tax wise investing – for incorporated physicians presented by: dave rose, cfp senior financial...
TRANSCRIPT
Tax Wise Investing –for Incorporated Physicians
Presented by:Dave Rose, CFP Senior Financial Consultant
Wednesday October 24, 2012
MDPIM US EQUITY POOL
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families– Uniquely focused on driving maximum value for members through objective
non-commissioned advice and world-class investment management at a very low price
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our members– MD and the OMA are natural partners in delivering value to Ontario Physicians– Currently partnering through Membership and the Insurance Alliance initiatives
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“ In a recent study,1 48% of CMA members identified MD as their primary investment firm, making us by far the dominant wealth manager for members. By comparison, only 11% identified our closest competitor.”
Brian PetersPresident and Chief Executive Officer
1 Source: MD Physician Services Loyalty Survey, November 2011.
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provide the advice and services you need– Team approach to bring specialization and strength to achieving client goals– Among the lowest management expense ratios (MERs) in the industry
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MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca.
Tax-Wise Investingfor Incorporated Physicians
Dave Rose, CFP Senior Financial Consultant
Managing your wealth: Purpose6
Purpose = Financial Independence (aka “Retirement”)
Factors to consider (among others):
Your time horizon
Your risk tolerance & risk capacity
The value of professional management
Your desire to outperform
Tax considerations
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Tax-wise Investing
Five Big Issues
1.Understanding tax on corporate investment income
2.The asset location and asset mix strategy
3.Your compensation decision
4.Other considerations
5.Your Personalized MD Team
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Issue 1 (of 5)
Understanding Tax on Investment Income
2012 Tax Rate Comparison Corporation Individual
Active Business Income<$500,000 15.50% 45.00%>$500,000 27.50% 45.00%
Investment IncomeInterest 47.00% 45.00% Non-eligible dividends 33.33% 33.00%Eligible dividends 33.33% 26.00%Capital gains 23.50% 22.50%
Tax impact of traditional investments
Managing the Corporate Tax Refund
Notional Accounts:
RDTOH: Refundable Dividend Tax on Hand
CDA: Capital Dividend Account
GRIP: General Rate Income Pool
Note: While the corporation receives a tax refund when distributing
investment income, the recipient often pays personal tax.
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Individual: Top Tax Bracket 50%
Understanding Tax on Investment Income
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Corporate Intermediary – all tax brackets 50%
Understanding Tax on Investment Income
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Understanding Tax on Investment Income
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Understanding Tax on Investment Income
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Match your situation and your tax preference:
Your Situation
I want to defer tax to the future
I want income now
I’m in the top personal tax bracket
I’m in a low personal tax bracket
Your Tax Preference
Capital Gains
Eligible Dividends
Capital Gains
Eligible Dividends
High-Level Guidelines
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Issue 2 (of 5)
Asset Location & Asset Mix Strategy
Asset Mix in RRSP Asset Mix in Corporation
Your asset mix & asset location strategy:
Should these be the same?
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Over a long time frame, when the assets at stake may add up to significant amounts of $1 million or more (even if you are starting with much less)…
Holding fixed income in your tax-sheltered account(s) (i.e. RRSP; TFSA; IPP; Permanent Life Insurance)
Could save you $$$$ in tax!
Asset location: the long view19
Portfolio assumptions
Strategy
Professional Corporation
Tax Sheltered
Accounts
Tax Efficient
100% equities
100% fixed income
Tax
Backward
100% fixed income
100% equities
Fixed-Income holdings
Equity Holdings
Balanced portfolio
Investment case study
Dr. Smith started practice at age 30
– Retirement target: Age 55
– Risk tolerance: Moderate
– Objective: Use corporate savings to cover retirement needs between retirement at age
55 and RRIF withdrawals at age 72
– Corporate Savings: $25,000/yr
– RRSP Contributions: $18,000/yr
Corporate investments
Assumptions:
Fixed income earns 4%1
Taxed yearly at top corporate investment tax rate
Equities earn 8% 1
No capital gains are realized until retirement therefore tax is deferred
In retirement, capital gains are realized yearly
Perfect integration
Perfect integration is assumed on investment income earned by the corporation and
then distributed to shareholders as dividends
–1Rates of return for fixed income and equity are for illustration purposes only, and may not be indicative of the actual rates of return these asset classes would generate.
Pre-tax investment balance - the numbers illustrated
After 25 years (at Dr. Smith’s retirement age 55) the difference between a tax efficient and tax backward portfolio is about $500,000.
$-$500,000
$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000
Prof Corp RRSP Total
Tax Efficient
Tax Backward
After-tax investment balance - The numbers illustrated
If all amounts were distributed from the corporation or withdrawn from the RRSP in a lump sum, the difference in after-tax funds between the tax efficient and tax backward portfolio is almost $500,000.
$-
$500,000
$1,000,000
$1,500,000
$2,000,000
$2,500,000
$3,000,000
Prof Corp RRSP Total
Tax Efficient
Tax Backward
Another tax minimizing optionIndividual Pension Plans (IPPs)
An IPP is a defined benefit pension plan sponsored by
your professional corporation on your behalf (in your
capacity as an employee).
IPP Contributions:
Determined by an actuary
Based on age, years of service, employment income,
etc.
Tax-deductible to the corporation
Individual Pensions Plans
Advantages:
Contributions generally increase with
age and can far exceed maximum
RRSP contribution limits
Additional contributions when
initiating IPP or at retirement may be
possible
Tax deductible contributions
increase, as necessary, if returns are
below 7.5%
Creditor-proof
Disadvantages:
Reduced withdrawal flexibility
(compared to an RRSP)
Contributions must be made in
accordance with actuarial valuations
Administrative and actuarial costs
Complexity
IPPs - Who can benefit?
Current service
– Are you age 40+ and interested in increasing your registered
savings?
Past service
– Have you been incorporated for at least 10 years?
Terminal funding
– Are you planning to retire early?
Return requirements
– Are your registered investments likely to earn 7.5%?
Consider funding a corporately-owned policy with “cheaper” corporate surplus dollars (compared to personal dollars) more tax-efficient
Earn no annual accrual taxes—your investments grow tax-sheltered within the policy
Consider holding fixed income within the permanent life insurance policy, due to its tax-exempt status
Start early in your practice—and never worry about increased insurance costs
Another Option to ConsiderCorporate-owned permanent life insurance, paid with corporate dollars:
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Another Option to Consider:
Corporate-owned permanent life insurance
Advantages:
Excellent estate planning tool
Good “back-up plan” for retirement income–especially in conjunction with sheltering interest income
Access to liquidity
… a quick example follows…
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Assumptions
Male and Female both age 45, death benefit paid on
death of surviving spouse (joint-last-to-die)
Investment of $100,000/year for 10 years
Fixed income return of 3.2%
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Tax-minimizing options - Permanent Life Insurance
Investment earnings and growth within the policy are tax-sheltered,
reducing current taxes The death benefit is paid tax-free to the corporation The death benefit less the adjusted cost basis is paid as tax-free
dividends to your beneficiaries up to the Capital Dividend Account
balance Money within the policy can be invested in fixed income or equity-
linked accounts. You can adjust that investment mix without
realizing taxable capital gains.
While maintaining the same overall portfolio risk, tax preferences guide us to position the assets as follows:
Put investments which generate interest and dividends in the
Tax Sheltered Accounts
Put investments which generate capital gains in the
corporate investment account
Asset Mix in the Tax Sheltered Accounts and Corporation
What’s the bottom line?
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Issue 3 (of 5)
Your Compensation Decision
“Salary versus Dividends” Compensation in the News
“Rethinking RRSPs for business owners:Why taking a salary may not make sense”
“Paying yourself in dividends”
“A radical way for biz owners to pump up retirement savings”
“A Taxing Business Decision: Salary or Dividends?”
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Current Tax:Gap on active business income
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No Canada Pension Plan contributions before retirement - or benefits in retirement. Must consider implications of losing CPP throughout your retirement years
No possibility of RRSP or IPP contributions
Dividend payments could impact Health and Welfare Plan
If this is your strategy, how will you create sustainable and tax-effective retirement income?
Taking only dividends before retirement:
Some implications
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Our Value Proposition:
Providing expert advice on your compensation decision, and partnering with you to implement effective strategies
Many physicians start with salary… and gradually convert to dividends
Your MD advisor can add broad perspective to your compensation decision—your tax advisor should play a role, too
If you change your compensation strategy—make sure your investment / product mix is adjusted to match
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Issue 4 (of 5)
Other Considerations
Other considerations
Should you contribute to an RRSP?
allows for tax-sheltered investments
earned income means you contribute to CPP
RESP vs. dividends?
Canada Education Savings Grant of 20% on RESP
Funds need to be used for education
Dividends allow flexibility on payments
Tax-Free Savings Accounts (TFSA)?
Health and Welfare plans?
Real Estate? Paying down personal debt?
MD Advisor MD Portfolio Manager MD Insurance Consultant MD Estate & Trust Advisor MD Referral Network
– Canadian Medical Foundation
– Electronic Medical Records
– Banking Solutions
Issue 5 (of 5)
Your Personalized MD Team
Your Personalized MD Team43
Next Steps
If you’d like to explore how some of these investment or wealth management strategies can be tailored to your individual circumstances, let your MD advisor know
We’ll arrange for additional MD specialists as necessary
We are happy to work with your existing tax and legal advisors as required
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Thank you!
MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca.
The information in this presentation is for information purposes only and is not intended to be used as direct investment, legal or tax advice. Please contact your MD Advisor before acting upon any of this information or before implementing any investment or tax strategy.
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Tax-Wise Investingfor Incorporated Physicians
Questions?