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Financial Planning Seminar

Presenter: Franca Matsos

Date: July 30th, 2008


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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’


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About MD Financial Group

  • 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.


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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


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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



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    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


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    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)


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    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


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    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


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    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


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    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?


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    Disability Insurance - What & How Much

    What if I become disabled?

    • Income Replacement:

      • Insurance benefit should replace 60-70% of pre - tax income

    • Office Overhead Expense

      • Pays for overhead expenses (rent, utilities, wages) incurred during disability period

      • More important for GP than a specialist


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    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


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    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


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    Definitions of Disability

    Regular Occupation:

    • 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.


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    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


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    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


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    Disability Insurance Options

    • Association plans (such as OMA)

      • Advantages: Group Insurance (savings of 40-50% in premiums)

      • Disadvantage: limited portability among provinces, premiums increase every 5 years

      • OMA Essentials plan - no evidence of insurability required - limited coverage available

    • Individual policies (Unum, Canada Life, etc…)

      • Advantages: unlimited portability and flexibility, premiums are fixed to age 65

      • Disadvantages: higher premiums (initially)


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    FAQ - Life Insurance

    Life Insurance:

    • Who needs it?

    • How do I calculate how much I need?

    • Term Insurance - pros /cons?

    • Universal Life - pros / cons / when to buy?

    • Mortgage Insurance - Is it good? Options?

    • Where can I get objective unbiased advice?


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    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


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    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


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    Types of Life Insurance

    Permanent Insurance - Universal Life

    • Lasts for life (estate planning)

    • Includes insurance plus tax sheltered investment

    • Greater flexibility


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    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


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    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


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    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.


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    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.


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    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.


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    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.


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    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.


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    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.



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    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?


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    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


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    Mortgage Fundamentals (continued)

    • Payment frequency

      • Monthly is most common

      • You can also choose to “accelerate” your payments either weekly or bi-weekly


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    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


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    Types of Mortgages (continued)

    • 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%)


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    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


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    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


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    Buyer Beware!

    • A debt ratio calculation alone does not take into account all of your short- and long-term financial goals!


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    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


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    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


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    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)


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    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


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    Four steps to help determine what you can afford

    4.Establish your objectives for price & housing requirements

    • 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?


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    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



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    Resident Debt Analysis

    • Common medical student / resident

    • debt load:

    $100,000 - 200,000


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    Debt Management

    • Student loans / Credit lines

      • What is the interest rate? (fixed or variable)

      • When does the repayment schedule start (blended payments)?

      • What is the amortization of the loan (repayment period)?

      • Will the credit line remain revolving or converted to a term loan?


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    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


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    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


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    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)


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    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?


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    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)


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    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



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    Resident Issues

    • Filing a tax return as a resident

    • How to increase discretionary income

    • Incorporation

    • Questions & Answers


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    FILING A TAX RETURN

    AS A RESIDENT

    (An Employee)


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    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


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    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.


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    Moving Expenses

    • Claim for school or work

      • Against corresponding income including scholarships, fellowships, research grants

      • 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


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    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


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    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


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    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



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    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


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    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.


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    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


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    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


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    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.


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    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


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    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%


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    Income (after expenses)

    Salary

    Professional fees (for the Corp)

    Net income

    The Numbers

    Unincorporated

    Corporation

    Year 1

    Year 2+

    150,000

    150,000

    150,000

    (117,000)

    (117,000)

    Income

    (4,000)

    (1,000)

    29,000

    150,000

    32,000

    Corporate net income

    29,000

    32,000

    Taxed

    Corporately

    Taxes - corporation

    (4,600)

    (5,100)

    After-Tax Income (Retained in Corp.)

    24,400

    26,900

    Personal income

    150,000

    117,000

    117,000

    Taxed

    Personally

    Taxes - personal

    (51,400)

    (36,800)

    (36,800)

    Net salary

    98,600

    80,200

    80,200

    Combined Personal & Corporate

    After-Tax Income

    98,600

    104,600

    107,100

    Deferral advantage

    6,000

    8,500

    Calculations are based on illustrative income tax rates noted on Slide 8.


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    The Numbers – MD Tax Deferral Worksheet

    Calculations in worksheet are based on 2007 income tax rates proposed or in effect as of Sept. 1/07


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    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


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    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).


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    The Numbers

    Unincorporated

    Incorporated

    Year 1

    Year 2+

    Income (after expenses)

    150,000

    150,000

    150,000

    Salary

    (117,000)

    (117,000)

    Income

    Professional fees for the corporation

    (4,000)

    (1,000)

    29,000

    Net income

    150,000

    32,000

    Corporate net income

    29,000

    32,000

    Taxes - corporation

    (5,100)

    (4,600)

    Taxed

    Corporately

    After-Tax Income

    24,400

    26,900

    Dividend Distribution (non-eligible)

    24,400

    26,900

    Funds retained in Corporation

    0

    0

    Personal salary income

    150,000

    117,000

    117,000

    Personal non-eligible dividend income

    24,400

    26,900

    Taxed

    Personally

    Taxes - personal

    (51,400)

    (44,400)

    (45,200)

    Net income

    98,600

    97,000

    98,700

    Combined Personal & Corporate

    After-Tax Income

    98,600

    97,000

    98,700

    Increase (decrease) in savings

    (1,600)

    100

    Calculations are based on illustrative income tax rates noted on slide 8.


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    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


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    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).


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    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

      • To maximize the amount you will receive personally, drawing the money out at the right time is essential.

      • It may be possible to withdraw a certain level of funds and incur little or no tax.


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    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.


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    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.


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    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


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    Income (after expenses)

    Salary

    Professional fees for corporation

    Corporate net income

    Taxes - corporation

    101,000

    After-Tax Income

    104,600

    107,100

    Increase in After-Tax Income

    3,600

    6,100

    The Numbers

    Unincorporated

    Corporation

    Year 1

    Year 2+

    150,000

    150,000

    150,000

    (117,000)

    (117,000)

    Income

    (4,000)

    (1,000)

    29,000

    32,000

    Taxed

    Corporately

    (4,600)

    (5,100)

    Available for deferral (or paid as a div.)

    24,400

    26,900

    Salary - John

    150,000

    117,000

    117,000

    Taxed

    Personally

    Taxes - John

    (49,000)

    (36,800)

    (36,800)

    Non-eligible dividend income - Julie

    24,400

    26,900

    Taxes - Julie

    -

    -

    Calculations are based on illustrative income tax rates noted on Slide 8.


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    The Numbers – MD Income Splitting Worksheet

    Calculations in worksheet are based on 2007 income tax rates proposed or in effect as of Sept. 1/07


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    After-Tax Income

    128,400

    137,800

    140,800

    Increase in After-Tax Income

    9,300

    12,300

    The Numbers (other examples)

    Unincorporated

    Corporation

    Scenario 1

    Scenario 2

    Income (after expenses)

    200,000

    200,000

    200,000

    Salary

    (150,000)

    (125,000)

    Income

    Professional fees for corporation

    (1,000)

    (1,000)

    Corporate net income

    49,000

    74,000

    Taxed

    Corporately

    Taxes - corporation

    (7,800)

    (11,800)

    Available for deferral (or paid as div.)

    41,200

    62,200

    Salary - John

    200,000

    150,000

    125,000

    Taxed

    Personally

    Taxes - John

    (71,500)

    (51,400)

    (40,100)

    Non-eligible dividend income - Julie

    41,200

    62,200

    Taxes - Julie

    (2,000)

    (6,300)

    Calculations are based on 2008 illustrative income tax rates noted on slide 8.


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    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.



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    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


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    Incorporation Myth #2

    • Limited Liability

      • No — physicians still liable for professional acts

      • Limited liability for corporate creditors


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    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



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    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?


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    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?


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    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?


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    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 you98 l.jpg
    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?


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    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:

    • MD Management Financial Consultant

    • MD Insurance Consultant

    • MD Estate and Trust Advisor

    • Accountant

    • Legal counsel



    Slide101 l.jpg

    Franca Matsos

    [email protected]

    MD Financial:

    mdfinancial.cma.ca

    click 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.ca

    1 888 855-2555

    Contact Us


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