The Professional Advisory Feb/2009

The

38 Professional

Advisory For Dental Professionals

IN THIS ISSUE WHOLE LIFE AND UNIVERSAL LIFE: PROPER RESEARCH WILL PAY OFF! Dr. Ian Wexler

EFFECT OF ECONOMIC CHANGE ON LEASE MANAGEMENT

TWO AREAS TO FOCUS UPON THAT COULD NEGATIVELY IMPACT THE VALUE OF YOUR PRACTICE Graham Tuck H.B.A C.A

Ian Toms B.Sc. (Hons)

SO I BOUGHT THIS PRACTICE NOW WHAT? (PART 2) Dr. Ron Weintraub

GETTING MONEY FROM YOUR PROFESSIONAL CORPORATION: PAYING THE LEAST TAXES

ASSOCIATE AGREEMENTS FROM THE PRINCIPAL’S PERSPECTIVE (PART 1) David E. Rosenthal BA., LL.B.

INVESTMENT RETURNS AND YOUR RETIREMENT Mark McNulty BA, CFP, CIM

David Chong Yen CFP, CA

plus THERE’S NO FREE LUNCH! NOTES FROM THE EDITOR

VOL. 38 : FEBRUARY, 2009

The Professional Advisory

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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.

There’s No Free Lunch!

RALPH CRAWFORD BA., DMD A phrase, this guarantee is not free, in one of our current articles caught my eye and reminded me of a story I heard at a practice management lecture some years ago. It seems there was a kindly Ruler in ancient times who knew he was dying and wanted to leave behind “the wisdom of the world” that would be the greatest benefit for his subjects. He called all the wise advisors in the kingdom to his bedside and set them to the task. Following their Ruler’s directions the wise men after several weeks presented him with 27 volumes that supposedly contained the “wisdom of the world”. “No, no,” he said, “No one will ever read all that. Condense it and return.” After several more attempts the wise men finally got down to nine volumes but this still didn’t satisfy the kindly Ruler. “If my subjects are going to benefit from your sage advice you must condense it even further so they will read it.” Finally, the wisest man in the kingdom approached the Ruler, “Sire, I have all the wisdom of the world that your subjects will ever need when you are gone and it’s written on a single sheet.” Anxiously the Ruler unrolled the message and there it was - the wisdom of the world - “There ain’t no free lunch!”

And isn’t it the truth! As we look into life in general and the wisdom presented within this Volume’s pages, it isn’t difficult to perceive that really, there isn’t any free lunch. The reality is that if anything worthwhile is to be gained in this world it takes one’s own thought, concern and effort - mingled with the experience and expertise of professionals - to ultimately attain our goals and reward us with success. Each of our authors in their own way

points us in this direction.

Mark McNulty outlines the choices for successful Investment Returns and Your Retirement and it was one of his choices where he discusses this guarantee is not free that stimulated the no free lunch musings.

In facing the Effects of Economic Change on Lease Management Ian Toms’ also references the “free” issue when he states that If the rent increases, tenants need a higher sales volume to pay the rent. And in his discussion of associate agreements David Rosenthal talks about the reversal aspect of “free” - obligation: It is the Associate’s obligation to remit from the gross amount the required taxes to the CRA. A practice transition is never easy - or free - but Ron Weintraub’s four-step protocol of examination, diagonosis, treatment plan and implementation outlines and emphasizes that Our attention to detail helps maximize the opportunity that we have purchased.

Graham Tuck discusses the areas that could impact the value of your practice during these difficult economic times and reminds us that The reality today is that patients and profits make value - and who has ever seen anything of value that’s free.

When David Chong Yen addresses Getting Money from Your PC: Paying The Least Taxes we know, without any doubt, he is talking about the Canada Revenue Agency and that’s one entity that’s never free!

And although Ian Wexler is talking about whole life and universal life insurance plans he rather sums the topic up quite succinctly - Proper Research Will Pay Off. In other words, whether it’s investments, retirement, leases, practice agreements, purchases, taxes or insurance There’s No Free Lunch. It’s hard work, diligence, care, concern, research AND the reliance on the guidance of experienced advisors that brings rewards. PA

crawford@dccnet.com

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Whole Life and Universal Life: Proper Research Will Pay Off! DR. IAN WEXLER www.protect-ins.com

Everyone knows that these are trying economic times!

Because of future uncertainty, which includes the reduction in stock portfolios and other wealth and retirement assets, many dentists are concerned that their insurance house is in order.

In addition to a sound disability program, proper life insurance planning is crucial to provide peace of mind for you and your family. A comprehensive review, analysis, and plan by a life insurance specialist will not only ensure your family is well protected in the event of your demise, but could save and even make you a significant amount of money down the road.

This article will explore two permanent life insurance plans that you may already have or are considering purchasing… whole life and universal life.

What is universal life and whole life (participating) insurance?

These are permanent life insurance plans (can be kept for life) that provide a feature which allows you to contribute additional funds into a tax-sheltered reserve or investment. Universal life primarily differs from whole life in that you control how the funds are invested, while with whole life, the investment decisions are made by the insurance company.

What are some of the other features that differentiate whole life versus universal life?

Universal life • Premiums and payment periods are flexible • The tax sheltered reserve links its performance or interest to an outside index such as the TSE 300, S&P 500, and other stock market indices, as well as as fixed rate options • MERs or Management Expense Ratios are charges

by the insurance company (this will reduce a client’s return) when reserves are linked to the indices • Investment options must be managed and reviewed on a regular basis Whole Life • Guaranteed cash values • Less volatility due to a “smoothing” of returns over time • Asset pool is managed by insurance company’s financial experts and is focused on a fund of diversified investments that leans towards fixed income, real estate, and a smaller amount of equities • Returns paid out as dividends which reflect both the return of the fund as well as profitability of the product. These dividends can also be used to purchase additional life coverage

Which one is better for you?

It depends, in general, on: The amount of control you wish to have on how the reserve funds are managed or invested. It has been my firm’s experience, and that of our life insurance specialists, that the majority of universal life plan holders do not actively manage how the funds are invested. As such we have seen a number of dentists

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who have lost a significant amount of their reserve funds over time. This can have at least two major consequences: 1. For plans with a projected fixed payment period (e.g. 10 years), if the investment returns fall short - like in the recent stock market collapse - you may have to continue paying premiums well beyond the anticipated 10 year time frame.

2. There may not be enough funds within the policy to continue paying premiums, and to keep the plan going. This may be particularly relevant for plans with “yearly renewable” versus “level” costs of insurance within the plan.

Whole life’s historical dividend returns have tended to be significantly more stable with much smaller standard deviations. These plans are better for those who choose not to manage the reserve investments directly. It should be noted that some plans have “never had a negative return” and that current plans have averaged approximately 5-8 per cent plus investment returns over the last 20 years. For these reasons, whole life plans have become very popular in recent months.

What else should I know if considering one of these plans?

Where applicable, and with advice of a knowledgeable

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accountant, you may wish to own your plan within a corporation such as a Professional or Hygiene Corporation. This is due to the fact that premiums AND additional investment funding can be paid with lower corporate “after-tax” dollars. For those with a permanent life insurance need and have extra retained earnings held inside their corporation, this may present an excellent opportunity to save funds for retirement. This is commonly called a CIRP or Corporate Insured Retirement Program.

Finally, whether you have a plan already or are considering purchasing one of these plans, you should know how they work, the risks, and ALL of the major advantages and disadvantages. It has been my firm’s experience that most dentists who have these plans know little about them, despite often paying significant monthly premiums. PA

Dr. Ian Wexler is an authority on insurance issues for dentists. He is the President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, and other insurance products and services to over 700 dentists across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@protect-ins.com

Effect of Economic Change on Lease Management IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Common sense has warned us for years that the economy was running on fumes. The credit bubble has finally burst with a resounding “pop”. Since North American commercial real estate ownership is largely a margin based investment industry, where property is often significantly mortgaged, the credit crunch and resulting economic changes will have a progressive, profound and long term effect on both landlord and tenant.

In the past few years return on real estate investment has been strong because of the rapidly increasing perceived value. The net result is that now many property owners are highly leveraged based on a real estate value set at a high point in the realty cycle, setting the stage for a progressive unraveling of the real estate market.

Tenants positions will be affected because landlords need a certain rent income to cover their mortgage cost, and tenants need a certain sales volume to pay the rent. If mortgage costs increase, landlords will need to receive higher rent to cover the cost. If the rent increases, tenants need a higher sales volume to pay the rent.

At this time, realty owners are facing a lack of available conventional financing which will not clear up until the toxic asset scare is addressed. Publicly

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traded ow ners ( RioCan, Morg uard , H&R Developments and First Capital Realty for example) have seen their available working capital vanish as their stock value has plunged on the order of 50 per cent over the past five months alone. In the meantime, property owners with long term mortgage commitments will not feel the effect of the credit crunch directly until they face mortgage renewal.

Currently there is no significant change in vacancy rates because existing tenants are signed in for the term of their lease. Rental rates remain high, even though consumer confidence and spending is eroding.

Within the next year or so I expect that yet-to-bebuilt developments - both commercial and residential - will be put on hold because developers will not be able to finance the development, and tenants and new home buyers will not be in a position to buy or lease the newly developed property. Tenants signed in to these developments may find themselves as a tenant in space that may not be built for many years. Tenants planning to reap benefits from yet-to-be built housing developments will need to extend their expectation time line significantly.

Tenants positions will be affected because landlords need a certain rent income to cover their mortgage cost, and tenants need a certain sales volume to pay the rent.

As the cycle progresses, interest rates will increase and together with higher unemployment, consumer confidence and spending will decrease. Landlord mortgages will become more expensive and requirements more stringent, meaning upward pressure on base rental rates for both lease term renewals and on additional rental rates for ongoing tenancies. Some landlords will go bankrupt. Expect lease negotiations to become more difficult. Expect rent to become increasingly more challenging to pay as sales volumes decline while rent remains at the high values previously set.

As the economy continues to erode, expect higher vacancy rates as tenants fail or elect not to renew the term of their lease. Lease term renewals and new tenancy arrangements will be completed at much better rental rates and generally on better terms and conditions as landlords and tenants adjust to the new

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economic landscape. Eventually, the financial relationship between mortgage rates, rental rates and consumer spending will come to equilibrium, conditions will stabilize and the cycle will repeat itself.

My advice to tenants is to look forward to improving your position through this period by actively managing your tenancy. Know that as the economy recedes your leverage position as tenant will become relatively stronger. Listed below are some points you may want to consider: 1. Register your lease on title to the property. Your lease is between tenant and landlord. If the landlord becomes insolvent and disappears you may find yourself without a lease and at the mercy of a receiver, which is exactly where you do not want to be.

2. Consider buying the property containing your premises. Your landlord may be forced by an inability to finance or refinance to sell the property. Let the landlord know you may be interested if the right opportunity comes up.

3. Be wary of long term base rental rate commitments. You don’t want to agree to a rate at the high water mark just to find your rate is significantly above the market in a few years. If you do use the leverage of a long commitment, make sure the rate is reasonable or build in a mechanism to reset the rate based on market conditions in a few years.

4. Inventory your lease. Identify a list of issues which you need to address when you enjoy an improved leverage position at your next renewal.

5. Recognize and use your leverage positions. As the economy progressively deteriorates you will have an increasing ability to “trade” items that currently have little or no negotiating power. A significant example is a personal covenant which will become increasingly more important to landlords who will need the strength of their lease as collateral.

6. Manage upward pressure on additional rent.

Demand and closely check your additional rent statements every year. If your base rent is set by the lease, landlords will consider “padding” additional rent to increase profitability to offset increased cost. PA

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) 7431220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com

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So I Bought This Practice Now What? (Part 2)

Purchasing a practice is an important decision requiring specific steps in choosing, initiating, and consummating the final acquisition of the practice we seek in hopes of it being a successful enterprise. In the last issue of The Professional Advisory, I addressed the first two steps (Examination and Diagnosis) of a fourstep process necessary to an organized, structured approach to transition successfully into an existing practice. Only after we have explored the examination phase carefully and extrapolated the data for a specific diagnosis, can we proceed. Continuing to use the model of the four-step protocol, we’ll now explore the third and fourth steps, Treatment Plan and Implementation.

place. This is also a good time to consider how we can embellish the day-to-day management of the operation.

The treatment plan includes a program to communicate to the patient base that the new leadership supports the core values of the practice and will continue to focus on patient needs as paramount on an ongoing basis. Communicating with them is the number one priority in the treatment plan to address retention of the patient base, the largest component of the goodwill you have purchased.

Retention is only one part of the treatment plan; another consideration includes initiatives to rectify traumatic profitability disorder in ways that do not threaten patients’ comfort level with earlier experiences. One way to view the topic is by reviewing hygiene protocols to ensure the appropriateness of hygiene intervals in relation to the demographic of the patient base as well as by being consistent with the norms of maintaining patient health. Another part of the action plan includes getting hygienists’ salaries in line with their productivity.

Step Three: The Treatment Plan After analyzing the findings of the examination and diagnosis phases, we need to pinpoint and apply strategies to remediate any negative aspects of the former operation. In addition, we need to support and reinforce the positive, successful approaches currently in

Finally, the treatment plan incorporates a strategy to wean patients from an expectation of a dental plan assignment approach and the attendant office costs and revenue loss that accrues. Our responsibility is to accomplish this in a non-threatening and sensitive way of treating patients’ cash flow issues. The most common reasons we hear for retaining assignment is

DR. RON WEINTRAUB www.innovativepracticesolutions.ca

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“others in the area do” and “patients will go elsewhere”.

Such harmful myths perpetuate this practice in many offices, but a careful strategy to convert patients atraumatically will dispel such thoughts. Employing various technological and financial policies facilitates the ability of patients to finance their dentistry.

Furthermore, the treatment plan provides for a targeted cost effective marketing plan for internal and external marketing initiatives.

Most importantly, the item on the treatment plan that we cannot overlook is to outline the steps and chronology of the changes to the practice that reflect our personal vision, skill set, and expectations.

Step Four: The Implementation So far, all the time, energy, and thought has gone into the Examination, Diagnosis, and Treatment Plan phases; now we need to consider a time appropriate implementation plan. This is the crucial phase in which you may do well to seek guidance even if you have not had any in the previous three steps.

The cardinal rule of implementing change in any organization is to inform and consult the team on reasons and strategies for the proposed changes. We advise

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implementing change in a controlled, focused manner along with prior information to team and existing patients by highlighting the benefits to both.

Providing the resources in the implementation step to the staff to improve their performance is twofold; it is a vote of confidence in them to give them professional development in their positions, and it provides them with the building blocks for improved financial results for the practice.

In planning and executing a successful practice transition, using the four-step model protocol, Examination, Diagnosis, Treatment Plan, and Implementation, our attention to detail helps maximize the opportunity that we have purchased. PA

Ron Weintraub 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 owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buyins, and business mergers. Dr. Weintraub can be contacted at (905) 4706222 Ext. 221 or drronips@rogers.com.

Getting Money From Your Professional Corporation: Paying the Least Taxes DAVID CHONG YEN CFP, CA www. dcy.ca

As a shareholder and an employee of your own professional corporation (PC), are you receiving payments (i.e., dividend or salary/bonus) in the most tax efficient manner?

There are times shareholders simply remove cash from the PC as a loan. However, you should understand the tax implication of such a move - there could be adverse tax implications. Discuss this with your adviser

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before proceeding.

Now let us review the owner-manager remuneration.

For illustrative purposes, here is the financial snap shot of a dentist/PC: • PC earns a profit of $400,000 (i.e., revenue minus expenses) before any salary paid to the dentist • PC is subjected to 16.50 per cent corporate tax rate • Maximum RRSP contribution room is $21,000 • Assumes no Employer Health Tax (EHT) • Assumes the maximum CPP is $2,119.00 • Cash needs of $150,000 (after tax) but includes maximum RRSP contribution of $21,000 Option #1 - salary of $120,000 and cash dividend of $87,320 Salary 120,000 Dividend 87,320 CPP paid (2,119) Personal Income taxes (55,201) Personal cash needs 150,000 Net tax cost Personal taxes on salary and dividend 55,201 CPP (PC and personal) 4,238 Tax Saving to PC arising from deducting salary (20,150) + employee CPP 39,289 Option #2 - all salary Salary 231,850 CPP Paid (2,119) Personal income taxes (79,731) Personal cash needs 150,000 Net tax cost Personal taxes on salary and dividend 79,731 CPP (PC and personal) 4,238 Tax Saving to PC arising from deducting salary (38,605) + employee CPP (45,364) Option#3 - all dividend Dividend 162,460 Personal income taxes (33,460)

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The above options are only true if the dentist has no low income family members (i.e., spouse/common law spouse, adult children and parents) to income split. If you do have these family members but have yet to include them in your PC, you might be missing some tax saving opportunities. Discuss it with your advisor if this might benefit you.

Let us revise option #1. If your parents make approximately $20,000 each and are not receiving Old Age Security or Canada Pension plan payments, they could each receive $34,610 dividend from your PC assuming they become shareholders. They pay extra taxes of $4,345 each on the dividend income. That means you now have the same cash of $150,000 and the taxes are reduced by over $18,000.

Salary 120,000 Dividends ($34,610 to each parent) 69,220 CPP paid (2,119) Personal income taxes (dentist) (28,410) Personal income taxes (parents on dividends) (8,691) Personal cash needs 150,000 Net tax cost Personal taxes on salary and dividend 37,101 CPP (PC and personal) 4,238 PC tax saving due to salary and employee CPP (20,150) 21,189 What should your remuneration mix be?

• The numbers certainly work but you should review to see if family members should be included for the following reasons: • Dividends paid to certain family members may end up taxed in your hands (i.e., at your high tax rate rather than their low tax rate).

• Is the structure flexible enough to enable you to pay dividends to certain family members while excluding others? What about future family members?

• Is your structure going to protect you at difficult times such as divorce or separation? Will you end up losing your dentistry professional corporation to your ex?

• Is your structure protecting you in the case where your children become wayward?

Personal cash needs (reduced by $21,000 of RRSP) $129,000 • Are you protected in case of your parents’ death?

• Should shareholders agreements be prepared?

Net tax cost • Would tax problem be created if other family memPersonal taxes on dividend 33,460 bers also own shares of their own private corporation?

33,460 Always consult your advisor before proceeding. PA Based on the above, the cheapest way to remove cash from the PC would be option #3 (i.e., all dividends). David Chong Yen, CFP, CA. has completed the CICA In-Depth Tax Courses This represents a tax savings of $5,829 (including and has been advising dentists for decades. Additional information can CPP) over option #1 except dividend income does be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail not generate RRSP contribution room - you can’t david@dcy.ca. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice. contribute to your retirement via RRSP.

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Two Areas to Focus Upon That Could Negatively Impact the Value of Your Practice This is where a strong front desk or booking person comes into their own. You will recall that in Volume #36 I was talking about having a star on the front desk. Now is when you need a star to keep the billings GRAHAM TUCK up and your chairs filled.

H.B.A., C.A. The reality today is that patients and profits make www. ppsales.com value. If billings are down, can you reflect a similar 1) First, is there a risk of a hygiene practice soliciting reduction in costs? The worst impact is that billings your dental hygienist to join their practice with your go down and costs go up. Reality may be that if you patients? are not experiencing increased billings maybe there is no I am writing this article, not to give you legal advice, wage increase for the staff. but to draw your attention to the risk. We are in the process of our first sale agreement whereby The risks involved in starting the vendor is responsible for having his hygienists a practice from scratch are still sign a reasonable restrictive covenant and /or noncompetition regarding non-solicitation of his patients. greater than the possible reducThink of this as the “writing on the wall”. tion in production in the practice Barry Spiegel LL.M. and David Rosenthal LL.B. have written excellent articles in the Professional Advisory in they purchase. #28, #31, #32 and especially #33 regarding this issue.

I suggest you read these articles and take whatever steps you see necessary. If you have not retained these If you are experiencing unfilled time slots in the booklets, e-mail me or David Rosenthal to send them to you. hygiene department I would expect that a reduction in overall hygiene days would be a solution, as I see 2) Second, the impact of the slowing economy. very few dental hygienists being paid on a percentage Depending on your community, your patients’ economic of their billings. situation and the quality of your patient base, the We are not yet seeing any reduction in value for praceconomic downturn can have an impact on your tices being sold. At this time purchasers are still happy practice value. If you have a good balanced practice, to pay a fair market value to get a practice. The risks i.e., reasonable billings per patient and controlled involved in starting a practice from scratch are still costs, it is possible that the downturn will have little greater than the possible reduction in production in or no impact on the value of your practice. the practice they purchase. We have been approached If you are anticipating that your billings and patient by a few dentists to put their practices on the market base are going to have a true downturn, e.g., an to solidify the equity in their practice and they would Oshawa practice, then you should expect a reduction stay on for a longer than normal transition. in the value of your practice. Now is the time to try to At this time I am not aware of any further reduction resurrect some of the patients that fell off the wagon in in the 16.5 per cent professional corporate tax rate. If the past three or four years, and for whatever reason, there is a reduction in taxes this should increase the haven’t been in your practice. value of the practice to offset some of the reduction in Most practices that are not in a vulnerable community profit, or at least modify the effect of any reduction in should only experience a five per cent drop in billings. profit. We will include in future issues of

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The Professional Advisory any changes in the corporate tax rate. Practices that have emphasized strong relationships between the patients and the dental team should better weather any downturn in the economy.

Practices with a high patient base relative to the production numbers will outperform those practices with a limited patient base that have high billings per patient. In fact now is the time to do some of those procedures that you never had time to do in the past.

Remember: a) Good basic dentistry is the bread and butter of most

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practices. Cosmetic dentistry, implants, full mouth reconstructions are great skills to have but may be the first to be dropped in hard times. b) A downturn in the economy will not impact all practice the same way. Be one of the winners. PA

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 1-888-777-8825 or e-mail at: grtuck@rogers.com

Associate Agreements From the Principal’s Perspective (Part 1) DAVID ROSENTHAL BA., LL.B. In Volume 37 of The Professional Advisory I wrote about the associate agreement from the associate’s perspective. In this article I will discuss associate agreements from the principal’s perspective.

For dentists who own a dental practice (Principal) and who hire an associate dentist, the associate agreement is the required legal contract. It is surprising how many dentists do not enter into written associate agreements to document this important relationship.

While a verbal agreement may be legally enforceable, it is not sufficient to adequately protect the Principal’s interests and deal with the many issues that should be clearly set out in writing.

Relationship - The owner of the dental practice is typically referred to as the Principal. In most cases, the associate dentist (Associate) who works at the dental practice is an independent self-employed individual under a contract for services with Principal,

namely the associate agreement (Agreement). That Agreement governs the relationship between the Principal and Associate. It details the terms on which the Principal agrees to retain the Associate to provide his or her services to patients in the Principal’s office but as an independent practitioner.

Principals and/or Associates can be either individual dentists or dentistry professional corporations. This article does not deal with professional corporations but it is always worthwhile to speak with your tax advisors to determine if it is beneficial to use a dentistry professional corporation as the Principal.

As an independent practitioner the Associate is operating his or her own separate business and is self employed. The Principal pays the Associate a gross amount and it is the Associate’s obligation to remit from that gross amount the required taxes to Canada Revenue Agency (CRA). The Agreement needs to clearly specify the independent contractor relationship between Principal and Associate.

Few dentists treat their Associates as employees.

Most Agreements specifically state the Associate is not an employee and will personally pay all taxes and satisfy all other governmental requirements. However, simply making that statement in the Agreement may not be sufficient.

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The relationship of Principal and Associate will be determined based on what the actual facts show the relationship to be, not what the words of the Agreement state.

CRA may audit and assess the Principal on the basis that their Associate was, in fact, an employee. If CRA were successful, the Principal would be responsible for the statutory deductions the Principal failed to make as an employer, such as income tax, Canada Pension Plan and Employment Insurance, in addition to possible penalties and interest.

How do you determine the relationship of Principal and Associate - is it an independent contractor or employer/employee relationship? There are several factors that CRA will examine, including: 1. Control - does the Principal have control over the patient lists, the hours of work, the quality of work and the right to hire and fire?

2. Ownership - who owns and supplies the equipment and instruments required by the Associate and who bears the costs related to their use?

3. Financial risk - is the Associate entitled to his/ her full percentage or remuneration regardless of the financial health of the practice?

4. Integration - this matter is considered from the Associate’s point of view, not the Principal. Is the Associate acting on behalf of the employer, connected with the employer’s practice in all aspects and dependent on the employer’s practice?

Where the Associate integrates his or her activities to the activities of the Principal, an employeremployee relationship may exist.

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I suspect some Principal/Associate arrangements could be classified and treated by CRA as employer/ employee relationships. This makes a properly drafted Agreement, which reflects the Associate as an independent contractor, extremely important from the Principal’s perspective and for the Principal’s protection.TheAgreement should detail what the Associate, as an independent practitioner, is responsible to pay for, including licences, memberships, insurance, educational courses, seminars, and other expenses applicable to the Associate.

The Agreement should detail all services and facilities the Principal will provide to the Associate, including the use of the premises, equipment, dental supplies, staff and services. Staff and services might include receptionists, chairside assistants, dental hygienists, management, administrative and bookkeeping services. If special equipment or specific staff is required (such as a designated operatory or designated chairside assistant or hygienist) this should be detailed in the Agreement. Often the Agreement provides the Principal will provide the ‘standard’ equipment and ‘routine’ dental supplies and it is the Associate’s cost if the Associate requires further specialized items.

Part 2 of this article will continue in the next volume of The Professional Advisory and address Associate remuneration, non-competition covenants and termination of the Agreement. PA David Rosenthal 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) 865-0736; or fax to (416) 203-8592; or e-mail to david@drlaw.ca.

Investment Returns and Your Retirement A financial checkup, if you will.

Dr. X was hoping to spend about $70,000 a year aftertax indexed for inflation in retirement. However, based on Dr. X’s current financial situation and retirement MARK McNULTY objectives, which included his portfolio generating a BA, CFP, CIM 5% annual return, Dr. X would need to save 150 per www. mcnultycentre.com cent of his net income each year for the next three I recently met with a dentist, Dr. X, who asked me to years. Needless to say, Dr. X will be unable to meet review his financial situation and let him know what this unrealistic savings target. sort of shape he was in as he prepared for retirement. However, when I presented my findings to Dr. X

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the first thing he pointed out was that he was targeting an 8% investment return. Dr. X was correct, in that if his portfolio averaged an 8% annual return as he and his advisor had targeted, then by only making his regular annual RRSP contributions his portfolio could fund his retirement needs.

Unfortunately, as I see it there are two problems with using an 8% return forecast for Dr. X. First, as Warren Buffett pointed out, during the 20th century the Dow Jones Industrial Average posted a 5.3% annual return plus dividends, and there’s no guarantee that this century’s returns will match that of the last.

So betting on an 8% return to fund your retirement might be a bit aggressive.

Second, and perhaps the biggest problem is that Dr. X has about 80% of his investable assets tied up in Guaranteed Investment Funds (GIFs). Dr. X’s GIFs guarantee that after 10 years he will get back at least his initial investment. Although it is nice to know the minimum amount that your portfolio will be worth down the road, this guarantee is not free and can in fact be very expensive.

To illustrate this point, I decided to run some numbers to quantify just how expensive Dr. X’s GIF insurance really is. On average, Dr. X is paying an extra 2% annually for his GIF insurance and that is over and above the mutual funds’ existing Management Expense Ratio (MER) of over 2%.

VO L. 38 : FEBRUARY 2009

Dr. X needs his portfolio to fund his retirement for 30 years and 10 years before retirement he had $500,000 in his RRSPs. Now, being a conservative fellow Dr. X wanted to be certain that he would have at least his initial $500,000 when he retires. So even though there are very few 10 year periods over which the markets have not at least broken even, Dr. X purchased $500,000 worth of GIFs. With an average premium of 2%, when added to the funds’ existing MER Dr. X’s expense ratio is somewhat over 4%. In return for this premium however, Dr. X’s worst case scenario is that he will have at least his $500,000 in 10 years, less inflation of course.

If Dr. X’s initial $500,000 investment in GIF mutual funds netted a 5% annual return, after 10 years his portfolio would be worth $814,447. However, if Dr. X had invested in those very same mutual funds without the additional 2% GIF premiums, his portfolio would be worth $983,576 - a full 20% or $169,128 more.

However, that is hardly the end of the story. Needless to say, given the very conservative nature of Dr. X when his first 10-year GIF insurance expires, he plans to continue to reinvest in this GIF insurance indefinitely.

Now once in retirement, if Dr. X follows the same investment strategy and has no other income to live on, he can expect to receive approximately $35,146 a year from his GIF insured portfolio, after-tax indexed for inflation. However, if invested in the exact same portfolio but without the additional 2% GIF rider, Dr. X could expect to receive $50,658 a year after-tax indexed for inflation. That is a full 44%, or $15,512 more, a year!

To sum up the total cost of the GIF insurance, that’s $15,512 a year in retirement for 30 years or $465,360 in total, PLUS the initial $169,128 in pre-retirement GIF premiums. This puts the grand total cost of the 2% GIF insurance at around $634,488! That is some expensive insurance - especially considering that initially he only invested $500,000.

So although portfolio insurance may well have a place in your overall retirement strategy, don’t lose sight of the big picture and let its costs derail your overall retirement objectives. PA Mr. Mark McNulty BA, CFP, CIM, is a nancial advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222 ext 209 or mark.mcnulty@raymondjames.ca.

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”.