The Professional Advisory November/2004

Will Your Business Insurance Claims Be Paid?

Out of Sight, NOT out of Mind - Signage That Works Managing Short Notice Appointment Changes and/or No Shows (Part 1) Buying Your Practice - Different Tax Angles To Consider Presentation of Charts What Happens To Your Professional Corporation at Your Death What Assumptions Are YOU Using for Your Post Transition Planning?

The

Professional

Advisory For Healthcare Professionals

Will Your Business Insurance Claims Be Paid? Dr. IAN WEXLER 2 Out of Sight, NOT Out of Mind - Signage That Works IAN TOMS B.Sc. (Hons) 3 Managing Short Notice Appointment Changes and/or No Shows (Part 1) DR. RON WEINTRAUB 1

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Buying Your Practice - Different Tax Angles To Consider DAVID CHONG YEN

CFP, CA

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Presentation of Charts

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What Happens To Your Professional Corporation at Your Death BARRY A. SPIEGEL

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GRAHAM R. TUCK

H.B.A. C.A.

LL.M., Q.C

What Assumptions Are YOU Using for Your Post Transition Planning? BARRY R. McNULTY CFP, RFP, CIM, FCSI

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Will Your Business Insurance Claims Be Paid?

DR. IAN WEXLER

Recently while speaking with Mr. Glenn Chudley, head of underwriting and claims at Great West Life and Canada Life, Canada’s largest disability insurer, he indicated that if an individual dentist had purchased either Business/ Office Overhead Expense (BOE) coverage or Disability Buy-Out Insurance (DBO) and subsequently formed a corporation for part or all of his or her practice, there may be significant issues that may arise at claim time pertaining to the payment of benefits if the insurance policies are not synchronized with the new structure of the practice.

What is the major issue?

In general, these contracts state that benefits will be paid to the beneficiary of these plans. In the case of BOE coverage, this plan reimburses the owner/beneficiary for covered fixed expenses when the insured incurs a justifiable disability. The owner/beneficiary, normally named in the insurance contract must be the entity directly responsible for payment of these expenses on a regular basis. If the dentist (the insured) is the owner/ beneficiary, than he or she is the one who should directly be responsible for these expenses. When a corporation, e.g., a hygiene corporation is directly responsible for paying expenses, the corporation should be specifically named on a separate contract as the owner/beneficiary. In this case, there should essentially be two BOE plans, one for the dentist, and another for the hygiene corporation.

What I have been told is that when the dentist is the only owner/beneficiary of a BOE policy, there may be no legal responsibility to pay a claim when some or all of the actual practice expenses are incurred by someone other than the dentist e.g. a corporation such as Dr. Jones Dental Practice Inc., or a hygiene or technical services corporation.

In the case of DBO, a number of pertinent issues also arise. A practice that changes its legal structure by incorporating may risk not receiving the anticipated payout for several reasons including: • Not having the correct owner/beneficiary noted on the insurance contract(s).

• The structure of the insurance contracts not being in conjunction with the shareholders, cost-sharing, and/or partnership agreement(s).

• If a new corporation is formed, e.g., a hygiene corporation, it will have its own insurable value. If the hygiene corporation is not insured separately from the practice, the amount of benefit at claim time received for the non-incorporated practice entity may be far less than anticipated, e.g. the practice value minus the value of the shares of the hygiene corporation.

Who may be impacted?

• Any non-incorporated professional who purchased BOE or DBO, and subsequently formed a corporation for all or

part of his or her practice, without changes made to the original policies or contracts.

• Any incorporated dentist (includes hygiene, technical services, and management companies) who purchased BOE or DBO where the contract(s) were not issued with corporation(s) named as the owner and beneficiary.

Why hasn’t my broker nor the insurance companies that issued these plans contacted me?

1. The insurance carriers obviously cannot take direct responsibility for changes that you make within your practice.

2. The insurance carriers are partially to blame. Several of the leading carriers have over the last number of years issued individual BOE and DBO contracts and paid benefits even though a corporation was not noted as the owner/beneficiary and they were aware of this.

3. Your broker may be unaware of this issue, or as to the impact of how your practice structure may impact a claim on your behalf.

4. If a dentist has an association plan as provided through CDSPI, it is generally the dentist who is responsible for structuring his or her own coverage.

What should I do about this?

Although none of the major insurance carriers whom I have contacted indicated that they will not pay justifiable claims in the near term, it is in every dentist’s best interest

who may be impacted by these issues to do the following: 1. Contact your current insurance advisor as soon as possible to: • Get proper advice on how to proceed • Obtain assistance on how best to restructure your current plans in light of your practice structure • Assist you in determining the proper distribution of overhead expenses.

2. If you receive any verbal notification that “everything is alright despite the restructuring of your practice,” get it in writing.

3. Speak to your lawyer to confirm the proper owner/ beneficiary of your insurance plans and concerning all legal and contractual issues pertaining to BOE, DBO, and related insurance issues.

4. Speak to your accountant to confirm the proper structure of your plans. This includes everything from practice and corporation overhead expense distribution to determining practice/corporation values.

5. If you have a plan through CDSPI, contact a representative there who can answer your questions and provide the necessary paperwork to make these changes.

Dr. Ian Wexler is considered Canada’s leading authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides disability and life insurance products and services to Dentists across Ontario. He can be reached at (416) 391-3764 or drwex@protect-ins.com

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Out of Sight, NOT Out of Mind - Signage That Works IAN TOMS

B.Sc. (Hons)

Imagine improving your top line 20 to 50 per cent with a single sign!

Signage - 24 hours a day, 365 days a year - invites new patients and reminds existing patients that you provide comfortable, affordable professional dental services.

Identify the following opportunities to improve your existing signage.

Choose appropriate signage types according to the distance your audience is from the sign, who the audience is, what the audience is doing (driving or walking for example) and the intended message.

Typical signage, in order of approach to the practice includes: Pylon signage: an internally lit box and mounted on an elevated pole with individual panels for each tenant • should be large enough to be easily read from a distance of at least 300 metres • choose the top or bottom position of the sign only; the middle panels get lost in the clutter • recall that a driver’s field of vision is limited through the windshield,

• the mind only deciphers seven to eight words in traffic at 40 kph • consider adding a module to the top or bottom of an existing sign, or buying and installing your own sign.

Fascia signage: mounted on the exterior of the building, usually above the door • commonly internally illuminated “can” sign (the rectangular box with the acrylic face), individual “channel letters” (e.g., SCOTIA BANK) or fabric awnings • large enough to be easily read from 100 metres • place an additional sign on the end of the building or even at the back if there is sufficient visibility.

Directory boards: common in lobbies of office buildings and hallways of enclosed malls that provide patients with unit numbers • should be large enough to be read from five metres Window signage: • consider window “clings” (opaque individual lettering), changeable translucent plastic lettering or posters • colourful neon tubing can be bent into tasteful letters or shapes • video screens set up to continuously project through lobby windows • leave your windows illuminated in the evening.

Often it’s not what you have, it’s what you do with it!

Atypical signage produces results.

• use a remarkable distinguishing colour, shape, and name • set up portable “sandwich boards” to advertise to sidewalk pedestrians or enclosed concourse traffic • paint and illuminate the exterior of the building - the whole building becomes the sign • mount signage on an adjacent building or remote location from the practice - this type of signage must have a reference to the geographic location of the practice • vinyl banners are an inexpensive mode of signage ideal for public events • consider tasteful messages on portable neon sign trailers

Use a reputable signage contractor. Remember, the finished product has your name on it! Meet with the contractor and ask for a package of digital photographs illustrating possible concepts that comply with municipal zoning. Make sure your lease has the necessary signage clauses to enable you to place all signage to the maximum extent permitted by municipal codes, now and throughout the tenancy.

Ian D. Toms, B.Sc. (Hons), acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is a real estate sales representative representing Professional Practice Sales (Ontario) Ltd. Mr. Toms was a multi-unit retail tenant and landlord for over 10 years and has since spent several years as a realty lease consultant. He can be reached toll free at (877) 216-1013, or by e-mail at iantoms@pipcom.com.

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Managing Short Notice Appointment Changes and/or No Shows (Part 1) Dr. RON WEINTRAUB One of the challenges in today’s dental practices is short notice appointment changes and no shows.

Wasting valuable resources, including hours of quality administrative time trying to “fill the holes”, this issue lowers both productivity and practice morale.

Understanding the issue is the first step in dealing effectively with it. Why are patients these days changing more appointments? There a number of contributing factors.

First: people are busier today. Unlike preceding generations, a great many now choose to “have it all” - a career, a family, a social life - causing a constant juggling of time commitments and a need to prioritize.

Second: in this era of prevention, dental appointments are not always “urgent”. Patients are confident often correctly - that in a time crunch, re-scheduling an appointment for two or three weeks later will not irreparably endanger their teeth or health.

Third: most dental practices today have reasonably flexible schedules. If cancelling an appointment meant waiting several months - as with other health disciplines - a patient may reconsider. However, today’s reality is that alternate appointments are available.

What to do about it?

Prevention: Here are some sound strategies to prevent last minute changes.

• As part of every new patient intake, after learning about the patient and what they want from us, we should offer the following:

May I tell you a little about our office? When we schedule an appointment we reserve space, equipment, staff and doctor time to provide you with the very best care.

It is important for us to schedule accurately to avoid schedule changes. We ask all our patients to honour their appointment times or at the very least, provide us with a minimum of three days notice should there be a need to change. Is that okay with you?

• Ask your patients a little about their schedule prior to offering an appointment time. If they are tentative about a time, offer a different time so there is less chance of conflict. Ask how best to contact them regarding their appointments (i.e., email, cell phone, leave a message) and follow their instructions.

• If you schedule hygiene appointments in advance, ask your hygienists to re-enforce this by saying: I look forward to seeing you in May. Our receptionist will contact you two weeks prior to ensure this appointment time is still convenient. Should you need a different time, could you please let her know at that time as I must firm my schedule in advance.

Why are patients these days changing more appointments?

• Courtesy call patients the day before, don’t confirm them. Appointments should be considered confirmed when scheduled. If the appointment is questionable, it can easily become a last minute change or no show.

Even with all your very best efforts, your patients will occasionally still need to change appointments at the last minute or even not show. This is one of the critical moments in patient relationships. How do you manage it effectively for the best possible outcome? Watch for

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PART II in the next issue of The Professional Advisory.

Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings to the Professional Advisory, over thirty years of knowledge and experience in the practice of general dentistry. Large companies such as Patterson Dental, Ash Temple Ltd. & the former Canadian Dental Co. have all sought his particular brand of expertise. Ron has been known to offer insight in the areas of practice enhancement. As a consultant to Innovative Practice Solutions, Ron can be found advising dentists on practice purchases, sales, location evaluations, associate buy-ins, and practice mergers. Dr. Weintraub can be contacted at (416) 224-1775 or admin@bvdental.com.

Buying Your Practice Different Tax Angles To Consider DAVID CHONG YEN CFP, CA Should the purchaser of a dental practice buy shares or assets? Let’s look at a summary of some of the tax issues.

When you purchase assets, cash in the vendor’s bank account, the vendor’s accounts receivables or bills owing by the vendor are generally excluded from the deal.

In a share purchase, the price reflects the value of the business as a whole, rather than the value of its individual assets. When you purchase shares, you become the shareholder of the corporation. The corporation is a separate legal entity, and it owns all the assets and owes all the debts including any corporate taxes, payroll taxes and suppliers’ bills.

Listed below are the advantages and disadvantages for each method of acquisition.

Purchase of Assets: Advantages: • Ability to negotiate the allocation of the purchase price among the assets acquired (goodwill, equipment, dental supplies, etc.). The negotiated allocation will determine the future tax write off available to you the purchaser.

Certain types of assets, such as inventory, has more favourable tax write off than dental equipment, leasehold improvement or goodwill; and • The purchaser is usually not responsible for any of the vendor’s outstanding debts or bills. The rare exception is the possibility of severance associated with the termination of employees who may have worked for the vendor. Consult your lawyer on this issue.

Disadvantages: • Normally, you will have to pay a higher purchase price for assets because of the higher tax write off available; and • You may also have to pay the Goods and Services Tax (GST) and or Ontario Retail Sales Tax (PST), which are levied on certain items. This will be in addition to the “purchase price”.

Purchase of Shares: Advantages: • As a rule, the vendor is willing to accept a lower purchase price as the vendor could possibly escape taxes on the sale, due to the $500,000 lifetime capital gains exemption.

• No GST or PST is payable when you purchase shares.

Disadvantages: • The corporation is liable for all its disclosed or undisclosed debts including those contingent debts that could arise based on future events.

• There are very limited tax write offs.

Summary: Buyers usually want to buy assets as they receive certain tax deductions. Sellers usually want to sell shares as they pay less tax when they sell shares as opposed to assets. Specifically, if shares are purchased, the price will probably be reduced. Usually a compromise is made. Most valuations or appraisals prepared by leading business brokers to the dental industry are based on assets and not shares.

Understanding what you are buying is rather important as it has legal and tax implications. More importantly, it affects the true after tax amount you will pay as

a purchaser. Work closely with your lawyer and accountant to ensure all aspects are in order.

Interested in knowing the seller’s thought process?

Review my next article “Selling Your Practice - Different Tax Angles To Consider” appearing in the next issue of The Professional Advisory.

David Chong Yen, CFP, CA with an international firm background and more than twenty-four years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or E-mail david@dcy.ca.

This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.

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Presentation of Charts GRAHAM R. TUCK

H.B.A. C.A.

Since patients and profits make up most of the value in a dental practice sale it is important that patient charts present themselves in the best possible light. There are a number of important steps that should be undertaken before a valuation is started.

1. Make a concentrated effort to re-activate the patients who have not kept their visits up to date.

2. Remove from the active files the charts that are three, four or more years since the patient was last in the practice.

3. Have adequate space in your chart drawers or shelves to hold your active charts. Charts should be easily accessible (i.e., not packed so tightly that one is unable to pull or return a chart easily).

4. Ensure plastic hangers are in good repair (i.e., plastic hangers should be replaced when broken or bent). This helps prevent the loss of files that have fallen from a hanger and slipped beneath the rest of the tightly packed charts.

5. Torn or worn out file envelopes look bad to the patient and are harder for the staff to file.

6. Charts that are hard to access make more work for your staff and contribute to inefficiency.

7. If the charts are in drawers, the drawers should run smoothly when pulled out and pushed back in. Tracks

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should be kept in good repair.

If these simple steps are taken into account and followed routinely, your staff will not only appreciate it but it will make them more efficient. When the time comes to sell your practice the charts will look neat and are easy for the purchaser to review, and it will be evident that they won’t have to spend money afterwards replacing charts.

With the new privacy considerations it may be an ideal time to convert to a more contemporary chart system where the charts are sitting on a shelf with colour coded files in lockable cabinets. These new files take up less room than those in pullout drawers and because the charts are sitting on a shelf, the shelving can be higher and hold as many files as needed. Also, you don’t need three feet of access in front as is necessary for the drawer system. The paper does not have to be folded in thirds as the files are 9” x 12”. The files are generally plastic coated for rigidity and easier to pull out and insert back on the shelf. There are many suppliers and quite a price range for these new files and it will be to your advantage to obtain a number of estimates.

Graham Tuck, H.B.A., C.A., is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1 (888) 7778825 or by e-mail at: grtuck@rogers.com

What Happens to Your Professional Corporation at Your Death BARRY A. SPIEGEL

LL.M., Q.C

An accountant recently asked me how a Professional Corporation (P.C.) can continue to practice dentistry after the dentist dies but before the shares of his or her P.C. have been sold. For estate planning purposes, it is important you know the answer to this question.

First, remember that a P.C. has the right to carry on a dental practice only after the Royal College of Dental Surgeons of Ontario (RCDSO) has granted a Certificate of Authorization, and that right continues until the Certificate is revoked or expires. The law does provide, however, that a Certificate of Authorization remains valid despite the death of the dentist, but it also provides that Certificates may be revoked in certain circumstances.

One of those circumstances is where the corporation ceases to be eligible to hold a certificate - and that would include the dentist’s death.

Typically, the RCDSO (the College) will give the estate a reasonable time, as much as six months, to sell the shares to another dentist before it uses its power to revoke the Certificate. The regulations state that if the College proposes to revoke a Certificate, the College must give notice of the proposed revocation; setting out the date it will take effect and the grounds for doing so.

The College is then obliged to revoke the Certificate 60 days after the notice is given, if the grounds for doing so still exist.

In a recent matter in which I was involved, the dentist died in February and the estate notified the College in March.

When there seemed to be little progress towards the estate selling the shares of the P.C. by June, the College gave notice that in 60 days it would revoke the Certificate.

I was acting for the purchaser, and while we had some

difficulty meeting the deadline, the College was most understanding - and the story had a happy ending since the estate sold the shares before the Certificate was revoked.

After the dentist died, a locum was running the practice. If the College had, in fact, revoked the Certificate, then the P.C. could not have continued to practice dentistry, new arrangements would have had to be made with the locum to treat patients and bill them in his own name and, quite possibly, the practice might have had to close down for a short period of time while implementing the revised arrangements. In any event, due to the lengthy period of time between the death of the principal and the sale to my client, a great deal of the goodwill of the practice was lost.

The moral of the story is that it is wise to plan for you dying suddenly and unexpectedly - whether or not you have a Professional Corporation. If you obtain a current appraisal of your practice and have the appraisal reviewed and updated on an annual or biannual basis, your estate will always have a good idea of the value of the practice. Then, in the event of your death, your personal representatives will find it easier to locate a purchaser quickly before the value of the practice diminishes, and before your P.C.’s Certificate of Authorization is revoked.

Barry Spiegel is a senior lawyer whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0330; or fax to (416) 363-8451; or e-mail to barry@spieglaw.com.

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What Assumptions Are YOU Using for Your Post Transition Planning?

BARRY R. McNULTY

CFP, RFP, CIM, FCSI

A key component of any transition plan is working out how you are going to finance your retirement lifestyle.

To do this properly, you and your advisors must make a number of assumptions. A critical factor to consider is the real growth expectation. In other words, investment returns less inflation. When combined with estimates on your spending needs and longevity, these factors help determine if you have sufficient capital.

No doubt you’ve heard the old adage “Garbage In Garbage Out”. Wrong inputs produce wrong answers, which brings me to my point. What are reasonable expectations concerning the important factors of inflation and investment returns? To answer this question, one might naturally be influenced by the past. For example, the TSX returned an average of over 13 per cent during the period between 1975 and the year 2000. In the nineties, returns on North American stock markets were significantly higher. Despite recent volatility, percentage returns on the S&P/TSX Composite Index at the time of this writing are over 20 per cent on a compounded basis for both the last three and the last five years. Is it reasonable to use this experience as the foundation for your post transition assumptions?

The investment and economic climate today is ever changing. Conditions are not the same as those that produced the returns enjoyed in the past. During the eighties and nineties investors enjoyed an environment where both inflation and interest rates declined. These are ideal conditions for stock market investing. It is also very good for bonds. Today, North American inflation and interest rates are at their lowest levels in decades. While these

levels are good for economic growth, they are unlikely to fuel the kind of stellar stock market performance experienced in the last couple of decades. There have been sharp increases in the value of real estate. Consumer debt is at record levels. Price earnings ratios for stocks, while not at their historic highs, are over their long-term averages.

And who isn’t aware of the dramatic increase in the price of oil?

I could go on and on, but I think you get my point. Conditions have changed. While no one can guarantee the future, when it comes to assumptions about your retirement I believe these changes justify taking a conservative approach. Ultimately, you will have to make up your own mind about what is appropriate in your circumstances. In my opinion, real growth assumptions, depending on your risk tolerance level, should be in the two to five per cent range.

If you agree with my assessment and are within ten years of your final practice transition, I recommend a thorough review of your investment capital and savings plans.

They may need adjustment. If you have already retired, I suggest an evaluation of your spending levels relative to your capital. You have to be sure - operating under conservative assumptions - that they’re in balance.

Mr. Barry R. McNulty CFP, FMA, CIM, FCSI is an investment advisor with Raymond James Ltd., Independent Financial Services. Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 216 or barry.mcnulty@raymondjames.ca.

Q A &

Please address your questions to: The Professional Advisory for Healthcare Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 info@theprofessionaladvisory.com

Q I recently changed the way I pay my hygienists.

Instead of them being paid as salaried employees, they are now compensated as independent contractors. How does this impact me insurance wise?

A This is an important issue pertaining to your Business Overhead Expense (BOE) coverage. Salaried employees are considered justifiable, reimbursable expenses in the event of a claim, whereas independent contractors are not. It is recommended that you review your current monthly benefit in light of this because you may be overinsured.

Q How much difference does signage and accessibility make to the top line of a practice?

A There are too many variables to exactly quantify the effect of signage. However, common sense tells us that the more visible, the more patients that will be attracted. A real example: a food retailer moved an existing operation exactly across the road. His sales increased by $6,000 per week. All else being equal, his net profitability, after expenses, increased just over $240,000 per year, which he attributes only to increased visibility.

Q What do I think of insured annuities?

A A good client recently asked me to review a proposal for an insured annuity that he had received.

One of the reasons he was interested in this financial product is that the sales person said he could get a higher after tax rate of return than available interest bearing investments. By way of background an annuity is a contract under which you purchase the right to receive periodic payments from an insurance company over a period of time, typically the balance of your life. An annuity can be purchased either with registered funds (they are an RRSP conversion option) or non registered tax paid capital. When purchased with tax paid capital a life insurance contract is often

combined with the annuity in case you happen to give the insurance company your money but unfortunately don’t live long enough to collect many of those periodic payments. This is called an insured annuity.

Think of it this way. If you die too early the insurance company would make a fabulous profit and you would loose out unless there was an life insurance contract in place.

Under an annuity of this type, which is purchased with tax paid capital only a portion of the periodic payments are taxable. That has led to the feeling that annuities of this type pay out a higher after tax rate of return. In fact this is not entirely correct in my view.

That’s because you have paid out your capital to the insurance company and part of that periodic payment should really be considered by you, if you are comparing apples to apples, as a return of principal. In other words, the return is not comparable to an interest return which would leave your capital intact. When considering such insured annuities I always suggest to clients that they compare investing the funds themselves and combining the return with consumption of some of the capital. When you spend some of your capital you of course do not have to pay any tax. Also you would not need to pay out the premiums for the life insurance because the money would pass to your heirs or estate if you passed away prematurely. In my experience, when this comparison is made you would have to live a very long time (the longer you live the greater the cumulative amount of periodic payments) for the insured annuity to make sense.

Annuities are complex. If you are entertaining the purchase of such a product I would recommend you get some good unbiased advise.

The views expressed in any article are those of the author alone. They should not be acted upon without the advice of your “professional advisors”.