Notes From the Editor: Making the Right Choice RALPH CRAWFORD BA., DMD (Editor)
2006 Investment Strategies for Dentists BARRY R. McNULTY CFP, RFP, CIM, FCSI
Transitional Insurance Planning: It Can Secure Your Retirement Nest Egg DR. IAN WEXLER
The Role of a Lease Consultant IAN TOMS B.Sc. (Hons)
Transition: An Opportunity DR. RON WEINTRAUB
Alert! Tax Alert! DAVID CHONG YEN CFP, CA
A Purchaserâ€™s Guide to Affording a Practice GRAHAM R. TUCK H.B.A. C.A
Sharing Income From Your Professional Corporation with Your Family BARRY A. SPIEGEL LL.M., Q.C
Advisory For Dental Professionals
The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different field. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Notes from the Editor: Making the Right Choice RALPH CRAWFORD
BA., DMD (Editor)
Readers will note some modifications in this issue of Professional Advisory with the addition of a Mission Statement and an Editorial. The Mission Statement gives clear insight into the purpose and direction of the seven authors as they discuss pivotal issues influencing the dental profession. And we all hope that their choice of editor is the Right Choice as he guides editorial content that provides in-depth knowledge and information with clarity and precision. I know only too well the importance of making the Right Choice. A 1964 graduate - deep in debt, much closer in age to 40 than 30 and bearing the responsibility of a wife and two children - I knew I wasn’t going to have as many years in dental practice as my classmates to provide a fitting retirement. I sought out early the first of the only two financial advisors I’ve had in more than 40 years, who in concert with accountants and legal advisors, guided me successfully year after year in the direction of my chosen goal - to retire from my active dental practice into a lifestyle to which I had become accustomed. You also make the Right Choice - and certainly enhance your financial future - when you read and follow the expert advice found within the pages of the Professional Advisory. In this issue Ian Toms leads you through the leasing and David Chong Yen, alerts us to the perennial
question, “Who wants to pay more taxes.” And speaking of taxes, Barry Spiegel outlines brand new legislation on how family members can share in professional corporations. Transition can affect a dentist at any stage - a new practice, a growing practice, a retiring practice. Ron Weintraub meets transition head-on as an opportunity to add value, and Ian Wexler summarizes the specifics of insurance during the transition phase. Forty years ago few of us ever purchased a practice. We just started a new one on any street corner we chose. Today it can be a financial nightmare but Graham Tuck’s practice purchase calculations is an easy-read guide on affording a practice. Stocks, bonds, taxes, RRSPs, RRIFs, buying a practice, negotiating a home mortgage and even buying a new car have always given this dentist a headache. That’s where advisors like Barry McNulty come to the rescue with their sage investment strategies. There is no doubt in my mind that the Professional Advisory offers readers the Right Choice when making those critical decisions that can lead to the difference between success or failure. We invite you to contact any one of its expert contributors at any time.
2006 Investment Strategies for Dentists BARRY R. McNULTY
CFP, RFP, CIM, FCSI
Last year was an excellent year for Canadian equities. The TSX was up over 20 per cent This is great news for investors. We needed a good year like this. Once again there appears to be a lot of bullish predictions in the media about growth in 2006. This is especially true following the unbelievable performance of Canada’s benchmark stock index on the first trading session of 2006 when it soared to an all-time high, eclipsing a record that had stood since the dying days of the infamous technology bubble more than five years ago. In my experience, at times like this investors are well advised to be cautious. Such great performance and so
much positive news can change people’s expectations about the stock market. There can be a real temptation to increase one’s exposure to stocks, in this case Canadian equities and in particular energy-related alternatives, in the pursuit of higher returns. In my view this would not be prudent. Don’t misunderstand. I am not saying the TSX will not turn in a good year. Nor am I saying that there will be a correction. What I am saying is that I don’t know what is going to happen with the markets tomorrow with any certainty, let alone how it will do on the whole year. And with all due respect to those bullish pundits, I don’t think they do either.
Yes, there are lots of reasons to be bullish, but also just as many, if not more, to support a more cautious view. For example, for the first time in five years the US bond markets recorded an inverted yield curve. That’s when the yield on short-term government bonds edges higher than the yield on 10-year bonds. Normally the shorter-term yield is lower than the longer-term alternative. The inverted yield curve did not exist for long and happened on a day when volumes were very light. Yet it is interesting to note that in the last 30 years this phenomenon occurred only five times and each time, the US economy went into recession about a year later. Investment fundamentals in Canada may be very good but if the US slows down, it’s a good bet we will too. After all, the US is our biggest trading partner. Close to 40 per cent of our Gross National Product (GNP) is tied to the US in one way or another. And it’s not just us. The US economy accounts for well over 20 per cent of world
Gross Domestic Product. My point is not to predict that we are about to enter into a recession caused by a slowdown of the US economy. There is ample evidence to indicate (as of this writing) that it is going strong. Rather, I believe that when it comes to investments, it’s very important for dental professionals to stick to a long-term strategic plan that compliments their objectives. Don’t take chances. Treat your investments as your pension - the resource that will provide you and your family with financial security in the future. Diversify in such a way so that no matter what happens, your long-term outlook is not threatened. Philosophically, emphasize a return of your money rather than the return on your money. 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 email@example.com.
Transitional Insurance Planning: It Can Secure Your Retirement Nest Egg DR. IAN WEXLER
The countdown has begun. You have made a plan to retire in ten years (or less). This is how things look: • You own your home mortgage-free. Its latest appraised value has just gone up to a staggering one million dollars. • You and your spouse have accumulated RRSPs valued at $750,000. • You still have one child at home to support. • You own your practice that nets you around $250,000 per year and is valued at around $700,000. • You don’t have much cash or other “outside” investments to speak of. • You bought a “whack of insurance” some time ago that you feel you pay too much for (as does your accountant) which includes an expensive universal life insurance policy, as well as some long term disability and business overhead expense coverage. Barring some unforeseen event, things look like you will be able to retire at just the right time – at the ten year mark - and with the right financial means to see you and your spouse through retirement. At least this is what your financial advisor has indicated. Your goal is to make it through the next ten years alive and healthy. But what if things don’t turn out just the way you planned. This is where transitional insurance planning enters the picture. Asset protection versus income protection As you head towards retirement, the focus moves from long-term disability protection to asset protection. In other words, as you near retirement, it becomes less important to replace your income “insurance-wise” as
it is to protect your accumulated nest egg. If something significant happens to you that ends your career or devastates you physically, the first things to be cashed in are your assets that are earmarked for retirement. Your transitional insurance game plan 1. Start with a comprehensive analysis of your life, disability, and healthcare insurance needs to primarily see you through the transition period. This includes analyzing your practice, as well as your personal financial situation. 2. Undergo a complete review of all of your existing insurance coverage to see how it fits with your current needs. What you may find is: • You can save money by removing certain riders on your disability plans, as well as reduce the benefit amount. • You may be able to lengthen the waiting period on your long-term disability coverage, and decrease the benefit period on your business overhead expense coverage. • You may be able to cut back significantly on your current life insurance premiums. This can be accomplished in a number of ways that are too many to list here. 3. Look at purchasing transitional insurance products that include: • Critical illness coverage - some plans even have a “reducing benefit” feature that may be particularly appealing due to lower premiums, or a “return of premium benefit” where you get most or all of your premiums returned in ten years.
• Lump sum permanent disability insurance - this coverage pays a lump sum benefit of up to five times your “gross” yearly income after a one year waiting period if you can no longer practice dentistry. • Term life insurance • Long term care insurance 4. Discuss with your insurance advisor and accountant how to use your Professional Corporation (or Hygiene and Technical Services Co.) to save on life insurance premiums and tax shelter funds for retirement. Some final advice Do not buy into the argument that you alone can fund a
health disaster with your retirement assets during your transition. Also, do not buy into the response by some accountants and financial advisors that “it’s too expensive” to purchase transitional insurance coverage. On the contrary, not having proper transitional coverage can have a catastrophic financial impact on you and your family.
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 firstname.lastname@example.org
The Role of a Lease Consultant IAN TOMS
A commercial realty lease hangs in my office dated April 30, 1794. Recall that at the time, Napoleon was attacking Great Britain and the population of Canada was about 75,000. The lease was written on a single sheet of sheepskin. The leased premises was an assemblage of commercial and agricultural lands and associated enterprises. James Pike and John Mouldy were the landlords, and Newcombe Meredith was the tenant. The term was for a period of one year. The rent was payable in peppercorns, and was due on the Feast of St. Michael the Archangel (September 29). There were no representations as to the condition of the property or the associated enterprises, no options to renew the term, no corporate tenant, no exclusivity, no default provisions, no use clause and no ability to assign the lease. The basic form of this lease is very similar to the landlord friendly leases I see every day - 212 years later!
terms and conditions required to reduce rental payment and protect the tenant’s interests.
2. Offer to Lease Negotiation, 3. Lease Negotiation, and 4. Lease Term Renewal Negotiation • Complete negotiation of all financial and business
• I handle more leases in a year than most people in the industry see in a career. I know the practical implication of what is contained in a lease - and what is not contained - and how to get around almost any obstacle.
5. Lease Review • Complete and comprehensive review and analysis, identification of problem areas and presentation of recommended alternatives. 6. Letter of Opinion • Professional opinion related to specific terms or conditions of the tenancy. Examples include base or additional rent value, exclusivity, use, or renewal provision administration. Each service I provide is a “stand alone” service. Clients can select one or more services at their discretion. Clients prefer my services because:
• Every reasonable effort is made to save my client more in concessions than is paid to me in fees. In fact, I guarantee that my fees for the Offer to Lease and Lease Unfortunately for Mr. Meredith - but fortunately for you - what Term Renewal Negotiation services are less than you has changed in the past 212 years is that tenants today save. have access to specialized professional representation, which serves to equalize the landlord/tenant playing • Only my client’s interests are represented and only my client pays me - as opposed to a typical realtor who field. is paid a commission by one party but represents the As a commercial realty lease consultant, I operate a specialty other. practice restricted to client representation during the • I am licensed under the Real Estate and Business negotiation of a commercial realty tenancy. Brokers Act of Ontario. The only services I provide are: • I use a common sense, practical and astute approach 1. Site Selection in all problem solving. I have a clear sense of the realty • Complete and comprehensive trade area survey resulting market, based on many years experience as a tenant, a in a summary of all sites, with recommended locations. landlord, and a lease consultant.
• I have completed numerous negotiations in most states and provinces throughout North America.
consultation to confirm that my services will save you time and money.
• I promise to give you, my client, my personal, prompt professional attention.
Based on more than 20 years business experience Mr. 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. and can be reached at (705) 743-1220, or by e-mail at email@example.com
Don’t repeat the mistakes made by Mr. Meredith 212 years ago! Call me now for a 15 minute complimentary
Transition: An Opportunity DR. RON WEINTRAUB
The call I often hear is the one that says, “I’m giving up! I’m thinking of winding down my practice. What should I do?” Although there’s no easy answer, a positive game plan is possible with vision, planning, and goal setting. Accepting the need for transition, overcoming barriers, and understanding true practice market value are crucial to success. Why change?
Change is inevitable. Dentists need to prepare for change by bridging their practice from the status quo to a contemporary entity. The need for transition signals the end of one stage and prepares us for new growth. It involves letting go of a comfort zone and incorporating new energizing ideas. Transition offers a special opportunity to break with the conditioning that has carried us successfully this far. However, expectations of patients and prospective purchasers have changed and we need to shift our emphasis to meet a perception of a current model of practice. Injecting new life into our practice prevents our falling into the doldrums that turn previously interesting jobs into purgatories (Bridges, 1980). What are the barriers?
stamina required to affect change. Accepting assistance from an outside source to help outline the steps during the implementation phase allows for an objective point of view and supports critical decisions. How can I add value to my practice? Among the many ways to add value to your practice is to introduce a computer system. These systems are not overly expensive today and increase the worth of the practice to a potential purchaser well beyond the initial cost of a viable system. Beyond patient expectation of an electronic environment, a computer system can unearth hidden value within the practice. For example, treatment previously diagnosed but not performed shows more quickly electronically than with a one-write system.
Having an experienced and competent staff also adds value by increasing a potential purchaser’s desire to pay for good will in the practice. Hygienists, assistants, and administrative staff contribute to its culture. In addition to their expertise, their demeanor with patients can add a positive influence.
Changes in the physical setup of the office contribute Barriers to change are mostly psychological. Most often, value as well. Patients see a progressive, proactive the common question “Is it going to make a difference if rather than a sixties-style practice. Although you don’t need extensive changes, patients notice and appreciI change?” comes to mind. ate up-to-date sterilization areas and décor. Upgrading One barrier is that dentists trained in repeat modalities patient experience leads to opportunities for referrals to often find it difficult to break out of familiar routines. offset normal attrition rates. Repetitive, predictable patterns of work prevent us from adapting easily to new ways of thinking. Another barrier Inevitable changes in daily life lead to modification in how is the belief that patients and staff resent change. Only we operate our practice. By overcoming the barriers to our insecurity allows such thoughts. Patients and staff transition and initiating new ideas, we can invest in the view new ideas, carefully developed and implemented, profitable divestment of our practice. as evidence of a dynamic practice. Based Ron Weintraub is a founding partner with the Bayview Village Overcoming the barriers to incorporate change result in a practice significantly more valuable at point-of-sale. At the same time, change sparks interest in a formerly static practice, increases enjoyment of renewed success, and makes the transition period a more fulfilling experience. Oftentimes, we need to dredge up the psychological
& Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As a consultant to Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contact at (905) 4706222 Ext. 221 or firstname.lastname@example.org.
Alert! Tax Alert!
DAVID CHONG YEN CFP, CA
Who wants to pay more taxes? If anything, most people try to pay as little tax as possible. It is important to know that although there are many legitimate ways to save taxes, there are some tax saving schemes to be wary of. The best way to guard yourself is to remember that when a money saving idea sounds too good to be true, it usually is. In the end, these types of schemes may cost you more money and aggravation. Tax Free Withdrawals from your RRSPs
As tax season approaches, there are people who will claim, “there is no tax to pay, so take advantage of your RRSPs” or “we will loan you $5,000 to $250,000 to put towards your RRSPs over the next five years, as long as your RRSPs are locked in.” This arrangement is basically a circular scheme that involves using your self-directed RRSPs to either purchase shares of a private company or pay interest on a private company’s mortgage. These funds are then loaned back to your self-directed RRSPs at either low or no interest. What is your risk? You may end up withdrawing your entire RRSP portfolio and you may face a huge tax liability. Why? If RRSPs are used as security for a loan, the full value of the RRSPs has to be added to your taxable income for the fiscal year, meaning that you will be taxed on your RRSPs now, rather than being taxed when you retire. Tax Shelter Donation Donations are tax deductible, meaning not only can you give to the charity of your choice, but you may also claim your donation at tax time. Some agencies may promise that if you donate a certain amount (e.g., $100) they will give you a receipt claiming that you donated more (e.g., $500) so that you may deduct more from your taxes.
Similarly, you may give a non-cash gift valued at a certain amount (e.g., $100) but claim that the value of the gift was more (e.g., $500). What is your risk? Current legislation limits the tax benefits of charitable donations made under tax shelters and other arrangements. The current legislative limits mean that although the person or agency receiving your donation may promise you a huge donation receipt with your rather modest cash contribution, you may end up getting a donation amount that is only equivalent to your actual cash outlay. In effect, the government may disallow part of your donation amount, which makes you responsible not only for paying your overdue taxes, but also the interest on those taxes. These schemes are very carefully planned and promoted to give the appearance of legitimacy. Some even go as far as to give you a legal opinion. However, a legal opinion does not necessarily mean that the Canada Revenue Agency (CRA) has approved the transaction. It simply means that from a legal point of view, it appears the scheme is legitimate. Only in situations where the promoter has actually obtained an advanced ruling from the CRA, will the transaction be approved with no risk. You must exercise due diligence to protect yourself against such schemes. They may potentially have a serious negative impact on you and your bottom line. It is always a good idea to check with your trusted advisors first, including your investment advisor, lawyer and accountant, to verify the validity of schemes before committing yourself. David Chong Yen, CFP, CA with an international firm background and more than twenty-five 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 email@example.com. This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advise.
A Purchaser’s Guide to Affording a Practice GRAHAM R. TUCK
The basic philosophy when purchasing a practice is that the practice should pay for itself within six to ten years. You should not have to use your personal dental earnings to finance it. Let’s take a look at how this works for the thriving practice you are looking at purchasing. First, compute the Net Income before Taxes from
Ownership (see below) after all expenses. This includes paying yourself and your associates at a rate of 40 per cent ($125,000) for treating your personal patients. Net Income after expenses $228,844 Payments to doctors @ 40% 125,000 Net Income before taxes, from Ownership 103,844 Taxes on the $103,844 36,000 Net Income after taxes from Ownership $67,844 ______
Next, compute the taxes on this $103,844 income. To calculate the taxes one can interpolate the following table to get close. The following table outlines some average tax rate. Net Income before Taxes $ 25,000 $ 75,000 $100,000 $150,000 $225,000 $300,000
Average tax rate 25% 30% 33% 33% 41% 42%
After deducting the taxes, there is $67,844 remaining to pay off the bank loan. If the interest rate is five per cent and you wish to have the loan paid off in seven years, then from the table below, the factor is 16.961 per cent. By dividing $67,844 by .16961 equals $400,000 that could well be the cost of the practice. Interest Rate 5% 6% 7%
Loan paid off in years 6 years 7 years 8 years 10 years 19.32% 16.961% 15.192% 12.728% 19.887% 17.530% 15.770% 13.322% 20.459% 18.111% 16.360% 13.933%
In the opposite direction, when you borrow $400,000 at five per cent to purchase your practice in seven years then the Net Income after Tax from Ownership should be 16.961 per cent of $400,000 or $67,844 per annum. Your accountant may fine-tune these calculations to reflect that: • You will produce more or less billings than the vendor • The interest portion can be calculated as a pre-tax expense
• Your expenses may be more or less than the vendor If the practice Net Income after Tax from Ownership is only 10 per cent of the selling price then the formula would calculate - given the same income and expenses - a payout of over 15 years. That is a long time. The practice may be overvalued. Remember, if the practice is underachieving, then one must make allowances for additional billings. Your accountant would be able to calculate a pro-forma for future production that could be greater than currently being experienced by the vendor. This additional billing should give rise to additional Net Income after Taxes from Ownership that would cause the value to increase making the practice worth more due to the reduced risk of purchasing. New practices with new equipment and prime location fall outside the above calculations due to the durability of the new assets. Little new equipment would have to be purchased while you were paying off the loan to purchase the practice. Similarly, older practices with poor equipment and leaseholds fall outside because more money is needed to put into the practice to replace the older equipment and leaseholds while you are trying to pay off the practice purchase loan. By older, I do not mean ten of twelve years old, I mean 25 or 35 year-old equipment.
Graham Tuck, H.B.A., C.A. is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sales of dental practices. He can be reached at (905) 472-6000 or 1-888777-8825 or e-mail at: firstname.lastname@example.org
Sharing Income From Your Professional Corporation with Your family BARRY A. SPIEGEL
I am sure you know by now, the Ontario Government has followed through on its promise to permit your family members to own shares of your Professional Corporation (PC). The regulations were just published on December 19, 2005, and as I write this article in late December, I am beginning to digest and analyze these new provisions. Effective January 1, 2006, your “family members” may own equity shares (shares that participate in profits) of your PC. This means the profits from your practice that until now, were fully taxable in your hands at maximum income tax rates, may now be divided among you and members of your family. This new law may result in significant tax savings for you if your family members are taxed at a lower marginal rate than the rate you
are presently paying.
I must first vent my annoyance that these new laws apply only to dentists and physicians. For reasons that escape me, we lawyers (and all other professionals and healthcare professionals except dentists and physicians) have not been permitted to share in the government’s largesse, and we will not be entitled to the tax relief now afforded to you. But I digress. Dentists must continue, as before, to own all of the voting shares of the PC, and family members may own only non-voting shares, directly or indirectly (whatever that means - and I have some views on this as well). A “ family member” is defined to mean your spouse, child or parent. A “spouse” is defined as someone to
whom you are married or with whom you are living in a conjugal relationship. With my tongue planted firmly in my cheek, it would appear from the definitions that, in certain circumstances, a dentist might have more than one spouse. However, note that only your parents but not your in-laws or grandchildren qualify as family members. The non-voting shares must be owned by a family member or by a trust for the benefit of your minor children. To me, at first blush, the wording of the trust provision is perplexing. Due to the principle being espoused and the ambiguity of the drafting, a great deal of thought will have to be given before using such a trust. Minor children who receive moneys from a corporation, either directly or through a trust, are subject to what is non-affectionately known as the “kiddie tax” which taxes these moneys at maximum income tax rates regardless of the child’s other income. Obviously, it is usually unwise, as well as expensive, to permit such moneys to be paid to minor children.
Q A &
Therefore, the trust will have to be carefully drafted and the trust will probably need to own a different class of share than the spouse. It will be essential to have a shareholders’ agreement that deals with, among other matters, divorce or separation as well as sale of the practice. And there are several other important provisions of the legislation which space does not allow me to comment upon. These new rules may be of great importance to you, and will most certainly cause your accountants to take a second and fresh look at the need for or the use of professional corporations for dentists. I suggest you proceed carefully and with the benefit of solid professional advice. 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) 203-8592; or e-mail to email@example.com.
Please address your questions to: The Professional Advisory for Dental Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 firstname.lastname@example.org
Q I do a fair bit of traveling abroad. Will this have any impact on my applying for life or disability insurance coverage?
A Yes! Over the past few years, this has become a significant issue for insurers. Depending on the type of coverage you apply for, which insurance company you apply to, and where you intend to travel, including the length of time, you can be looking at anything from an outright decline, to an exclusion for certain countries traveled to, to a standard plan (no exclusions). My advice is to do the following: 1. Ensure that you disclose all information to your insurance advisor pertaining to your travel plans. 2. Make sure that your advisor looks at “several companies” as they may differ in how they view your travels abroad.
Q What is the origin of the word “Indenture” in the context of an agreement such as a lease? A Originally, because a lease is an agreement between more than one party, more than one copy of the agreement had to be made. Since there were no photocopiers hundreds of years ago, and each copy was written by hand, the copies were placed one over the other, and the top margin of all copies together was cut along a wavy line, to make a series of unique indentations. In this fashion, each party could prove the authenticity of their copy by comparing the indentations of their copy of the “indenture” to the other copy or copies.
Finally, realize that any current coverage you have, as long as it is guaranteed, can not be altered based upon your travel plans.
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”.