The Professional Advisory Nov/2007

The

32 Professional

Advisory For Dental Professionals

IN THIS ISSUE THE VIEW FROM HERE A Summary of Realty Types and Characteristics Ian Toms B.Sc. (Hons)

NEW LAWS AFFECTING DENTAL HYGIENISTS Barry Spiegel LL.M., Q.C

COMMON CHALLENGES IN DENTAL PRACTICES: Benets and Fee Structure

YOU AND THE DOLLAR Mark McNulty BA, CFP, CIM

Dr. Ron Weintraub

THE ART OF DONATING FROM A TAX ANGLE David Chong Yen CFP, CA

HOW DO I PREPARE MY PRACTICE FOR SALE? Graham Tuck H.B.A C.A

RECEIVE A TAX FREE DISTRIBUTION FROM YOUR CORPORATION! Dr. Ian Wexler

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THE LAW OF OUR GROWTH IS PROGRESS NOTES FROM THE EDITOR

VOL. 32 : NOVEMBER, 2007

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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 eld. 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.

The Law of Our Growth is Progress RALPH CRAWFORD BA., DMD One of the first things our readers will notice with this particular edition of The Professional Advisory is that it has a new format, new design concepts and has expanded from eight to twelve pages. And true to the words of the outstanding 19th century educationalist, Egerton Ryerson (1803-1882), “The law of our youth is growth; the law of our growth is progress.”

The Professional Advisory has come a long way since seven dedicated professionals first began meeting as a group in the year 2000 because they believed more, much more, could be done for their individual clients to elevate the awareness of the all-important business side of dentistry and the vital aspects of personal financial management. Each knew, through experience – sometimes bitter experience – that although dentists have excellent training and know-how in the oral care of the patients to whom they are dedicated, they all too often have limited knowledge in the business of their practice and the management of their finances.

The reality was, and still is, that although Canada’s ten dental faculties are among the best in the world it really isn’t the educators’ role to teach business and finance. Their primary responsibility is to teach the art and science of dentistry.

Out of those first informal meetings of seven likethinking minds came the realization that their combined advice, expertise and direction virtually covered every aspect required for the financial security and personal success of not only their own personal clients but the broader scope of every dental practice in the country. They had all the essentials covered: practice management, taxation, insurance, tenant advocacy, legal advice, financial direction and valuation/practice sales. Thus, Volume 1 of The Professional Advisory was launched in May 2001.

More than seven years and thirty-two Volumes later, with added pages and new design concepts, the founding authors have never lost sight of their Mission:

…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.

And to ensure they keep one another informed of the “latest developments relating to the profession” the authors meet regularly for a thorough review of the past and a vision of the future.

This month’s publication – as with all Professional Advisory publications – is open evidence of the authors’ dedication to the Mission’s expert information and advice for dentists and their advisors. Ian Wexler outlines how to Receive a Tax Free Distribution from Your Corporation and still in the realm of taxes, David Chong Yen directs readers on The Art of Donating From a Tax Angle. Mark McNulty’s You and the Dollar offers timely advice on dealing with the daily American greenback headlines. And although not daily headlines, an understanding of both The New Laws Affecting Dental Hygienists outlined by Barry Spiegel and Ron Weintraub’s Common Challenges in Dental Practices, Benefits and Fees is absolutely vital to any successful practice.

Every dental practice needs a location somewhere and The View From Here by Ian Toms presents a variety of choice and at the end of it all how do you sell your practice? Just read Graham Tuck’s How Do I Prepare My Practice for Sale.

We offer our congratulations to the authors for their newly enhanced expanded format and fully agree with Egerton Ryerson that indeed, the law of our growth is progress. PA

crawford@dccnet.com

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The View From Here A Summary of Realty Types & Characteristics IAN D. TOMS B.Sc. (Hons) You should be demanding with regard to the location of your practice. If you don’t know what realty types are available, then you are not able to make an informed decision. You have to find space that is appropriate for and compatible with your vision of practice, and in order to do that, you must understand what realty is available to you. Summarized below are the primary realty types and characteristics along with monthly gross rental cost indicated for 1,500 square feet of space.

Office space: • Subjectively described as Class A, B & C • Class A space is prestige space in high rise buildings with mirrored windows, concierge service, and polished granite lobbies.

• B and C buildings are more modest; medical/ professional buildings are usually Class C • typically little or no signage, restricted hours of operation, limited expensive parking, and located on or near public transit • typical rates range from $28 psf for Class C ($3,500 per month) to $70 psf for Class A ($8,750 per month).

• Retail space can be considered under the following headings.

• Prestige strip plazas: • long single storey developments • rental units ranging from 1,200 to 40,000 sf.

• clean, contemporary design • consistent and significant signage • ample close parking • typical tenants are chartered banks and national retail chains • significant consumer traffic • typical rental rate is $35 psf or $4,375 per month • freestanding pad space is occasionally available in this type of development offering excellent access, signage and visibility, but at a cost of $45 psf or $5,625 per month.

Prestige Strip Plaza

• Common strip plazas: • long single or two storey developments • divided into 1,200 sf street level rental units with office space above • tired look today because the style was built in the 1960’s • tenant community is primarily family businesses • modest consumer traffic • non-uniform signage • ample close parking • typical rental rate is $26 psf or $3,250 per month.

• Anchored retail strip plaza • include both prestige strip retail space and large grocery or drug store anchor tenant • significant consumer traffic generated by large retailer to the benefit of smaller retail tenants • well designed and built with consistent signage, superior tenants, and a superior location • typical rental rate is $35 psf or $4,375 per month continued

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Anchored Retail Strip Plaza

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Special Space - Converted Retail

• Enclosed malls: • modest rent typically $10 psf or $1,250 per month • huge numbers of consumers • the possibility always exists that an auto body repair • restricted signage and parking facility could locate beside your clinic.

• tenants include both family businesses and national Special space chains • dream locations which are often the product of two • typical rental rate is $70 psf or $8,750 per month to three years of planning and developing • for interest, the Eaton Centre in Toronto is currently • examples include free standing retail, rezoned charging a whopping $200 psf, or $25,000 per month, residential, or otherwise remarkable space requiring an annual production of over $4 million!

• for example, a residential property may need to be purchased, rezoned, renovated, then built out, a process costing several years and $1,000,000, equating to payments for base rent, taxes and maintenance typically at $7,800 per month • typically consumers travel to and attend this type of property as a destination, as opposed to noticing the location when they attend an adjacent business In summary, manage your location to suit your vision.

1. Understand what type of real estate is available to you.

2. Decide where you would like to practice.

3. Design a strategy a number of years in advance to locate your practice where it best fits your vision. PA Special Space - Converted Residence

Industrial space • occasionally leased by dental practices where zoning permits • may appear to be retail, especially if the space is adjacent to the road • characteristically low consumer traffic

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 licensed as a Real Estate Broker 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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Common Challenges in Dental Practice: Benefits and Fee Structure DR. RON WEINTRAUB Running profitable dental offices in modern times requires a broad range of skill and business acumen.

Knowing two common challenges in operating our offices effectively helps us avoid making mistakes: Considerations of Dental Benefits and Proper use of the Fee Guide.

Dental Benefits Considerations Patients who are fortunate to have access to some form of dental benefits are a significant group in most patient populations. Allowing such patients to become insurance dependent is a mistake. Dental benefits should not determine patients’ choices or dominate office relationships.

Some offices allow the focus on benefits to influence every phase of treatment. Some spend more time examining the insurance program than the oral cavity.

When an insured patient presents for an exam, we should offer the same detailed treatment plan as we do for those without insurance. We should tailor the treatment to patient needs instead of limiting it to what the insurance covers. When necessary, offering a courtesy or pro bono treatment to assist some needy families is both morally and professionally responsible.

In some practice areas, a large patient base with dental benefits increases the value of the practice.

If we perform only insured treatments, however, we minimize its value. Twenty-first century economic changes reflect greater numbers of self-employed people who typically do not have health plans. With the increase of sole proprietorships, a decrease of salaries with benefits, and an aging population, an insurance dependent office risks negative growth.

One of the biggest insurance issues is the handling of assignment. Two major reasons dentists give us for accepting assignment are the following: 1. Most of the other offices in the area do so, and if we don’t, we look as if we don’t want to help patients

pay for their treatment. Consequently, they will go elsewhere in the neighbourhood.

2. Purchasers believe that since they bought the practice with assignment in place, it must remain. They don’t realize they can change since they don’t know how to eliminate assignment without losing a significant number of patients. But techniques are available to switch from assignment to non-assignment and are successfully accomplished with a little professional guidance. It’s worth considering having a non-assignment practice when transitioning out because it is the most sought after practices by purchasers.

Use of Fee Guide The Ontario Dental Association (ODA) designed the Suggested Fee Guide as a rational approach to evaluating the cost of a dental service using specified criteria. The Preamble of the Guide suggests using the fee formula is not obligatory. Rather, “...it is intended to serve only as a reference for the general practitioner to enable development of a structure of fees which is fair and reasonable.... Practitioners are expected to determine independently the fees which will be charged for the services performed.”

In practices using dental office management software, using the Guide sometimes borders on unfairness to dental offices and sometimes to patients. The Fee Guide suggests a range of appropriate fees, but some major dental software shows only a single fee at the top end of the range. Occasionally, fractious issues arise when patients have a short emergency visit or a small adjustment and the computer program defaults to the high end of the range. When patients get to the front desk and learn the fee, it often results in administrative embarrassment when they need to adjust it. Other times, patients accept the fee but they feel “ripped off.” Such feelings result in negative public relations for the office.

Another error we see in offices where

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we carry out a performance enhancement is the discomfort practitioners feel deviating from the Fee Guide. For example, one of our clients uses significantly more time on procedures than the Fee Guide allocates.

Although he excels in several aspects of dentistry, setting appropriate fees challenges him. He has difficulty charging ODA Fee Guide suggestions so he frequently finds reasons to render courtesy. This is a disservice to the dentist and his family from a life style perspective. It also limits the office’s ability to provide patients with new, beneficial technologies because of a lack of cash flow resulting from his fee structure.

Proper use of the Guide allows opportunity to use the range to determine fees appropriately.

Our policy is not to change the way dentists render services; alternatively, we encourage charging fees commensurate with the way they provide their services. When fees exceed insurance companies’ idea of a normal fee for a specified procedure, explaining the

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additional charge in advance helps patients understand the reason for it.

Overcoming obstacles in running a successful dental practice include understanding the intricacies of dental benefits and establishing a realistic fee structure.

Confronting the challenges and eliminating the barriers that prevent us from achieving our business goals require a thoughtful plan. PA RonWeintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-ve 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 beneted 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) 470-6222 Ext. 221 or drronips@rogers.com.

The Art of Donating From a Tax Angle DAVID CHONG YEN CFP, CA We donate to our favorite charities to support their missions and to help those in need. And of course, we all understand that donations to worthy causes can reduce our tax bill.

Individual Making Donation: As an individual, the first $200 of donations saves you about $43 of taxes and any donations in excess of $200 will save 46 cents for every dollar donated. Any un-deducted donations may be carried forward for five years. In general, it is most tax beneficial to combine the spouse’s donations in either one’s personal tax return rather than each individual claiming their own donations. Remember, you may not deduct donations made by any other family members on your own tax return.

This means your child might not enjoy any tax benefit if he/she donates and makes/expects to make no income or insufficient income to claim the donations.

Have you thought of donating in kind (e.g., furniture, dental equipment, kitchen cabinet, tax shelter and publicly traded stock, etc.); this may save you taxes.

You will receive donation receipts equivalent to the value of the item donated. Rather than dumping the old kitchen cabinet in the landfill, you could donate it to Habitat for Humanity or any worthy charity and receive a donation receipt.

How about those publicly traded shares that have risen in value? What if you donate these shares instead of the net cash you received from selling them?

Example 1: Donate with after tax cash from sales of shares Shares Proceeds/Selling Price Cost Capital gain Personal tax (@46.4% x $90,000 x 50%)

$ 100,000 10,000 90,000 20,880

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Donate with after tax dollars ($100,000 - $20,880) Tax saving on cash donations ($79,120 x 46.4%) (assumes there are at least $200 of other donations)

79,120 36,712

Net tax saving ($36,712 - $20,880)

15,832

Example 2: Donate shares directly No capital gain tax on shares Donate Net tax saving on shares donation

Based on the above examples, you would have saved an additional $30,568 ($46,400 – $15,832) by donating the shares directly.

Donating shares which have risen in value is better than selling these shares and donating the cash received from the sale.

Corporation vs. Individual: Having your Professional/Technical/Hygiene Service

100,000 46,400

Corporation make the donation is better than you making the donation personally.

Assume your corporation pays tax at 50 per cent on non-professional income (e.g., capital gains on investment or interest income) and pays tax at 18.62 per cent on professional income. Using the same examples as above, except your corporation makes the donation:

CORPORATION Example 3: Donate with after tax cash from sale of shares Shares Proceeds Cost Capital gain Corporate tax (@50% x $90,000 x 50%) Donate with after tax dollar ($100,000 - $22,500) Tax saving on cash donation Net tax saving ($28,600 - $22,500)

$ 100,000 10,000 90,000 22,500 77,500 28,600 6,100

Example 4: donate shares directly No capital gain tax on sale of shares Donate Net tax saving on shares donation

By having your corporation donate the shares directly, you would have saved an additional $12,520 ($18,620 - $6,100) which appears to be far less than if you donate the shares personally. However, when your corporation donates the shares, you (the shareholder) may also receive a tax free dividend of $45,000 in example 3. This represents the non-taxable portion of the capital gains. Such a dividend may have cost you $14,100 ($45,000 x 31.33%) of taxes if it is a taxable dividend and you are at the top tax bracket. With this tax free dividend, your tax saving is now increased to $20,200 ($6,100 +$14,100).

On the other hand, if you donate the shares directly to a charity, you may receive a tax free dividend of

100,000 18,620

$90,000 and the equivalent tax saving is about $28,200 ($90,000 x 31.33%). The gross saving is now increased to $46,820 ($18,620 + $28,200).

It is slightly more beneficial to donate via your corporation instead of you personally donating, as demonstrated by the above examples. PA David Chong Yen, CFP, CA with an international ďƒžrm background and more than twenty-seven years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 5102699, 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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How Do I Prepare My Practice For Sale?

GRAHAM TUCK H.B.A., C.A.

Time marches on, circumstances change and nothing is forever. Sooner or later you are faced with the inevitable question, How Do I Prepare My Practice For Sale? To help construct a game plan that best fits your needs the “preparation plans” will be discussed in a series of four articles according to time frame: Part 1: Eight to ten years from selling time (Volume #32) Part 2: Four to seven years away (Volume #33) Part 3: One to three years away (Volume #34) Part 4: Sell the practice now (Volume #35) Part 1: Eight to Ten Years Before Planned Sale In this category you have time to plan. It all starts with a valuation which should specify the current value as well as identifying areas of weakness in your practice such as: a) over staffing, b) location, c) old, tired facility, d) building lease risks.

Assessing Weakness a) Identify your true staff requirements and get yourself onside over time. If you are paying thirty per cent of your gross billings as wages you are paying too much. This will be seen as a weakness in your practice as the purchaser will most likely be hiring all your staff. The extra expense will also reduce your profit and thus your practice value.

Too often staff requirements are set by the staff. I have seen a practice billing $600,000 and having two receptionists. A good rule of thumb is one star receptionist

for up to $900,000 billing – and you want a star in this position. This assumes that you are only open 40 hours per week or less. Larger practices can be structured around an office manager and this will be discussed in a future article. b) Is your facility what one would call “contemporary” with good visibility and easy access? Second floor with no visibility, a cut-out in the wall with a sliding glass window for the receptionist and no elevator is not where it is at today. If you find yourself in this position you should consider moving. You have time to amortize the cost to your practice and would have good value when you put your practice up for sale eight to ten years down the road. Any facility with a contemporary design will have eye appeal to a purchaser. c) When was the last time you did a major overhaul of your practice facility? As in location (above) any renovations can be amortized over the next eight to ten years. Adjusting room sizes and colour schemes can truly improve not only your practice but also your attitude. Your patients will notice. d) Three times recently we had situations where the landlord informed the dentist that the lease was not going to be renewed due to major building renovations. This made the practice un-saleable. The forced move meant that not only was there a cost of relocation but it also caused a delay factor in order to show the purchaser that the patients moved with the practice.

In one of the above situations it was a smaller medical/dental building in which a retailer bought the building and wanted the main floor immediately, and ultimately to occupy the entire building. The medical doctors moved out leaving only the dentist and one other professional. Patients were forced to come into the building through the back door. The dentist should have moved when the doctors moved out. Now what choices does the dentist have? The dentist could pay for renovations for a new location if one was available, purchase another practice in the area and move the practice into the purchased premises or sell to a local

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dentist and move with the patients. The dentist did not want to practice too much longer so I recommended selling and moving with the patients. You can see from this last example, a lease does not always protect you.

If you are eight to ten years away from selling your practice, now is the time to plan. There is a comfort feeling of having a more attractive facility to work in and it will be more appealing to the purchaser. Since you are looking eight to ten years away, your facility and equipment are going to age in that time period.

One must take this into consideration – an eighteen year old chair and unit today will be nearly thirty years old when you decide to retire. This does not have the best image for the purchaser. The purchaser is

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adding up the cost of the practice plus $35,000 to $50,000 for each old operatory. Turn key purchases sell better than older facilities.

If you have missed the eight to ten year planning period, the four to seven year recovery period will be discussed in the next issue. PA

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.

New Laws Affecting Dental Hygienists BARRY SPIEGEL LL.M., Q.C. In Volume 28, my colleague, David Rosenthal, wrote about the possible future changes to the laws affecting dental hygienists. Well, the future is now - effective September 1, 2007.

Recapping briefly, on January 1, 2004, a new regime governing all healthcare professions went into effect in Ontario, including the passing of The Dental Hygiene Act, 1991 (so named, but not in force until January 1, 2004). That Act defined the practice of dental hygiene and, in section 4 gave authority to dental hygienists to perform teeth scaling and root planning plus orthodontic and restorative procedures. There was a catch however, which restricted the dental hygienists from doing any such procedures unless they were “ordered” by a dentist.

Recently, an omnibus bill, the “Health System Improvements Act, 2007” was passed that included major changes applicable to dental hygienists. Section 5 has been amended to permit scaling of teeth and root planning, including curetting of surrounding tissue on the dental hygienists own initiative, if none of the contraindications detailed in the regulations are present and the dental hygienist ceases the procedure if any contraindications are present.

(The procedures can still be done however, if ordered by a dentist). It is professional misconduct for a dental hygienist to contravene any of these provisions.

Another section of the amendments provides that regulations could be passed: • Specifying drugs that a dental hygienist may use. The dental hygienists already well know the drugs they may use but, of course, they cannot dispense them; • Prescribing requirements for performing the scaling and root planning including educational and experiential qualifications which must first be obtained; and • Prescribing the contraindications to a dental hygienist performing on his/her own initiative.

As a result, a regulation to the Dental Hygiene Act, 1991 (O.Reg.1501/07) was passed that prescribes the contraindications with which both the dentist and the dental hygienist must become familiar. Space does not permit detailing all of these but they include such things as certain cardiac conditions, unstable medical or oral health, active chemotherapy, drug or alcohol dependency, and a drug or combination of drugs with which the dental hygienist is unfamiliar. If any of the contraindications is present, the dental hygienist continued cannot proceed on his or her

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own initiative unless the patient has received clearance from a physician or dentist. Further, if the dental hygienist is in doubt as to the status or accuracy of the medical or oral history he/she cannot perform such services.

To deal with the educational and experiential requirements, the College of Dental Hygienists of Ontario (CDHO) has passed a standard of practice for selfinitiation, which I recommend you read on its excellent website (http://www.cdho.org/). To alleviate any concerns of the public and, I suspect, the dental profession, the CDHO has decreed that dental hygienists cannot self-initiate unless they have been authorized to do so by the College. Dental hygienists must meet certain stringent tests and complete an application that if approved, will result in the dental hygienist receiving a Seal to be affixed to his or her wall certificate.

It is important for you to familiarize yourself with the new rules and all the contraindications in order to be able to discuss them intelligently with your dental

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hygienists, your patients who will most certainly be asking you and, of course, with your other staff. Also you will want to ensure that neither you nor your hygienists inadvertently commit an act that might be considered professional misconduct.

Some dentists are confused about the meaning of the words “self-initiate” and I hope this article answers some of your questions. I do not expect that these changes will result in a major encroachment on a dental practice and history shows that when one avenue of a professional practice is changed, another avenue often opens. PA

Barry Spiegel Q.C. is a senior lawyer with Spiegel Rosenthal Professional Corporation 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 email to barry@drlaw.ca

You and the Dollar MARK McCNULTY BA, CFP, CIM Over the past five years, our currency is up over 60 per cent as compared to the U.S. dollar! Now, for the first time since November 25, 1976, the Canadian dollar has broken through parity. It is no surprise that the number one question I am asked by clients these days is, “Should we be buying U.S. dollars?” The answer is unique to each client.

It is impossible, in my opinion, to predict the shortterm fluctuations in exchange rates. However sometimes you have short-term decisions to make. Let me illustrate some specific cases I have dealt with in the past couple of weeks.

to what most media reports would have you believe, there is a science behind proper investment management. That science is based on research by academics from the University of Chicago, Harvard, Yale, etc.

The research consistently shows that market timing does not work.

An investment strategy should be based on the Nobel Prize winning research which supports Asset Allocation Modelling. If you follow a balanced Asset Allocation Plan, chances are a component of your portfolio already holds securities denominated in U.S. currency. Given the decline in the U.S. dollar, you may Should I buy U.S. dollars to improve investment returns? need to rebalance back to the Asset Allocation Plan.

In that case, the recommendation would be to buy The bad news for Canadian investors is that the U.S. dollars as dictated by the Asset Allocation Plan. decline in the U.S. dollar has dampened overall invest- In other words, while we do not recommend buying ment returns by an estimated six per cent annualized U.S. dollars to speculate on the currency market, we over the last five years (according to iShares research). do recommend you consider buying now if you are Will that reverse? under-weighted in U.S. currency according to your Speculating on exchange rates is market timing. Contrary long-term Asset Allocation Model.

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I travel South every year. Should I convert my spending money now?

Again, since we are forced in this case to make a call, the answer is, ”Yes”. Our Snowbirds will begin their flight south shortly, and as such they will be locking in gains of over 14 per cent just from the past year! It is quite possible for the Canadian dollar to continue its rise against the greenback. However, if we convert now we will be locking in the gains of the past five years. On average, we are converting three years worth of U.S. dollar spending for our Snowbird clients.

I rent in Florida every year. With the currency change and decline in real estate should we buy?

We have seen a significant decline in Florida real estate over the past couple of years. Add this to the decline in the U.S. dollar and it is pretty clear that Florida property prices for us Canadians have dropped dramatically.

The answer depends on the specific terms of the property purchase and the client’s situation (for example, how much time do they spend in Florida?). However, our first concern is whether or not the decline in prices is over. I recently read a report from CIBC which estimated another 25 per cent default of the $490 billion

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in sub-prime debt coming up for renewal by the end of 2008. That would mean further foreclosures and a continued decline in real estate prices.

Barry, my father and partner, spends a month every year in Florida (Siesta Key). He rents, largely because the rental costs when compared with ownership costs and hassles, are quite favourable. This is consistent with the research we have done throughout Florida for our clients. It is less expensive to rent than it is to own.

As one client put it, we may only see parity once or twice in our lifetime. I’m not sure that is true. If you have a need for U.S. dollars in the short-term you should consider buying some now. However I strongly recommend you avoid the temptation of speculating on exchange rates for the purposes of investment return. For more on this topic see my newsletter 50+ Dentist or visit www.50plusdentist.com. PA Mark McNulty is co-author of The Canadian Small Business Owner’s Guide to Financial Independence.

Mark is an Associate Portfolio Manager with Raymond James Ltd. Independent Financial Services – Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. Mark may be contacted at 1.866.261.4768 or mark.mcnulty@raymondjames.ca.

Receive a Tax Free Distribution From Your Corporation!

DR. IAN WEXLER * Many dentists incorporate to accumulate money inside their corporation. The major attraction is the significantly lower tax rate – about 18 per cent – that income retained within the corporation attracts. To a certain extent, this money is now trapped within their corporations, because if it is paid out it will attract the additional taxes that were saved. This raises the question of how and when to access these funds to realize the tax savings in the most “tax-advantageous fashion”.

There appear to be two options: 1. Similar to an RRSP, you can accumulate your money inside the corporation and DEFER paying tax for as long as you can, typically waiting until

retirement at which point in time you pay tax as the money is withdrawn, or 2. Find ways to access the money without paying tax BEFORE retirement.

For many who have personally held life insurance policies, there may be an opportunity to realize the tax savings today.

Here is how it works...

If you have personally-owned life insurance policies, you may be able to extract (no pun intended) money out of your corporation tax-free, by transferring your policy(ies) into your corporation continued

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at the policy’s fair market value. In essence, your corporation is “buying” your life insurance policy from you.

In a technical paper, Tax Planning Regarding the Ownership of Life Insurance, written by Peter Everett and Chris Ireland for The Canadian Tax Foundation 2004 52(3): 976-979, it is quite apparent that the unique tax rules that apply to life insurance transfers may benefit those considering the non-arm’s length transfer of their personally held life insurance policy(ies) into their corporations.

How much tax free money can I get out?

The tax free amount is based on the fair market value of the policy. The approximate fair market value of a $1 million permanent policy on a 50 year old male non-smoker (purchased 10 years ago) with no cash value and an annual premium of $5,000 would probably be in excess of $150,000. Term insurance policies will typically have zero or nominal value unless the insured’s health has deteriorated.

How do I get started?

As a first step, we ballpark the fair market value of your life insurance to determine if the opportunity exceeds the costs of the transaction (costs include various documentation and independent professional advice). We typically run the concept by the client’s accountant, and if everyone is onside (i.e., it makes sense to own the life insurance inside the corporation) we can move forward.

One necessity is to have the fair market value evidenced by an actuarial valuation. The valuation must comply with general guidelines outlined in paragraphs 40-41 of the Canadian Revenue Agency (CRA) Information Circular 89-3 “Policy Statement on Business Equity Valuations”. Issues that may impact the value of the policy include: • The amount of the life insurance benefit • The age of the insured • The health of the insured • The premium • Any cash value within the policy • The age of the policy

VO L. 32 : NOV EMBER , 2007

What about the tax department?

At the 2002 CALU (Conference for Advanced Underwriters), CRA agreed that the Income Tax Act provided these results, and “the result of this transaction is that the shareholder is effectively receiving a distribution from the corporation on a tax free basis… it is not clear that the result is intended in terms of tax policy and the Department of Finance has been advised, and it will be given consideration in the course of their review of policyholder taxation.” In other words, CRA is currently “on-side” with this process.

Are there any other issues that I should know about before proceeding?

1. It makes sense to have your accountant onside. He or she may need to learn a bit more about CRA’s position, as well as the specific paper trail required.

2. Understand both the positive and negative implications of having your corporation as owner and beneficiary of your life insurance policy(ies).

3. There is usually a fee associated with this process that may either be a flat fee or a percentage of the overall tax saving.

4. Some dentists hear the terms “permanent life insurance” and “corporation” in the same sentence, and automatically think that this process involves the concept of purchasing Universal Life insurance to put inside your PC or other corporation for tax and retirement planning. This is not the case at all. No insurance purchase is involved.

5. If you have a life insurance plan as described above, and wish to find out how much it’s worth, and how much you can extract from your corporation, it is recommended that you deal with an insurance professional who is experienced in this area. PA 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 for questions or other enquiries at (416) 391-3764 or drwex@protect-ins.com * With contributions by Jeff Cait MBA,CLU,CFP who is the life insurance specialist for Protect Insurance Agencies Inc.

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”.