The Professional Advisory April/2005

The Impact of New Technologies on Dental Practice Freezing Your Tax Bill?

Changing Location When the Opportunity Comes Along Are You Vulnerable? (Part 2) The Philosophy of Value Driven Financial Decision Making Hard to Insure? Here is What You Need to Know (Part 1) Rental Rates and the Real Estate Market

The

Professional

Advisory For Healthcare Professionals

The Impact of New Technologies on Dental Practice DR. RON WEINTRAUB 2 Freezing Your Tax Bill? DAVID CHONG YEN CFP, CA 3 Changing Location When the Opportunity Comes Along GRAHAM R. TUCK H.B.A. C.A. 1

Are You Vulnerable? (Part 2) BARRY A. SPIEGEL LL.M., Q.C 5 The Philosophy of Value Driven Financial Decision Making BARRY R. McNULTY CFP, RFP, CIM, FCSI 6 Hard to Insure? Here is What You Need to Know (Part 1) Dr. IAN WEXLER 7 Rental Rates and the Real Estate Market IAN TOMS B.Sc. (Hons) 4

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The Impact of New Technologies on Dental Practice Dr. RON WEINTRAUB With the explosion of new technology, dental practitioners have the opportunity to expand their horizons. Patients expect practitioners to keep pace with technological advances, so developing strategies to cope with these new demands requires sound consideration.

Understanding the needs, benefits, and barriers of incorporating technology helps practitioners in the decision-making process to incorporate new technologies into their practices.

According to University of New Mexico communication theorist, Everett M. Rogers (1930-1994), individuals tend to respond differently in adapting to a new paradigm.

Rogers placed us in four categories: the Innovators, Early Adapters, Early and Late Majority and the Resisters. The Innovators are those who seek out and are first to incorporate technological solutions to clinical as well as administrative objectives. Within a slim crosssection of our profession are those who have a strong affinity for digital solutions as well as a strong desire to be among the first to embrace new technology. Some of those technologies are: • CAD/CAM milling of onlays and crowns e.g., CEREC • digital radiography • rotary endodontics • Panorex • in-house tomography • DIAGNOdent

• intra-oral cameras • voice recognition • email confirmation • laser technology • air abrasion • diagnostic charting software Another group, Early Adopters, sees the advantages of their innovator colleagues and realizes the opportunities available by incorporating the technology. As a result, they are convinced to adapt to the inclusion of technological advances that significantly contribute to more successful practices. The Early and Late Majority group makes up the largest percentage of dental practitioners. This group feels pressure to be more proactive in adapting to the technological explosion. The new norm is patient-driven and is now a reality. Patients question and request technologies such as one-hour toothwhitening capabilities e.g., ZOOM™. Non-responsiveness to patient-driven demands can be costly to the practice not incorporating requested services. Patients may seek treatment elsewhere based on their perception that their dental provider is not current in supplying necessary care.

Patient-driven demand, specifically in the cosmetic realm, is a major factor in the impetus to expand on elective dental procedures. The final group, the Resisters, drag their heels and needs assurance that a new idea will not fail before they can adopt it.

Benefits of adopting technological strategies are undeniable. The challenge is to determine the most efficacious way to incorporate them into your practice.

The ability to access expensive high-tech equipment is enhanced by sharing the costs, inherent in group practice. In many cases, the ROI - Return On Investment - is directly proportional to the number of times the system is used. For example, the more units generated on a CEREC the less onerous the investment to acquire the hardware becomes. Single practitioners need to assess carefully and introduce slowly those technologies that would be most appreciated in their practice. Some dental supply companies are geared to provide support needed to integrate new systems into your operation.

These companies are indispensable to the successful deployment and integration of the newly acquired equipment and it’s worthwhile to seek them out.

Another commitment to include new technology is the

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learning curve associated with the training to develop competence in its use. Courses to reach proficiency are provided by manufacturers and seminars are presented by distributors and guest clinicians for professional staff and their team as an integral part of the investment.

A danger exists that the public may adhere to the misconception that technology is a substitute for competence. Clearly, we dentists have a responsibility to negate this thinking. Technology is a powerful adjunct to an established caring and committed practice.

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.

Freezing Your Tax Bill?

DAVID CHONG YEN CFP, CA An estate freeze is a tool that is used as part of your estate planning to reduce your estate’s taxes. Estate planning is essential to minimize taxes payable when you die. An estate freeze is used to fix or freeze the value of your estate and therefore your tax bill at a particular point in time so that future growth or appreciation is taxed in the hands of your children, grandchildren, spouse or a family trust. So why have the gains taxed in someone’s hands other than your own? Because they are hopefully in a lower tax bracket and should pay less taxes than yourself.

A typical application for a dentist involves the hygiene and/or technical service corporation shares (H/TSC).

If you freeze the value of your H/TSC shares prior to their appreciation, you may substantially reduce your tax bill when you sell the practice. So, what if I never sell my practice? Why do I have to worry about taxes payable on the sale of my practice? Well, the government will deem there to be a sale upon your death, i.e., death triggers a deemed. The selling price from the tax department’s perspective will be the fair market value prevailing on the date of your death.

Why do you need an estate freeze? By fixing the value of your shares, you can fix or freeze your tax bill. The estate freeze may also provide you with retirement income in the form of dividends. Hence, you know your tax bill well in advance of your death.

This advance notice enables you to plan your affairs including finding cost efficient ways to pay for the taxes upon death.

Example, insurance is sometimes used to pay for the tax bill arising on death. An estate freeze can also reduce the probate fees payable upon death, as the value of your estate is reduced.

In the estate freeze process one should consider utilizing any unused portion of your $500,000 lifetime capital gains exemption.

Estate freezing will also facilitate creditor proofing and income splitting with children who are 18 and older in addition to multiplying the $500,000 lifetime capital gains exemption. By effectively transferring all future growth to other family members, you are keeping this future growth away from your own creditors.

An estate freeze can be structured so that you, the dentist, and/or your spouse effectively control the H/TSC after the freeze has been implemented.

To maximize creditor proofing of the dentist, it is recommended that the dentist does not directly control the H/TSC. In fact, he/she should also consider transferring all of his/her initial investment in the H/ TSC to his/her spouse at fair market value. At the very least this will allow him/her to use the funds generated from this sale for personal living expenses, and then hopefully be unavailable to his/her creditors.

All taxpayers, including children have a $500,000 lifetime capital gains exemption. Because these children now own (via a family trust) the H/TSC shares, any capital gains realized in the future will be taxed in their hands. The capital gains may be “sheltered” or offset

with their $500,000 lifetime capital gains exemption i.e., they pay little or no tax on the future gains. Attribution rules were designed to tax capital gains, income or dividends in the richer persons’ hands, typically the dentist’s hands as opposed to the spouse and children’s hands. However, attribution rules do not apply to capital gains realized by children, regardless of their age.

One should consider an estate freeze if they want

to leave more for their loved ones and less to the government. It is an essential tax and estate planning tool for those who are fifty and better.

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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Changing Location When the Opportunity Comes Along GRAHAM R. TUCK

H.B.A. C.A.

Dentists, like most other professionals, often become complacent in the location in which they are working.

The community changes but their practice remains the same. The first thing they know is that the practice does not relate to the community and no longer attracts new patients. This often happens because the ethnic nature of the neighborhood changes. Part of Canada’s ethnic kaleidoscope is that a new group comes into the country, congregates in a certain area and changes the orientation of the neighbourhood. A dentist who relates to these new patient groups will prosper while others, who were well established before the new influx, may now flounder and stagnate.

The opening of a new plaza in your area can also create a major impact on your practice. Another dentist sees this as an opportunity and opens a new practice in the plaza. Meanwhile, your practice that hasn’t moved with the times and is tired and old, no longer attracts patients. They see the new location and prefer to go there. This visibility trend, that started in the 1980s and certainly continued on into the 1990s and the new century, is playing an even greater role today in “who is successful”. If you remember a few issues ago I wrote about investing in your own practice. For some dentists this may mean moving to a more upbeat, superior and more visible location to allow your practice to grow.

I visited a dentist recently, who had graduated more

For many patients dentistry is a matter of perception associating tired, outdated equipment with the treatment provided.

than 20 years ago, to answer his question. ”What should I do now”? The location was very good but the practice looked tired. He had not replaced the chairs and lights, which had been moved from his first location he had originally purchased back in the 1980s. He had spent nominal dollars on few new assets. Ten years ago he had seen the writing on the wall and had moved the practice to the present location and has done very well increasing his gross to over $1,300,000 - but he still has his old equipment. This could have a long-term impact of losing patients because the practice does not look up to date. For many patients dentistry is a matter of perception - associating tired, outdated equipment with the treatment provided. My recommendation to the dentist was to invest about $100,000 on chairs, lights and an additional operatory. The practice would then look like the superior treatment centre it really is.

Remember, the government pays half the cost when you write off you Capital Cost Allowance.

Dentists should periodically re-evaluate their practices.

Would moving the practice to a superior location better relate to my patients? Do I really want to be here in five or ten year’s time? Is a beautiful practice in an inferior building with poorly kept hallways the place to be? And seldom is stair access only in an ever-aging population a good formula. Reinvesting in new leasehold improvement is expensive but upgrading a location that you do not want to be in is counter-productive and would only tend to perpetuate your problems.

If you are anticipating selling your practice in the next few years, it is probably too late for major improvements - you would not be able to recoup your costs before you sell. Focus on upgrading such things as x-rays and sterilization, which is generally not an excessive amount of money.

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) 777-8825 or by e-mail at: grtuck@rogers.com

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Are You Vulnerable? (Part 2) BARRY A. SPIEGEL

LL.M., Q.C

Never has one of my articles (Volume 18, The Professional Advisory) evoked such a strong reaction among readers. I have received numerous telephone calls and emails from dentists concerned about being assessed for income taxes on the basis that their dental hygienist(s) are employees rather than independent contractors. And some have reason to be concerned!

Canada Revenue Agency (CRA and formerly Revenue Canada) is no longer ignoring this issue. Based on established rules, CRA is actively reviewing the contractual arrangements between the dentist and his or her dental hygienists to determine the real relationship - regardless of what the written or oral agreement may state or imply or what the parties wish from the relationship.

If the dental hygienist is an employee, there is no problem, but if he or she claims to be a self-employed independent individual, then the tests I referred to in Volume 18 should be carefully reviewed. If it is clear that the relationship is between the dentist and an independent contractor, then once again, there isn’t an issue to resolve. However, if it is not abundantly clear that the relationship is one of selfemployment, the parties should consider what changes have to be made to avoid the likelihood of the CRA knocking at the door.

If the dental hygienist insists that he or she be treated as an independent contractor - regardless of what the facts seem to indicate - then the parties must decide who will bear the risk if the CRA does not agree and possibly reassesses the dentist. If the risk is to be borne by the hygienist then possibly the hygienist should agree to indemnify the dentist if CRA requires the dentist to pay the amount of money that should have been withheld as

employee deductions. The indemnity would state that if the dentist were assessed for taxes based on the fact that the hygienist was an employee, the hygienist would reimburse the dentist for the additional taxes.

Alternatively, the parties may agree that the relationship should be affirmed as one of employment, in which case, a new written agreement between the parties should be prepared. This may not prevent an assessment for past years but will prevent the problem from continuing and escalating. The dental hygienist may be unhappy at no longer being able to make all the deductions from income tax to which a self-employed person is entitled. But all is not lost. An employee may also be entitled to deduct certain expenses from employment income. The Income Tax Act permits employees to make some deductions where certain conditions of employment exist and where the employer and employee complete certain forms.

The hygienist should seek advice from an accountant respecting this issue.

Obviously, this article is not to be read as providing legal advice applicable to your particular fact situation. If you have any concerns, you should raise the issue with your accountant and/or lawyer, carefully review the facts, and then determine if changes are advisable or necessary.

Once again, I remind you, for similar reasons, to review your agreements with your associate dentists to determine, together with your advisors, whether there is a potential problem in those agreements as well.

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) 8650330; or fax to (416) 363-8451; or e-mail to barry@spieglaw.com.

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The Philosophy of Value Driven Financial Decision Making BARRY R. McNULTY

CFP, RFP, CIM, FCSI

I had an interesting conversation the other day with a dentist in his mid-fifties. Let’s call him Dr. G. Dr. G believes that there is no way he can put aside any money for his retirement beyond RRSPs. In Dr. G’s words, his retirement is based on the “Freedom 75” plan. Like me, you are no doubt hearing this “Freedom 75” saying or some variation of it quite frequently. A lot of people seem to be feeling this way lately.

I must confess this tongue in cheek expression of resignation

sounds very strange to me. A good analogy would be a patient saying that he or she didn’t floss or come in for regular visits because they believe it’s inevitable that they’re going to lose their teeth anyway.

The fact is Dr. G has a lot of options. When you think about it, a great many of his colleagues have been able to achieve a successful transition and enter into a comfortable retirement. If they can do it, why can’t Dr. G, or any dentist for that matter? Do the others who have

have retired have some kind of secret? Are they any smarter than Dr. G? Did they work harder? Are they simply luckier? Does Dr. G not want to be financially secure? The answer to these questions is a clear-cut No! In my experience, the reason Dr. G feels so resigned to “Freedom 75” is a combination of two key factors.

The first factor is a lack of understanding that there are specific ways, methods, strategies, and/or processes he can use to create the relative wealth he and his family will need. Often it is not that a person does not know the answers to financial issues. Rather, it’s that they do not know the questions.

The second key factor is what I call value based financial decision making. It’s deciding what your most important values are and using those values as a guide to direct your finances. In Dr. G’s case, he has a very successful practice. It generates a significant income, particularly when compared to that of other Canadians. However,

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it’s not directed towards Dr. G’s most important core values. A value based financial philosophy quantifies those core values in dollar terms and acts as a guide or beacon that directs the necessary financial resources into accomplishing what is most important to you.

Just as you explain to a patient that it’s not inevitable that they lose their teeth, my advice to Dr. G, and anyone like him, is that they don’t have to be resigned to the “Freedom 75” plan. Quite the opposite. As with almost everyone else, Dr. G’s financial resources are finite. A sound value based financial philosophy is exactly what is needed to prevent his banter about “Freedom 75” from becoming a prophecy. Good luck!

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.

Hard to Insure? Here is What You Need to Know (Part 1) DR. IAN WEXLER

You are between 35 and 50 years old and have just returned from your annual check-up at your physician’s office. You told your doctor about some lower back pain you experience after a long day at the practice.

Your blood pressure was a bit high at 120/92 and your cholesterol is also elevated. In addition to this, your family history includes the fact that your mother has high blood pressure and your father had a mild heart attack at age 55. Your GP recommends you lose a few pounds, exercise more, and refers you for some physiotherapy for your back problems.

Since you just moved into a bigger home and you are spending almost all of your disposable income on things like private school and summer camp for the kids, your spouse has requested that you make sure that your life and disability insurance coverage is up-to-date. So, you meet with your broker and fill out new life and disability insurance applications to bring your insurance up to the right amounts.

Then a call arrives... ”I have some good news and bad news! The good news is that you’ve been approved for additional long term disability and life insurance. The bad news is that the long term disability coverage will be rated 50 percent (meaning you are charged 50 percent more than the quoted premium), it includes a lower back exclusion, you were declined for critical illness insurance, and finally, you are being rated 100 percent on your life insurance (double the quoted premium). Sound remotely familiar?

This and similar scenarios are becoming more and more common. Reasons include a) we are often not as insurable

as we think we are, and b) insurance underwriting is becoming tougher and more stringent.

If your current state of health, medical history, and family history are not ideal, it is crucial that you know what your options are when looking to purchase life and/or disability coverage?

What happens to your insurability if you have a preexisting medical condition or your insurance test results are positive?

The answer is one of three things, an exclusion, rating, or decline.

1. Exclusion An exclusion refers to an additional clause added to your insurance contract which states that benefits will not be paid if the stated condition causes the reason for the claim. For example, someone who suffers from stress, anxiety, or depression may have a “mental and nervous disorder” exclusion added to their contract. Generally, insurance companies have a “three strikes…you’re out” rule for exclusions. This means that if they feel that three or more exclusions are warranted, they will not issue the policy.

2. Rating A rating implies an extra premium charged for your policy because of a higher risk. An example of this is someone who is a smoker, obese, or suffers from hypertension.

3. Decline The insurance company considers you too high a risk to offer you coverage.

What are your options?

Believe it or not, insurance underwriting, the process by which an insurance carrier determines your risk is not always black and white. Often, a knowledgeable broker may try to negotiate a better offer for you.

Options may include the following: 1. A longer waiting period 2. A shortened benefit period 3. Exclusions 4. Ratings 5. Accident only insurance 6. Critical illness insurance

7. A non-cancellable guaranteed renewable plan 8. A plan that is not as comprehensive and has restrictions 9. Group insurance 10. Lose weight, quit smoking, get treatment 11. Stop participating in hazardous activities 12. Get several underwriting opinions Dr. Ian Wexler is 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 life, disability, critical illness, and healthcare insurance products and services to professionals, executives, and business owners across Ontario. He can be reached at (416) 391-3764 or drwex@protect-ins.com

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Rental Rates and the Real Estate Market IAN TOMS

B.Sc. (Hons)

The current Greater Toronto Area (GTA) realty market reflects 10 years of continuous sustained growth.

Statistics indicate all time high numbers of new and existing home sales, record housing sale prices, and record amounts of cash being invested in commercial real estate as a commodity. Commercial realty rental rates have increased significantly, with rates in some areas double those paid 10 years ago. Consider the following to understand how to administer future lease obligations.

Commercial realty rental rates are defined by the value of real estate. The value of real estate is defined by supply and demand. Commercial real estate is in demand when either: • investors are buying the commodity, and/or • potential customers are available and need services provided by the commercial tenants.

Generally, the highest commercial rental rates are in developments located in areas of new residential properties where there is high investment appeal.

Demand for both commercial and residential GTA real estate is very high because large numbers of purchasers with available cash are buying real estate.

The large number of purchasers can be attributed to: • a sustained high level of immigration into the GTA from other areas of Canada and abroad • residual demand left over from a few years ago when the rate of return was lower • owning is currently less expensive than renting because of low interest rates • a net increase of more than 750,000 new jobs in the area over the past 10 years.

There is a pool of cash available in both the residential and the commercial real estate market because:

• interest rates are low • real estate has been providing a better rate of return than other investments • first time home buyers are able to purchase with as little as five per cent down, and purchasers are able to dip into their RRSPs. As long as the demand for commercial and/or residential real estate remains high, the rental rates will also remain high.

Within the next 18 to 24 months, the market will cool because interest rates will increase, the pool of available residential and commercial purchasers will shrink, and more cash will be invested back into equity markets as return rates improve. Because the current boom is driven by several factors, the correction and therefore the lease rate adjustment will be comparatively gentle and less significant compared to that seen in the early 1990s.

When negotiating rental terms at this point, I recommend taking care to plan for a correction by 1) building flexibility into the lease, and 2) setting the rate at a level you are sure you can afford regardless of economic circumstances. Be prepared to walk away from a deal that is too expensive. You may want to consider renting in alternate areas now, or wait to lease sometime in the future.

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.

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 How do I determine an acceptable rental rate?

A You need to compare the rental rate to both the market context, and to your gross revenue. To complete a market comparison, collect and compare lease rates from similar developments within the area being considered. Dividing your monthly gross revenue by five to seven per cent will give you an estimate of what your monthly maximum rental rate should be.

Q I just bought into a practice as a partner/ shareholder. What kinds of insurance coverage should I have?

A This is a very complex question so the first thing I would advise you to do is get good advice. You will likely need a good lawyer, a properly qualified investment advisor and someone to advise you on tax planning, depending on your parent’s needs, circumstances and priorities. At a minimum you will need a power of attorney from your parents that gives you the legal right to deal directly with your their financial affairs. Make sure that the appropriate financial institution (bank, insurance or investment firm) will accept this document as many of these companies have specific requirements when it comes to such forms.

A When you join as a partner and owner of a practice, there may be at least six new types of insurance coverage to consider: 1. Creditor life insurance for the practice bank loan 2. Disability insurance for the bank loan 3. Business Overhead Expense insurance 4. Partner/shareholder life buy-out 5. Partner/shareholder disability buy-out 6. Business Interruption/General Liability/Office Contents Do not attempt to analyze on your own the proper type, amount, and structure of these coverages. It is extremely important that all of these be coordinated in the optimal fashion “before” signing on the dotted line.

Q My parents are in their eighties and have a fair sized investment portfolio. Managing their finances is getting to be quite challenging for them. Frankly they would be quite happy if I or one of my siblings were to take on this responsibility.

Can one of us take over the management of their investments and if so how do we go about it?

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”.