The Professional Advisory November/2006

Notes From the Editor: It’s Never Too Early to Plan RALPH CRAWFORD BA., DMD (Editor)

Tax Traps Associated With Using Family Members to Save Taxes (Part 1 of 4) DAVID CHONG YEN CFP, CA

Strategic Planning - How to Get Started GRAHAM R. TUCK H.B.A. C.A

Adding Family Members to Your Professional Corporation (Part 2) BARRY SPIEGEL LL.M., Q.C

What’s Your Definition of Diversification BARRY R. McNULTY CFP, RFP, CIM, FCSI.

It’s All About The Claim DR. IAN WEXLER

Look Forward to Lease Term Renewal Negotiation IAN TOMS B.Sc. (Hons)

Purchasing A Practice By Following A Plan DR. RON WEINTRAUB

The

Professional

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.

It’s Never Too Early to Plan RALPH CRAWFORD

BA., DMD (Editor)

In the third week of August my wife and I were on our way to the Canadian Dental Association Convention in Newfoundland. We had stopped over in Toronto for a few days visit with relatives. While there we got the glad – and surprising – news from our daughter and husband in Vancouver that we were new grandparents.

Our wonderful little grandson had arrived a whole month early so we had no choice except to catch the first flight home. This is our first grandchild and there will be many other CDA Conventions.

As part of this entire glorious event was a packet of papers the new parents acquired from various sources and as a curious old grandfather I leafed through them.

One information pamphlet, along with information on birth certificates and passports, dealt with the need to get a SIN so the parents could open his Registered Education Savings Plan and take advantage of the Canada Education Savings Grant. The message was “It’s never too early to help a child’s dream come true”.

And I thought, isn’t that what it’s all about. Planning can and does make dreams come true.

We shouldn’t be surprised then that in this issue of The Professional Advisory, planning – or any of its synonyms such as arrange, prepare, design, propose, set-up – are intrinsic to success. Ian Toms tells us that when renewing a lease, knowledge, timing and strategy are everything and both Ron Weintraub with Purchasing a Practice by Following a Plan and Graham Tuck’s Strategic Planning

meet the “planning” issue head-on. So too does David Chong Yen: in Tax Traps Associated Using Family Members he puts planning front and centre in the first paragraph, “Income splitting is a fundamental taxplanning tool”. On the other hand, Barry Spiegel, in the concluding paragraph of his Part 2 of Adding Family Members to your PC, must have had “planning” also in mind when he states, “you must carefully consider all the available options with your lawyer and accountant”.

Without pushing the language barrier, isn’t “consider” another version of planning?

Profitable stock diversification just doesn’t happen.

That’s why Barry McNulty advises, as part of diversification that, “It is very important for you as an investor to clearly define risks”. I’m sure Barry’s intent also includes a “plan” that makes risk an important factor. And what about that insurance claim? Ian Wexler is pretty direct: “Without proper claim management and assistance (isn’t that planning, preparing, designing?) your odds of a smooth claim go down significantly”.

Yes, it’s never too early to help a child’s dream come true. And as our contributors to the Professional Advisory keep advising us, it’s never too early to help a dentist’s dream of financial comfort, peace of mind and wellbeing come true. It’s all in the planning.

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crawford@dccnet.com

Tax traps Associated With Using Family Members to Save Taxes (Part 1 of 4) DAVID CHONG YEN CFP, CA Please note: This is the 1st of a four part article; in the 1st segment, we will identify tax traps. In the subsequent segments (2nd, 3rd and 4th), we will identify solutions.

Income splitting is a fundamental tax-planning tool and is synonymous with saving taxes. It usually involves deflecting income away from the higher income family member (taxed at a higher rate), to the lower income family member (taxed at a lower tax rate) to reduce the family’s overall tax bill.

However, to discourage income splitting among family members, the Canada Revenue Agency (CRA) enforces strict rules known as the attribution rules to prevent abuse of this concept.

Attribution rules or “tax traps relating to gifts” are as follows: 1. Spouse – If you gift money to your spouse and your spouse invests this gift, any capital gains/dividends/ interest realized/earned from the investment will be

taxed in your hands (i.e., will be included in your personal tax return).

interest realized/earned from the investment will be taxed in their hands.

2. Grandchildren/children 18 years of age or older (18+) – If you gift money to your grandchildren/children (18+) for investment, any capital gains/dividends/ interest realized/earned from the investment will be taxed in their hands (i.e., will be included in their personal tax returns).

3. Grandchildren/children (<18) – If you lend money to your grandchildren/children (<18) interest free for investment, any capital gains realized from the investment will be taxed in their hands. However, if the investment earns dividends or interest, you will be taxed on this income.

3. Grandchildren/children under 18 years of age (<18) – If you gift money to your grandchildren/children (<18) for investment, any capital gains realized from the investment will be taxed in their hands. However, if the investment earns dividends or interest, you will be taxed on this income.

On the other hand, if the loan is interest bearing, then all investment income earned by your spouse will be reported on their tax return. The interest rate you must charge is set by the Canada Revenue Agency (4th quarter 2006 rate is 5%), so if you lend money to your spouse, you must charge interest at 5% and the annual interest must be paid by January 30 of the following year. When you set up an interest bearing loan with family members, it is advisable to document it by signing a promissory note detailing the date, amount of the loan, interest rate charged and the repayment terms etc.

Please note; the attribution rules do not apply if you sell property to your spouse at the fair market value.

However, such a sale will likely result in a tax bill if there is a capital gain on the sale.

Attribution rules or “tax traps relating to interest free loans” are as follows: 1. Spouse – If you lend money to your spouse and do not charge interest and your spouse uses this loan for investment, any capital gains/dividends/interest realized/earned from the investment will be taxed in your hands (i.e., will be included in your personal tax return).

2. Grandchildren/children (18+) – If you lend money to your grandchildren/children (18+) on an interest free basis for investment, then any capital gains/dividends/

Although we have detailed the attribution rules intended to prevent income splitting, there are still several legal opportunities that exist to split income and save taxes among family members which we will discuss in parts 2 through 4 of this article.

David Chong Yen, CFP, CA with an international firm background and more than twenty-six 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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Strategic Planning How to Get Started GRAHAM R. TUCK

H.B.A. C.A

I recently attended a Strategic Planning meeting that a dentist organized for himself. He invited his wife, his accountant, his investment/retirement consultant, his insurance specialist and myself as a valuation/ sales broker. The accountant brought to the table the dentist’s current financial situation and tax position.

The investment/retirement consultant was a long time business advisor and confident. The insurance broker was familiar with his insurance needs including practice insurance. I was invited as I had valued his practice in the past and understood the strong and weak points of his practice management as well as establishing the value of his practice for retirement purposes.

The meeting included a review of his debts, his income, his future cash requirements (i.e., children’s wedding

costs). The big question was: What should he do today to reach his objectives in the future? Future objectives included: 1. Total debt elimination in five years 2. Maximize RRSPs for both himself and his wife 3. Balance the retirement savings for both himself and his wife 4. Minimize future taxes.

We discussed practice management techniques to improve his bottom line. The overhead in the practice was higher than it should have been. The decision was made that he should start up a hygiene/management company owned by his wife. The expectation was that excess income could be accumulated in the hygiene corporation and transferred to an investment company.

This would keep the current taxes as low as possible on the excess income until drawn out for personal use.

It was felt that the excess income would not require the dentist to form a Canadian Controlled Private Corporation (CCPC) to shelter excess income at this time. A laboratory corporation was discussed but was considered too complex for the time he had available and other projects would make better use of his time.

At the end of the meeting, which took three hours, there was a consensus to establish priorities for the each member of the group in order to achieve the dentist’s short and long term objectives. It was good from the

aspect that everyone knew where they were headed with a time frame to achieve objectives.

There was a five year plan, a ten year plan and a fifteen year plan. It was arranged that the group would meet annually after we have completed his comprehensive valuation for the previous year.

If you do not know where you are going how will you know when you have arrived.

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: grtuck@rogers.com

Adding Family Members to Your Professional Corporation (Part 2) BARRY A. SPIEGEL

LL.M., Q.C

In my last article, I began discussing the costs of adding “family members “ to your Professional Corporation and describing the types of shares you can issue to those individuals.

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year, without any obligation whatsoever, if the child or parent should receive any dividend at all or, if so, in what amount. If that is your wish, then you may want to issue to them shares with a variable discretionary dividend as described in (2) above.

In that article I reviewed the possibility of your spouse receiving non-voting “equity” shares and explained the (4) It is important that you issue a different class of shares to each and every family member, so that, in each year, pros and cons of this option. you can declare a different amount of dividends on each (2) A second option would be to issue “non-equity” class, depending on the tax ramifications and on the shares to your spouse. These shares would have the needs of each family member shareholder. For example, right to a variable dividend, determined in each year by one child may need assistance with university tuition, you, in your sole discretion. You may issue no dividends while another child needs nothing at all that year. in any year or, at your discretion, you may issue a dividend for any amount up to one hundred percent of (5) Remember that your minor children (under age the profits of the corporation. This option gives you total 18) cannot own shares in their own names - the laws requires that shares for your minor child or children freedom to decide the most tax efficient way of dealing must be issued to a trustee on the child’s behalf. The with the income of the Professional Corporation - you so-called “kiddie tax” discourages issuing any dividends may take some of the income by way of salary (at least whatsoever to shares held for minors, since doing so will enough to make your maximum contribution to your attract tax at the maximum personal income tax rates.

RRSP), and then decide whether to leave the balance Accordingly, the trustee should not be paid any dividends in the corporation, or to divide some or all of the profits at all, and, when the child reaches 18, the shares will between you and your spouse in whatever proportions be transferred into the child’s name. It is apparent that you decide. the only purpose in issuing shares through a trustee In the event of a separation or divorce, or for any other for minor children is to issue the shares currently for a reason whatsoever, you or the corporation can buy these nominal price which may not be possible if you wait for shares back from the spouse for as little as one dollar the child to reach 18 before issuing the shares. per share since the fair market value of these shares is negligible. However, since these are not “equity” shares, it is unlikely that they will be entitled to any taxfree capital gain when the shares of the corporation are eventually sold.

Issuing shares to family members can be very tax effective but you must carefully consider all the available options with your lawyer and accountant to ensure that the shares you require will be available when your Professional Corporation is created or its Articles amended.

(3) If you wish shares to be issued to your children or your parents, you would probably not want to issue equity shares. You may want the right to decide in each

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) 203-8592; or e-mail to barry@drlaw.ca.

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What’s Your Definition of Diversification BARRY R. McNULTY

CFP, RFP, CIM, FCSI

If you were to mention the colour blue during a conversation with a group of friends, chances are that if you could see the image the word blue conjures up in your listeners there would be a wide variation in each party’s perception. Some for example, might think of aqua blue. Others might see navy blue. In fact, there could be as many variations of blue as the number of listeners.

The fact there is a lot of variation in people’s mental picture or definition of the colour blue is not something for any of us to be concerned about. But that’s not true of all definitions, especially those that relate to the investment world. For example, take the word “diversification” as it applies to your investments. I chose this particular word because it is a vitally important one for investors. It is also, in my experience, one that seems to have many variations in definition.

In meeting new clients, one of the most common problems I see concerning their investments is that they are not properly diversified. It is interesting though that they very often think that they are diversified. There’s obviously a difference in our definitions. For example, I see many portfolios that hold a significant portion of Canadian “blue chip stocks” or several mutual funds that have the same objectives. Because their monies are not all invested in one company or fund, the client thinks they are diversified. To a certain extent this is true. Such portfolios are diversified relative to company specific risk. But such portfolios are often underdiversified relative to other risks. If you have all of your

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investments in Canadian “blue chip” stocks, whether held directly or through mutual funds, when Canadian markets decline so too will your assets. It doesn’t matter whether you have one stock or quite a few. A heavy weighting in such stocks can mean your portfolio is over exposed to the risks that affect Canadian stock markets.

This is just one example of the risks that can impact your investment strategies. There are a great many more, and proper diversification can help address the majority of them. Examples include company specific risk, industry risk, market risk, currency risk, interest rate risk, purchasing power risk, and political risk to name just a few.

Unfortunately, there is not enough space available to cover them all in this article. Let me just say that risk is a necessary part of investing. In fact it is the basis for how capital markets work. Investors are (or at least should be) properly rewarded for the amount of risk they take. At the same time, it is very important for you as an investor to clearly define these risks so that you can develop the diversification needed to mitigate their impact on your financial well being. If you are interested in finding out more on this topic, there are a lot of good books on the subject. One I recommend is Risk is Still a Four Letter Word by George Hartman, Canadian financier and author. 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 905-470-6222 ext 216 or barry.mcnulty@raymondjames.ca.

It’s All About The Claim DR. IAN WEXLER

I just received a phone call today that made me change the entire beginning of this article. The call was from the senior claim examiner at Great West Life. It was pertaining to a long term disability claim that I was overseeing on behalf of a client for the last several months. What made this particular claim so important were several facts:

submit the claim.

2. Very shortly after this individual and I met, we initiated the claim process. This was almost a full year after it should have originally been submitted.

3. Per the definitions and wording in the contract, Great West Life had a right not to even consider the claim because of its late submission.

1. My client was completely abandoned by his original broker who sold him the plan when he originally tried to 4. Great West Life’s claim department acted with honour

and integrity in approving the claim after being presented with all of the facts and issues pertaining to the claim.

The call that I made to the client today, telling him that Great West Life was not only honouring the claim, but going to pay full benefits retroactively to the date of the disability, reconfirmed what I consider to be my primary duty as an insurance advisor - to get my client’s paid benefits at claim time.

Here is what you need to know if you want to have the best chance of getting paid disability benefits at claim time.

Know the Priorities At the end of the day, it does not matter which plan you have, how much you are paying or how much you like or even trust your insurance broker. Without proper claim management and assistance, your odds of a “smooth” claim go down significantly. At the same time, your odds go up of incurring a significant amount of stress and aggravation in dealing with most, if not all, of the claim yourself.

Make Sure All Claim Forms Are Properly Completed Having handled dozens of disability claims as an insurance advisor and claims consultant, it has been my experience that not a single claim form has been properly filled out, when completed solely by either the dentist or the dentist’s spouse. The forms often ask questions in a poor or confusing fashion, and leave no room for adequate answers. In addition, many claimants’ physicians fill out their portion of the claim form inaccurately.

Know What Your Insurance Broker Will Do For You at Claim Time!

• Help you understand how your particular disability plan(s) pay or don’t pay at claim time • Assist you in obtaining all claim forms • Ensure that all time frames for notification and submission of the claim are met • Make sure you understand all of the information asked on the forms and how best to answer all of the questions in the most complete manner possible.

This includes understanding your specific inability to perform your pre-disability daily duties within your practice. Ideally, your advisor should know what specific questions to ask you with regards to your limitations as a result of your disability “as a dentist.”

This is crucial and can have a significant effect on the adjudication and payment of your claim • Assist in gathering all financial and other pertinent claim data in the most efficient fashion • Ensure proper record keeping • Properly monitor the claim with you • Finally, ideally, your advisor should intervene when appropriate with the insurance company, in a professional fashion on your behalf during the claim process. Taking an assertive and helpful approach and not an aggressive or confrontational approach is critical.

Ideally, your advisor should know what specific questions to ask you with regards to your limitations as a result of your disability “as a dentist.”

Make The Call Today Do not wait to find out what will happen to you at claim time. Send an e-mail or call your insurance advisor today and find out exactly what he or she will do for you at claim time. In addition, speak to a dentist or two who has been through a claim with your advisor. It’s worth the “peace of mind!”

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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Look Forward to Lease Term Renewal Negotiation IAN TOMS

B.Sc. (Hons) -

www.iantoms.com

When renewing the term of your lease, knowledge, timing and strategy are everything – especially in today’s realty market.

Recently a tenant called me in a panic. He had received

a notice from his landlord giving him just 24 hours to either accept a new and nasty lease with a rental increase of $1,372.50 per month, or leave the premises before the end of the next month. Moving on such short

notice was not a possibility.

This tenant had not managed his lease term renewal option. Instead, he had: 1. purchased an operation without taking assignment of the lease (the lease was in someone else’s name), 2. allowed his term renewal option to expire, 3. allowed the lease term to expire, 4. continued as a month to month tenant for period of several months, 5. never responded to any landlord notices, because these were sent to the former owner.

Incompetent tenant? Maybe. Unusual tenant? No. Quick, ask yourself now when your current term renewal option expires. If you can’t answer that question immediately, you are asking for trouble, because you are not prepared to manage your lease term renewal.

Save yourself time, money, and emotional stress!

Manage your renewal as follows: 1. Examine your lease to identify what features need to be amended to improve your tenancy.

2. Examine your renewal option(s) to identify: a. How many options do you have, and how long is each option?

b. When does the next renewal option expire? c. When does the term expire? d. When should you initially approach the landlord?

3. Approach the landlord well in advance of the renewal option expiry with a specific proposal to renew the term and amend the lease.

4. Conclude the negotiation in a timely and professional manner.

So what happened to the tenant who did not manage his renewal option? Even though he had a negative leverage position with the landlord, the rent demanded by the landlord was reduced by over $12,000, the relationship with the landlord was re-established, and many significant lease issues were corrected.

Bottom line? Not managing the lease term renewal still cost this tenant a whopping $900.36 per month, or in five years, $54,021.60 above what he ought to have paid in this market!

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, by e-mail at iantoms@pipcom.com, or through his web site at: www. iantoms.com

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Purchasing A Practice

By Following A Plan DR. RON WEINTRAUB Assuming you have gone through the stages in deciding to buy a practice, the next hurdle to achieve one of the most important purchases in a lifetime is initiating the process. Callers frequently ask us how to purchase or divest (Professional Advisory Vol. 21) of an existing practice. Associates sometimes choose to buy into their current affiliation or they buy another practice or buy into one. The journey in seeking a “perfect” fit to purchase the practice of your dreams begins with three major steps for success: review your chosen criteria, initiate steps for the search, and collect the required data for decision-making.

Review Criteria Review established criteria to decide on the purchase of your ideal practice. You need a firm conviction for the location and type of practice: urban vs. rural, downtown vs. suburban, or family-type vs. predominately adult. Think carefully about whether a practice within a well-established neighborhood vs. one growing in a new suburb suits you. Decide on your comfort level for a purchase in a defined ethnic community or in a multifaceted demographic that represents the diversity large

urban centres reflect. Another important consideration in selecting a single practitioner office vs. a group practice is choosing to buy either the entire practice or a percentage of it.

Initiate Steps to the Search Initiate the search to your quest with the following five steps: 1. Scan the advertisements in Oral Health, ODA Journal, CDA Journal, and other professional publications; 2. Speak to practice brokers and let them know your requirements. Ask them to keep you on file to alert you to opportunities that arise; 3. Contact accountants, financial planners, insurance specialists, and practice management consultants who focus primarily on the dental market. They are knowledgeable sources of opportunities for unlisted practices for sale; 4. Approach dental supply company representatives for insight into prospective sales; and 5. Be proactive. Consider placing an ad in publications and online indicating your desire to purchase an active practice. Be sure to include your criteria. When presented with an opportunity that meets it, do your due

diligence with the aid of your accountant, lawyer, and practice management consultant.

Associates considering buying into their current practice require another strategy. In this case, after having been involved in the practice, these practitioners require confirmation from the owner as to whether the principal wants the associate to buy into the practice within a specified time or, alternatively, a commitment to purchase it at an agreed time. In addition, since they have knowledge of day-to-day operations, associates can focus their due diligence efforts on the structure of the office.

Collect Required Data All potential buyers need solid facts upon which to base their decision. Allowing time to gather the necessary documents to support a decision to purchase helps quell anxiety. Among the required documents are the following: • A current practice evaluation including three years of statements; • All pertinent practice statistics; • Complete lease information;

Q A &

• Employee status and contracts; • A breakdown of production mix: Analyzing the numbers of the production mix contributes to understanding the extent of existing opportunities; • An agreement on the value of the practice with the owner. This number ideally allows the purchaser to earn reasonably while retiring the debt incurred in buying the practice; and • Third party consultation for objective advice on the viability of a structured deal.

Purchasing a practice can be trying. However, by understanding your criteria, being proactive in the search, and gathering required data for objective decision-making, your purchase can conclude successfully.

Ron Weintraub is a founding partner with the Bayview Village & 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 contacted at (905) 4706222 Ext. 221 or drronips@rogers.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 info@theprofessionaladvisory.com

Q Mr. Toms, I really enjoy your articles. Are you available to attend classes or study groups as a guest speaker?

A I appreciate and enjoy the opportunity to speak to groups. I have a number of prepared presentations including “Traps and Tricks: Dealing with Landlords in the Current Leasing Market”. Please contact me directly to discuss the opportunity.

Q My financial planner told me that it’s “criminal for an insurance broker to sell any life insurance product that doesn’t have zero surrender charges”. I would appreciate your comments on this.

A Interesting question. The bottom-line is that high early surrender fees actually result in higher long term policy values.

Surrender charges are imposed by insurance companies to recover some of the expenses insurers incur in issuing/placing insurance policies from clients who surrender. Insurers bear a cost when policies surrender early. This cost exists whether or not there is a surrender charge (implicit or explicit) in the policy.

An insurer who does not levy that cost of early surrender against those clients who generate those costs will be forced to either absorb those costs or to pass them on to clients in some other format. It should be no surprise that insurance companies tend not to simply absorb this cost. Policies that carry no surrender charges tend to assess higher loads or assess higher insurance charges or assess higher MER’s (i.e., lower credited returns) or pay lower bonuses to all policies in order to compensate for these costs generated by those policies that surrender early.

So my direct rebuttal to the “never sell a policy with a surrender charge” statement is that this doesn’t reflect a sound risk/reward approach. I think a better approach is to avoid policies that carry surrender charges for clients who have a high likelihood of surrendering early.

However, for clients who have a low likelihood of early surrender, I would seriously consider the risk/reward tradeoff of policies that carry surrender charges. For clients with virtually no likelihood of early surrender, I’d actually seek out the policies with the highest early surrender charges available.

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”.