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Financial Planning Seminar. Presenter: Franca Matsos Date: July 30 th , 2008. MD Mission Statement.

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slide1

Financial Planning Seminar

Presenter: Franca Matsos

Date: July 30th, 2008

md mission statement
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’

about md financial group
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.
products and services
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
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
financial issues you face as you start residency
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
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
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
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
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
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
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
recommendation
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
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 disability16
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.
benefit period
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
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
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)
faq life insurance
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?
life insurance
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
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 insurance23
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
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
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
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
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
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
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
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
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.
mortgage fundamentals
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 fundamentals34
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
Mortgage Fundamentals (continued)
  • Payment frequency
    • Monthly is most common
    • You can also choose to “accelerate” your payments either weekly or bi-weekly
types of mortgages
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
types of mortgages continued
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%)
finding the right mortgage
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
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
slide40

Buyer Beware!

  • A debt ratio calculation alone does not take into account all of your short- and long-term financial goals!
four steps to help determine what you can afford41
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 afford42
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 afford43
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 afford44
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
four steps to help determine what you can afford45
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?
assemble a team of pros that you trust
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
resident debt analysis
Resident Debt Analysis
  • Common medical student / resident
  • debt load:

$100,000 - 200,000

debt management49
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?
debt repayment strategy
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
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
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
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
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
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
resident issues
Resident Issues
  • Filing a tax return as a resident
  • How to increase discretionary income
  • Incorporation
  • Questions & Answers
slide58
FILING A TAX RETURN

AS A RESIDENT

(An Employee)

tuition fees education credits
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
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.

moving expenses
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
scholarships and bursaries
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
employment residents
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
employment residents can i deduct
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
agenda
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
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
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 comparison69
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
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
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
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

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.

the numbers md tax deferral worksheet
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

mary considers incorporating
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
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 numbers77
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.

john says no to incorporation
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
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
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.
the income splitting advantage
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
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
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 numbers84

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.

the numbers md income splitting worksheet
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

the numbers other examples

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.

key considerations88
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.
incorporation myth 1
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
Incorporation Myth #2
  • Limited Liability
    • No — physicians still liable for professional acts
    • Limited liability for corporate creditors
the real advantages
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
questions for your accountant
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 accountant95
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
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
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
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
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
Franca Matsos

franca.matsos@cma.ca

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

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