Trusts)
The use of cheaper after-tax corporate dollars Non-deductible expenses (i.e. 50% of meals & entertainment) Repayment of business debt
Incorporation Myth #2
Limited Liability
No — physicians still liable for professional acts
Limited liability for corporate creditors
The Real Advantages
Tax-deferral
Income splitting
The use of sophisticated products Individual Pension Plans for retirement planning Health & Welfare Trusts Universal Life insurance policies for estate planning
Important Questions
Questions for Your Accountant
Have you incorporated many physicians?
What expenses can I pay from the corporation?
In my particular situation, how much tax can I save by
incorporating?
How sensitive to change are these savings?
How can I benefit from the use of Universal Life insurance or an
Individual Pension Plan?
Questions for Your Accountant
How will I set up the books?
What dividend/salary mix should I have?
What legal structure should I have for my situation?
What range of fees will I be expected to pay?
Questions for Your Lawyer
Have you incorporated many physicians?
What are the limitations of incorporation in this province?
What happens to the corporation in case of marital breakdown?
How much will your fees be?
Questions for You
How much debt do I have?
Am I a good saver?
Does my lifestyle allow me to “leave” a sufficient amount of
money in a corporation over a long-term period?
Am I willing to split income with my spouse and/or children?
Questions for You
Am I well-organized financially?
Do I handle financial complexity well?
Am I risk-averse?(in terms of changes to the legislation)
Do I have a good relationship with my accountant/lawyer?
What Next?
Incorporation is a complex issue. Our goal is to ensure that you
receive valuable advice tailored to your specific situation. We will
work with your current advisor to ensure this is achieved
Be sure to consult:
y MD Management Financial Consultant
y MD Insurance Consultant
y MD Estate and Trust Advisor
y Accountant
y Legal counsel
Questions
Contact Us
Franca [email protected]
MD Financial:mdfinancial.cma.caclick on “Students/Residents”1 800 267-2332
MD Financial Banking Solutions: mdfinancial.cma.caclick on “Banking Solutions”
Practice Solutions: cma.ca/practicesolutions
Canadian Medical Association:cma.ca1 888 855-2555
