The Professional Advisory April/2009

The

39 Professional

Advisory For Dental Professionals

IN THIS ISSUE CHECK YOUR PREMISES LEASE FOR RENT OVERPAYMENT! Ian Toms B.Sc. (Hons)

ASSOCIATE AGREEMENTS FROM THE PRINCIPAL’S PERSPECTIVE (PART 2) David E. Rosenthal BA., LL.B.

LEADERSHIP STYLES: WHAT TYPE LEADER ARE YOU? Dr. Ron Weintraub

REDUCING ONE OF YOUR LARGEST EXPENSES DURING THE RECESSION: PERSONAL AND CORPORATE INCOMES TAXES David Chong Yen CFP, CA

THE INVESTING DENTIST PHENOMENON David Lind

VOL. 39 : APRIL, 2009

INVESTOR PARALYSIS Mark McNulty BA, CFP, CIM

THE INSURED ANNUITY: A GREAT RETIREMENT OPPORTUNITY Dr. Ian Wexler

plus EASY STREET!?

NOTES FROM THE EDITOR

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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.

Easy Street!?

RALPH CRAWFORD BA., DMD One of the signs - problems? - of getting old is the tendency when something unusual occurs to relate and compare the events to what happened in the past. Such is the case of the current downturn in the economy that is creating marked changes in many a family’s financial situation. My mind wandered back to when I was a young teenager in the early 1940s when my parents were planning their retirement. My father had worked for the federal government for many years and ill health was forcing him to leave his job a few years earlier than they had planned.

I still have a clear memory of the two of them at the kitchen table with pencil and paper trying to determine what lay ahead. They knew it wasn’t going to be easy.

They had just come through the deep depression of the 1930s, and even though they didn’t owe a dime to anyone, extra dollars were just not available. My father’s pension was going to be $75 a month - half his modest $150 salary - and even though milk was 12¢ a quart, bread 7¢ a loaf and a dental extraction $1.00, getting by on $900 a year would be a struggle. What I recall most vividly of this family crisis was my father looking up and saying, “Mother, if we just had $10,000 we’d be on Easy Street”.

I’m not sure how $10,000 from 65 years ago equates to today but it’s not hard to visualize some of our 2009 families facing similar circumstances - recession, job loss, shrinking pensions plus today’s debt loads saying, “If we just had a million dollars we’d be on Easy Street”. Nor am I sure how many families of today are eventually going to solve their budget problems but what fascinates me is how my parents dealt with their situation. They sought professional help. I recall them

consulting with their local bank manager, an insurance representative and the financial officer where my father worked. Although I know they never got their wishful Easy Street $10,000, whatever advice they received appeared to work. They frugally lived out their remaining years in the “lifestyle to which they had become accustomed”.

Have things changed much over those many decades?

No! In good times and bad it’s the sound advice we receive from professionals that makes the difference between success and failure. Again, this Professional Advisory Volume more than proves the point. Ian Wexler’s Insured Annuity answers the question, “how will I fund my retirement?” and David Chong Yen guides us on Reducing One of Your Largest Expenses During the Recession. David Lind outlines a recent phenomenon, The Investor Dentist, as a means to providing a viable option in this period of declining global equities and still with an eye on the down turn in the economy Ron Weintraub advises dentists to re-evaluate themselves in his new series on Leadership Styles and Ian Toms stresses a need to Check Your Premises Lease For Rent Overpayment to maintain pre-recession profitability. Continuing on this mode of professional advice David Rosenthal presents Part 2 of his thoughts on Associate Agreements From the Principal’s Perspective and Mark McNulty comes up with a new term, Investor Paralysis, as he discusses how doing nothing in a market crash can not only change retirement plans but lives.

Whether it’s yesteryear’s $10,000 or today’s $1,000,000, planning your financial future on an Easy Street windfall - I think not. Whether it’s profitable times or economic downturns, planning your financial future on sound, sage professional advice - Now That’s The Way To Go. PA

crawford@dccnet.com

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Check Your Premises Lease for Rent Overpayment!

IAN D. TOMS B.Sc. (Hons) www. iantoms.com

It will become increasingly more difficult to maintain the same pre-recession profitability as the economic recession settles in. Consumer spending and therefore production will progressively decline over the next few years as unemployment and interest rates increase.

In order to maintain the same bottom line, tenants will need to either find alternate markets to offset production losses, or reduce overhead costs. Ounce for ounce, cost reducing measures are far more effective than increased sales efforts because every overhead dollar not spent contributes directly to the bottom line, whereas only a fraction of every sales dollar ends up at the bottom line.

You will not see misspent dollars unless you look for them! A good place to look for misspent overhead dollars is your premises lease.

Consider the following example: I reviewed a lease for a premises that had been running for 18 years, and had never made money, in part because the rent was too high. The operation had been bought and sold a number of times, and the lease assigned in each instance. My client purchased the operation at a very good price with the intention of relocating to more affordable premises.

I received, reviewed and compared the lease and current additional rent statement. It was immediately apparent that the tenant was overpaying additional rent by approximately $2,770 per month. Incredibly, this overpayment had continued each month for 18 years. 18 years times 12 months times $2,770 per month works out to almost $600,000 in rental overpayment! For some reason, tenant was paying, and landlord collecting, double additional rent! These were “bottom line” dollars. This tenant immediately saved $2,770 per month simply by paying only what had been agreed upon under the lease.

All this tenant had to do to save $600,000 was to confirm the correct aspect of the lease. That’s all.

Incredibly, although the lease had been reviewed by a number of professionals during each purchase and sale, and presumably at each fiscal year end, no one had simply compared what the tenant had agreed to pay as rent to what the tenant was actually paying.

Perhaps the oversight was so obvious it was invisible!

I encourage each tenant reading this article to have their own lease reviewed annually to make sure that no overhead dollars are being wasted.

Rent overpayment is very common. There is a significant chance that you are: • paying a base rent several dollars more per square foot than required because you have misread the lease • paying an incorrectly calculated share of some or all additional rent items • paying rent based on an incorrect number of square feet • overpaying additional rent because you haven’t checked to make sure that those additional rent exclusions so carefully negotiated into your lease are actually excluded.

I encourage each tenant reading this article to have their own lease reviewed annually to make sure that no overhead dollars are being wasted. A convenient opportunity arises each year to accomplish this comparison efficiently. Under most leases, landlords prepare and forward annual rent statements to tenants which summarize key rent payment parameters. If you know what you are looking for, and the statements are prepared properly, these statements show in some detail what tenant has paid, and what landlord thinks tenant ought to have paid.

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My simple and clear advice - forward a copy of your or two of professional time - which is certainly a wise lease together with this annual statement to a investment on the part of the tenant. PA qualified professional with instructions for a review and opinion as to whether the rent being paid matches the rent payable according to the lease. This review Based on more than 20 years business experience Mr.Toms, B.Sc. (Hons) as a tenant advocate on behalf of select retail and professional is not something to be completed by anyone except acts tenant clients primarily in the Greater Toronto Area. Mr. Toms is with extensive knowledge of how premises area licensed as a Real Estate Broker and can be reached at (705) 743measurement, base rent, and additional rent work. 1220, by e-mail at iantoms@pipcom.com, or through his web site at: The review should not take more than an hour www.iantoms.com

Leadership Styles: What Type Leader Are You? and well organized thus denying their controlling manner.

DR. RON WEINTRAUB www.innovativepracticesolutions.ca

The economic storm clouds currently hovering over us have the potential of becoming a deluge unless we are proactive and scrutinize our operation. Dental offices are no different from other businesses that need to re-evaluate their daily practices to sustain themselves during the present downturn in the economy. A good place to begin is with the person whose name is on the door.

Looking at ourselves objectively for self-evaluation in our role as team leader is not easy to do. Oftentimes calling in a knowledgeable and impartial third party gives us information that is more accurate than our self-perception while also allowing a team assessment from a variety of perspectives. Initial observations of our leadership style are revealing. Most often, dentists fall into one of three management styles: a Micromanager, an Enabler, or an Abdicator. Although these styles are not mutually exclusive, we frequently have a dominant one.

What Is A Micromanager?

Micromanagers are those who attempt to manage the team and the environment with great or excessive control and attention to details. Instead of giving general instructions on smaller tasks to the team while overseeing larger concerns, micromanagers monitor and assess every step. They view their style as being structured

What Are The Characteristics Of A Micromanager?

It’s not difficult to identify a micromanager. Among the behaviours noticeable to patients and the team, micromanagers frequently have one ear listening to what is occurring in adjoining hygiene rooms instead of giving complete attention to the patient during treatment. Other behaviours disempower staff. For instance, this style of manager avoids delegating decisions to the administrator by directing receptionists to rebook patients exactly to specified protocols, thereby diminishing administrators’ power.

In dealing with patients, micromanagers insist they are uniquely qualified to explain treatment plans in lay terms and to discuss financial details. Such behaviour results in a dynamic where patients feel less comfort-

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able discussing the treatment plan and financial arrangements with the dentist than they would with a knowledgeable administrator. Not only does this behaviour colour the doctor/patient relationship, but also it is a poor use of potential clinic time.

Other characteristics of micromanagers are that they constantly oversee and correct the activities of team members with the unstated understanding that without their input, the maximal beneficial result will not occur. The net effect of such vigilance is a team that performs as they perceive the dentist would want them to perform instead of applying good practice protocols. Moreover, micromanagers are controlling.

If the team holds meetings or huddles, dentists with this style of leadership direct the meeting with little team participation. Such controlled huddles partially defeat their purpose by not allowing sufficient involvement, contribution of knowledge, and creative problem solving.

Micromanagers insist on being involved in minor decisions such as sundry purchases, not just product choices, instead of dedicating time to larger considerations. Such a person views staff as incapable, static, and lacking maturity for decision-making.

Finally, micromanagers are firmly convinced that their practice is unique; therefore, according to them, there is only one way to operate. All too frequently, their personal ideas are outdated. Such tunnel vision is unproductive and self-defeating.

Since dental education trains us to operate in a repetitive manner with a narrow focus on minute details, it is easy to see some of this behaviour applying to our management style. Many of us also have

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a psychological profile that avoids broader, outsidethe-box thinking. This, too, carries over into our management intervention.

Can Micromanagers Change Their Leadership Style?

Despite the negative picture of micromanagers, many are somewhat successful because of the energy expended in the process. Ultimately, however, they usually realize that it is impossible to grow beyond the status quo without delegating to the team.

Micromanaging behaviour runs the gamut of mild, medium, extra strength manifestations with varying degrees of negativity within the practice. Although fundamental personality traits are impossible to change totally, we can work toward modifying them to make them more benign. Many practitioners allege that they are former micromanagers. In fact, they are merely “recovering micromanagers,” and they will require constant vigilance in order not to regress.

Choosing a leadership style is a combination of using our basic personality traits coupled with a clear knowledge of management strategies. A future article will deal with management styles of an Enabler and an Abdicator and with suggestions of strategies to modify some of the aspects of all three labels. 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 buy-ins, and business mergers. Dr.Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.

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Reducing One of Your Largest Expenses During the Recession: Personal and Corporate Income Taxes DAVID CHONG YEN CFP, CA www. dcy.ca

One of the dentist’s largest expenses is personal and corporate income taxes. Consider the following to reduce your income tax bill: 1. Lend money to poorer spouse at current prescribed interest rate of one per cent. If spouse can invest the money at higher than one per cent, taxes will be saved.

2. Contribute to Tax Free Savings Account (TFSA).

3. Pay poor family members (parents, children, nieces, nephews, etc.) who are 18 and older to babysit your children 16 and under. The poorer spouse will be eligible to receive a tax deduction for child care expenses as follows: $7,000 - child up to 6 years old $4,000 - child up to 16 years old 4. If you have a professional corporation and or technical/hygiene services corporation, and your poorer children who are 18 years old or older or your poorer parents or spouse are shareholders, then pay them a dividend. About $35,000 of dividends can be received virtually tax free provided one has no other income.

5. With the stock market crash, consider selling shares to realize the capital loss - wait for 31 days or longer if you wish to buy them back. On the other hand, your children 18 years or older could buy them back immediately, thereby avoiding the 31 day wait period. Capital losses can be used to offset current, past three years or future capital gains.

6. Consider renovating your kitchen in your home.

Contact a non-profit organization such as Habitat for Humanity to remove your old kitchen at no cost

to you. In addition, they will issue you a donation receipt which will reduce your personal tax bill.

7. Contribute to Registered Retirement Savings Plan and Registered Education Savings Plan.

Your corporation, if you have one, should consider: 1. Setting up an Individual Pension Plan (IPP) which serves as a supersized RRSP. Any contributions made by your corporation to the IPP will be a tax deduction to the corporation. These contributions will also provide you retirement income when you retire. Monies in your IPP are also protected from creditors.

2. Making spouse and children - especially if the children are 18 years or older - a shareholder. This will result in tax savings as it facilitates dividend sprinkling. See #4 above.

3. Paying a tax free car allowance to you for any business driving. Your corporation will receive a tax deduction for the payment and you will receive the amount tax free.

4. Paying for your universal or whole life insurance premiums. Even though the premiums paid by the corporation are not tax deductible it will improve cash flow. The insurance policy, however, must be owned by the corporation.

5. Paying for and deducting medical expenses using a Health and Welfare Trust. This way you don’t have to use personal income which is taxed at a higher rate to pay for your personal medical expenses.

Consider establishing a double will so that when you die probate fees will be reduced/avoided. If your PC is worth for example, $1 Million, then about $15,000 in probate fees will be saved by having a double will.

Also consider claiming your $750,000 lifetime capital gains exemption in respect of your PC shares. You do not have to sell your dental practice to another dentist in order to do this. You can achieve the claim by sell-

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ing your existing PC shares back to the PC. All den- 3. Recording bad debt expenses in respect of any tists, whether they have a PC or not, should consider: uncollectible patient fees.

1. Paying reasonable salaries to family members for Reducing taxes, one of the dentist’s largest expenses should be an ongoing activity much like brushing and services rendered to the dental practice.

2. Recording a bonus for services rendered by flossing one’s teeth. Doing it only once per year can employees (including the dentist in the case of a PC, result in unnecessary pain. PA or any family member who works in the practice) and David Chong Yen, CFP, CA, of DCY Professional Corporation Chartered for which payment will be made in the future (up to Accountants, has completed the CICA In-Depth Tax Courses and has been dentists for decades. Additional information can be obtained by 179 days after your dental practice’s year end). Your advising phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. dental practice will receive the tax deduction before the www.dcy.ca. This article is intended to present tax saving and planning recipients get taxed on the actual money received. ideas and is not intended to replace professional advice.

The Investing Dentist Phenomenon DAVID LIND www. ppsales.com

Over the last several years many of our practice sales have been to Investing Dentists. This trend is growing and with the recent decline in global equities, we are seeing even stronger demand from Dental Practice Investors. This is not a solution for everyone but certainly provides a viable option for many. In this article I will answer the top ten questions we are asked about Dental Practice Investors.

• Large businesses have been created to buy practices 1) Who are Dental Practice Investors? and brand them under a corporate banner. This is a There are a wide range of Investing Dentists that we different strategy than the Investing Dentists discussed work with but many share the following traits; here.

• They enjoy the business side of dentistry as much or more than the scientific side.

2) What changes would they make to my practice?

• They recognize the investment potential in denInvesting Dentists generally look for practices that tistry and consider it as good or better than other are performing well and that do not need significant places they can invest and feel their knowledge gives changes. They want you and your staff to continue them an advantage. to do what you have been doing for your patients.

• They have achieved a certain measure of success You will use the same materials, work the same way in their own practice and want to leverage that success. and generate the same or greater revenue. They may • Many have joined together to form small investor tweak some of the business processes to be more groups (2-3 dentists) in order to further leverage efficient, implement programs to ensure maximum their respective strengths. This also provides them patient retention and centralize some administrawith better access to capital. tive procedures.

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3) How long do I stay?

You are the central element in their decision to purchase. They will want you to stay for as long as possible with 5 years being average.

4) What’s in it for me?

Many dentists whose practices have been purchased

by Investing Dentists over the last few years report the following benefits; • More time to do things outside of the office.

• Less stress because the burden of owning and managing the day-to-day affairs of the office now falls to the owner.

• Higher level of enjoyment of dentistry because that is the entire focus of your day.

• Most investors will allow longer consecutive holidays (a month!) as they will arrange to fill in for you with an associate. This is not possible as an owner and can be very healthy and rewarding.

5) How will my staff be affected?

In most cases there will be no impact on staff provided your practice was run with reasonable staff levels and you were paying them reasonable wages.

The investor will need one key contact person such as an office manger in order to facilitate communication. The office manager will generally feel a higher level of fulfillment as their role increases in responsibility with absentee owners.

6) How will this affect my patients?

Generally the patients will not even be made aware that there has been a change in ownership. The Investing Dentist will want the patient to receive the same level of quality care that you have been providing to them for many years.

7) Who hires new staff ?

Investing Dentists recognize the need for good work-

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ing relationships among the entire dental team. They will suggest it is most beneficial for you to have the final say on any new employees for your office.

8) Do I have to sell 100% of my practice?

Investing Dentists have different philosophies on this question. Some like you to retain a small piece, 10% for example, in order to make sure your interests and their interests are aligned. Others find it simpler to purchase the entire practice.

9) Will I have to take back a note from the purchaser?

Investors are generally well financed and have a good relationship with their financial institution. It would be highly unusual for you to be required to provide a vendor take-back note in order to complete the deal.

10) What are the pitfalls of selling to an Investing Dentist?

Factors to consider to ensure you avoid any drawbacks include; • Can you actually see yourself giving up control?

The idea of acting as an associate in your practice and focusing on patient care is very appealing, but can you really let go?

• Make sure there is alignment of practice philosophy with the Investing Dentist.

• Gain an understanding of the Investors long term goals.

Investing Dentists are here to stay. They represent a viable option for those dentists considering a sale, particularly if you want to keep practicing. Could it be the right answer for you? PA David Lind is a Partner in Professional Practice Sales (Ontario) Ltd. (www. ppsales.com), which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: david.lind@ppsales.com

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Associate Agreements From the Principal’s Perspective (Part 2) DAVID ROSENTHAL BA., LL.B. In volume 38 of The Professional Advisory I wrote about the associate agreement from the principal’s perspective.

This is Part 2 of the article.

Remuneration - The Associate is typically paid based on a percentage of the Associate’s collected billings.

The current standard going rate for general dentistry is 40 per cent of collected billings, but that is a negotiable amount and may be higher or lower depending on various factors, such as a specialty which may merit a higher percentage. For the Principal, monthly payments to the Associate are easiest as third party laboratory invoices might be received only on a monthly basis.

The definition of collected billings in the Agreement is very important.

Collected billings means the gross billings for dental services rendered by the Associate to patients of the dental practice for which payment has been received by the Principal, after deducting laboratory fees. The definition needs to specify whether the Associate’s gross billings includes the dentist examination fee for dental hygiene services where the examination has been performed by the Associate.

Keep in mind the definition refers to collected billings.

If a patient does not pay an account, then it is not included in the calculation of collected billings. The Associate is not paid his or her percentage until the invoice is actually paid by the patient. If a bad debt (such as a patient’s cheque not being honoured at the bank) is incurred for a fee previously included in the Associate’s gross billings and paid to the Associate, the Agreement should specify that such amount is deducted from the amount then owing to the Associate, or the Associate shall repay the sum to the Principal.

The Agreement should specify (i) the Associate’s agrees to endorse any patient or third party (insurance company) cheques to the Principal so that billings and collections will be done through the Principal’s accounting system and bank account; and (ii) the Principal is collecting the Associate’s portion of the fees as agent for the Associate and that such portion received is held in trust for the Associate.

Non-Competition - Probably the most valuable asset a Principal owns is the patient list. To protect that asset the Agreement should contain a non-solicitation covenant whereby the Associate agrees not to solicit patients or staff of the practice. Perhaps more importantly, the Agreement should also include a noncompetition covenant whereby the Associate agrees not to compete with the Principal within a specified geographic radius for a specific time period time after the Associate ceases to work at the practice. The comments below are intended only for general practitioners since there are different rules that may apply for specialists.

A non-compete covenant will only be enforced if it is reasonable both as to the area of non-competition and to the amount of time the covenant will be in force.

That may be only one or two kilometres in a densely urban practice or 15 kilometres or more in a rural setting.

The amount of time the clause remains in effect is also important. In the case of a new Associate, he or she will likely not be a threat if they leave the practice within a trial period of, say, three months, and generally only a minor threat if they leave within one year.

A “phased-in” non-competition covenant is reasonable.

It could provide the non-competition clause (i) does not apply to the Associate for the first three months of the association, (ii) applies for a period of one year after termination if the Associate departs within one year, and (ii) applies for a period of two years after termination if the Associate leaves after one year.

After a year or two away from the practice, the departing Associate will not likely be any real threat to the Principal.

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Therefore, a two year covenant in most cases is usually adequate.

Termination of Agreement - The Principal needs to have the right to terminate the Agreement upon one to three months notice. This is particularly important if the Agreement is for a specific time period, such as a one year contract. If the arrangement is not working for whatever reason, the Principal does not want to be stuck with the Associate for a full year.

Consider also whether the Agreement includes a holdback of the Associate fees for corrective work required on patients previously treated by the Associate. The time period could be from three to six months and amount of the holdback anywhere from a few thousand

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dollars and up to significant percentage of the last month’s Associate’s Collected Billings.

In summary, a properly drafted written associate agreement is essential. It is strongly recommended the Principal consult with his or her professional advisors to ensure the Agreement contains all necessary provisions to protect the Principal’s interests and dental practice. 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.

Investor Paralysis MARK McNULTY BA, CFP, CIM www. mcnultycentre.com

I am happy to report that, to date, we have not had to change the retirement plans or retirement income for any of our clients. However, between December 2008 and the beginning of February 2009 we met with four new referrals (all dentists) who, on average, were down more than 40 per cent on their retirement portfolios.

Their average age was over 54 years old. This market crash has not only changed their retirement plans, it’s changed their lives.

Each of these dentists has something else in common.

They don’t know what to do now, so have decided to do nothing. Today’s market downturn has given them a severe case of what I call “Investor Paralysis.” They just want to hold on in hope that their portfolios will rebound.

To me, it is as if these four dentists have decided to reward poor performance by sticking with their current manager! I do not agree with this “hold on at all cost” approach. As you have likely heard many times before, past performance is certainly no guarantee of future performance. Generally speaking, if you have a fund or manager that has a long reputation of being

an underperformer in the past, it’s unlikely that reputation will change in the future.

Some investors seem to forget that not all mutual funds or investment advisors are created equal. If you look at the mutual funds in the Morningstar Mutual Fund Database, you see that performance within every class of mutual funds varies widely. For example, of the nearly 400 Canadian equity funds with a five-year track record, the best returning Canadian equity fund posted a 10.8 per cent average annual return and the worst performing Canadian equity fund posted a minus 17.1 per cent average annual return. That’s a 27.9 per cent average annual difference over the exact same period! About 47 per cent of Canadian equity funds posted positive average annual returns whereas the other 53 per cent posted negative returns over the last five years. Which group of funds are you invested in? The point is that you should not only be comparing your fund’s absolute performance, but its performance relative to its peers as well.

I can certainly understand that if someone, for example, has 30 per cent of their assets allocated to Canadian equities, they’re not wanting to sell out now and move into cash or bonds. But, as illustrated above, since not all mutual funds or managers are created equal, today’s market downturn might well be the best possible time to reshuffle your portfolio’s individual holdings while keeping the same exposure to each asset class.

Another reason to take action as opposed to doing

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year, or in any of the three preceding taxation years.

Now depending on your situation, reclaiming taxes paid on capital gains from previous years could result in a fairly handsome tax rebate from the Canada Revenue Agency.

With today’s market environment about as uncertain as most investors have ever seen, it is more important than ever to try to keep your emotions in check and to not let “Investor Paralysis” prevent you from making decisions that will help you going forward. Poor results in the past may very likely mean poor results in the future, so perhaps a change is in order! PA

nothing is that in most cases, the sale of your current assets won’t trigger any capital gains. In fact, they will more than likely allow you to harvest capital losses which in non-registered accounts can be used to offset gains in the current taxation year, in any future taxation

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 Insured Annuity: A Great Retirement Opportunity DR. IAN WEXLER www.protect-ins.com

If you are over age 60 or have parents around this age, with the economic crisis in full steam, you or your parents are probably wondering “how will I fund my retirement?!”

What if you were told of a strategy that would allow you to “lock-in” an income stream that would be equivalent to one produced by an “eight to ten per cent GIC?” Further, in the event of your death, the capital would pass tax-free to your beneficiaries without attracting probate fees. This strategy, which has been

around for years, goes by names such as the “insured annuity” or “back-to-back arrangement”.

Overview of the Strategy There are two components that make up an insured annuity arrangement: a life annuity and a life insurance policy. A life annuity is a right to receive fixed periodic payments, based on the life expectancy of the annuitant and on interest rates.

Step 1 The first step in the implementation of the insured annuity strategy is to purchase a life insurance policy.

The amount of the insurance purchased should be equal to the amount of the capital that is being invested.

Step 2 Once the insurance is in place, you then purchase a life annuity. In order to maximize the payment stream, an annuity payable for the lifetime of the annutitant

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is chosen (i.e., payments stop on the death of the annuitant). The premiums for this life insurance policy are funded using a portion of the annuity payments received.

Pros and Cons This strategy produces a couple of advantages. While the individual is alive, he∕she benefits from an increased after-tax return when compared to using fixed income vehicles such as GICs. The second benefit of this strategy is its simplicity - once in place, it requires virtually no management to maintain it. Finally, by its very nature, the strategy is conservative and appeals to those who are risk averse.

There are issues/disadvantages that must also be considered. One such issue is that this strategy is meant to be used by those who are at least 60 years of age. Also, individuals need to be healthy enough to qualify medically for the life insurance.

Perhaps the biggest problem with this concept is the fact that once you enter into this arrangement, there is no turning back. If there is a change in market conditions or perhaps in the annuitant’s/insured’s financial situation, there is no way to completely undo the strategy.

Here is an example: Problem Jack, age 75, has GICs worth $1,000,000 that are maturing. He is concerned that with the GIC rates currently being offered, his cash flow will be hurt significantly. The thought of putting more money in the stock market makes him very nervous. As a result, Jack feels that he doesn’t have any real options available. He has advised that he has no serious health concerns.

Solution Let’s compare the insured annuity strategy with the GIC strategy that Jack has favoured in the past.

We will assume that Jack is able to obtain a five per cent return using GICs. Please note that in order to match the annual after-tax rate of return earned by the insured annuity, the GICs would need to earn approximately 8.9 per cent (before tax). One would be hard-pressed to find a financial institution that would issue a GIC with this rate of return in our current economic environment. The end result is that Jack has more after tax cash flow available to him from the same $1,000,000 investment.

Here’s a summary of the Insured Annuity for Jack to consider as compared to a GIC investment.

VO L. 39 : A P R IL 20 09

Insured Annuity Jack GIC

Insured Annuity

at 5% Total Invested: 1,000,000 Annual Income: 50,000 Taxable Income: 50,000 Tax payable at: 46.41% 23,205 Insurance Premium: 0 Net Income: Net Earnings: Gross equivalent return:

26,795 2.68%

49,722 4.97%

5.00%

9.28%

Increase in income: Percentage Increase in Income: Capital Returned to the Estate:

1,000,000 106,073 6,930 3,216 53,135

22,927 86% 1,000,000

1,000,000

After Tax Income Comparison $49,722 $26,795 GIC Income

Insured Annuity

This is an illustration only.

All values are subject to verification during the underwriting process.

Rates shown as of February 25, 2009.

The Insured Annuity concept has justifiably experienced a “rebirth” during our recent economic downturn. This strategy should be considered by those who are yearning for guaranteed cash flow, who are looking to maximize return and minimize risk. PA Dr. Ian Wexler is Canada’s leading 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, annuities, and other 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

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”.