The Professional Advisory April/2011

The

49 Professional

Advisory For Dental Professionals

IN THIS ISSUE CAVEAT EMPTOR

TENANCY MANAGEMENT OPPORTUNITIES

David Lind

Ian Toms B.Sc. (Hons)

ASSOCIATE AGREEMENTS PART 2

DENTAL PREACTICE: AN INCREASINGLY COMPLEX ENDEAVOUR

David E. Rosenthal BA., LL.B.

NEW RULES FOR CANADIANS WHO OWN FLORIDA REAL ESTATE

Dr. Ron Weintraub

INCORPORATION: MORE QUESTIONS YOU SHOULD ASK

Mark McNulty BA, CFP, CIM

DO YOU KNOW YOUR INSURANCE PRIORITIES - PART 1

David Chong Yen CFP, CA

Dr. Ian Wexler

plus TIMES, CONDITIONS CHANGE NOTES FROM THE EDITOR

VOL. 49 : APRIL 2011

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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.

Plan Your Way To Peace Of Mind RALPH CRAWFORD BA., DMD In February we vacationed in Florida and the Bahamas and enjoyed every moment of sunny skies, warm days and sandy beaches. One of the highlights was a re-visit to Walt Disney World in Orlando. I say “re-visit” with nostalgia because our first visit was with our two children 40 years ago when Walt Disney World opened in 1971. Certainly much has changed but the theme of the park, as proclaimed by Roy Disney at the 1971 opening, remains solidly in place: “The Magic Kingdom where the young of heart of all ages can laugh and play and learn....together”.

We are all familiar with Walt Disney; the father of Mickey Mouse, 59 Academy Award nominations and 22 Oscars, the Disneyland opening in California in 1955 and his dream of Disney World in Florida.

But I became even more fascinated with Disney’s outstanding creative life, when on this recent visit, I noted quotations of his scattered on the walls along some of the walkways. Quotations like, “The way to get started is to quit talking and begin doing” or, “All our dreams come true, if we have the courage to pursue them”. But the one that really caught my attention was, Times, conditions change so rapidly that we must keep our aim constantly focused on the future.

Reflecting on our lives and the world around us we can’t help being aware that times and conditions indeed change - rapidly - and we must keep focused on the future. Think of ourselves and our families, how rapidly an accident or illness can change daily routines.

Think of the world with recessions, countries at war or conflict, hurricanes and earthquakes. And think of a

a dental practice and providing a retirement. Indeed, each and all must keep one’s aim constantly focused on the future. And this is where the Professional Advisory can help.

David Rosenthal, as he presents Part 2 of Associate Agreements and deals with remuneration, noncompetition and termination, leaves no doubt we must keep our aim constantly focused on the future. Insurance in all its forms, is there because times and conditions do change and when Ian Wexler asks Do You Know Your Insurance Priorities, his Step #6 concludes, “Develop a plan with your advisor to obtain appropriate coverage now and in the future”. Laws, regulations, ordinances change often and David Chong Yen in his Incorporation: More Questions You Should Ask defines Who?, Why? and When? as you consider professional corporation now and in the future. David Lind’s very title Caveat Emptor outlines examples of Buyer Beware and how in these changing times “it is important for buyers to ensure they are making intelligent buying decisions. And speaking of times, and conditions changing, Mark McNulty has a wealth of information considering the New Rules For Canadians Who Own Florida Real Estate - they could change your future. In Dental Practice: An Increasingly Complex Endeavour, change and its complexities is exactly what Ron Weintraub outlines and advises that “this change should alert dentists of the need to plan”. And how about Ian Toms’ opening line, “Have you ever wished you could change a term or condition after signing your lease?’

His Tenancy Management Opportunities tells us how.

Ask any dentist about the changes in their practice for the past 10, 20, 30 - whatever years - and the answers no doubt will include words like Yes, For sure and Rapid. Walt Disney was right: times, conditions do change and the most successful are those who keep their aim constantly focused on the future. PA

crawford@dccnet.com

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Caveat Emptor DAVID LIND www. ppsales.com

We have been engaged by several buyers recently to provide a valuation for a target practice they were considering acquiring. That by itself is not interesting as we have performed this function for buyers (and banks for financing purposes) for many years. What is interesting is the timing of our engagement and the outcome as a result of our findings.

In a more balanced market, we would generally be contacted to provide our valuation prior to the Purchaser and Vendor negotiating the terms and conditions of a transaction. The last few years have seen quite an imbalance in the market where there are more buyers than sellers. This fact has caused buyers to try to secure the target practice by negotiating the terms and conditions of a deal before they know its true value. Then, after the fact, they get us involved in order to confirm what they think they are buying or verify what has been represented to them is accurate.

This can be an effective way to proceed, however as you’ll see, it can also be a frustrating waste of time, money, and potential lost opportunity.

Regular readers of The Professional Advisory will remember that the primary drivers of practice value are Patients and Profit. In order to assess value it is not appropriate to simple apply a multiple of gross revenue and make an offer such as “I will buy your practice for 100 per cent of your gross”. The following examples will show you why.

Example 1 We were contacted by the buyer who was a past valuation client for her own office. She had made an offer of $600,000 for an additional practice. The legal agreements provided a condition that she get her own valuation done. The target practice was in a Toronto medical building. It was one of several practices this Vendor had in Toronto. It was about 20 years old, had four operatories in approximately 1,000 square feet.

The practice had a three year average gross income of $650,000. When we performed our chart audit we discovered that this practice only had 380 recall patients and 810 active patients (of which 230 were new). This gives us billings per recall patient of $1,725 which is virtually impossible. What was going on here?

We discovered that this Vendor moves patients from one office to another to accommodate his schedule.

Therefore, while the gross revenue was performed in that office, it was generated on patients that were not patients of that office. The vendor had also switched from a “Dental Accountant” to a cheaper accountant who was reporting revenue from multiple locations on one set of statements. It was difficult to get the accurate financial data for that location only. Once we did, our valuation came in at roughly 40 per cent of gross. Needless to say the Purchaser abandoned the transaction.

Example 2 In this situation we were referred to the client by his practice management consultant. He engaged us to do a valuation that he needed in order to get financing on this practice he was getting a “great deal” on. The practice was in South Western Ontario. Purchaser was paying $850,000 for a practice that grossed over $1.2 million last year. It had eight operatories of fairly modern equipment and was located in a good stable ground floor professional centre. The problem here was the Vendor had allowed a colleague in need to move into his practice. This colleague brought his own patients and generated approximately $350,000 of the $1.2 million. He was paid the normal 40 per cent associate split. This colleague had recently left (with his patients) so the revenue would not be recurring.

After normalizing out the one time revenue, we were left with a practice that had steadily declining revenue over the last three years and flat overhead. Naturally the bottom line was taking a serious hit and the facility is grossly under-utilized. The practice was valued at around $750,000 and the deal did not proceed.

In both of these cases, the Vendors accepted the outcome and were quite interested to learn the necessary steps they needed to take to properly prepare their practice for a future sale.

While we take no joy in being the purveyors of

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information that may scuttle a deal, we do feel it is important that Buyers always empower the rule, Caveat Emptor, in order to ensure they are making intelligent buying decisions. The more transparent approach is for the Vendor to have the practice valued by a Professional Valuator before putting it on the market. That way, anomalies, such as those noted above could be identified and corrective action taken before entering into negotiations to sell what, in many

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cases, is their life’s work. Vendors who do this, do so with the intention of providing full disclosure and receiving fair value for what they have built. That is probably the best way to put a deal together. PA David Lind is a Principal in Professional Practice Sales 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

Associate Agreements Part 2 DAVID ROSENTHAL BA., LL.B. In volume 48 of The Professional Advisory I wrote about 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. A specialty practice may command a higher percentage. That amount is negotiable and could be higher or lower depending on various factors, including the location of the practice and availability of associates in that area. For the Principal, monthly payments to the Associate are easiest as third party laboratory invoices are typically received on a monthly basis.

The definition of collected billings in the Agreement is critical. 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 should 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.

Note that 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 the percentage until the invoice is actually paid by the patient. If a bad debt is incurred for a fee previously included in the Associate’s gross billings and paid to the Associate (such as a patient’s cheque not being honoured at the bank), the Agreement should specify that such amount is deducted from the amount then owing to the Associate, or the Associate must repay the amount to the Principal.

The Agreement should specify (i) the Associate 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 - 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. The Agreement should also include a non-competition 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.

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A non-competition covenant will only be enforced if it is reasonable both in geographic scope and time limit.

That may be only a few 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, there will likely be no threat if the Associate leaves the practice within a trial period of three months, and generally only a minor threat if they leave within one year.

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.

The Agreement might include 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 the amount of the holdback anywhere from a few thousand dollars A“phased-in” non-competition covenant is reasonable. and up to significant percentage of the last month’s It could provide the non-competition clauses: Associate’s Collected Billings. (i) does not apply to the Associate for the first three In summary, a properly drafted written associate months of the association (ii) applies for a period of one year after termination agreement is essential. The Principal should consult with a professional advisor to ensure the Agreement if the Associate departs within one year (iii) applies for a period of two years after termination contains all necessary provisions to protect the Principal’s dental practice. PA 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. Therefore, a two year covenant in David Rosenthal is a senior lawyer with Spiegel Rosenthal Professional Corporation whose practice is devoted to corporate, commercial and most cases is usually adequate. business law, with special emphasis on advising and consulting for the Termination of Agreement - The Principal must be dental profession. He can be reached at (416) 865-0736; or fax to able to terminate the Agreement upon one to three (416) 203-8592; or e-mail to david@drlaw.ca.

New Rules for Canadians Who Own Florida Real Estate MARK McNULTY BA, CFP, CIM www.yournumber.ca

A large number of our clients are “snowbirds” who own real estate in Florida. There have been changes recently to the US/Canadian tax treaty. As a result, one of the questions we are asked most frequently these days is, “What are the estate taxes going to be on my Florida real estate?”

We are by no means cross-border financial planning quick research on the topic. Some of the main points specialists. However, because this question is so we came across include: common we thought it might be best to do some 1. First, each individual non-US resident is

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eligible for a basic US estate tax exemption of at least $60,000 and the criteria to qualify for this exemption is pretty straightforward.

2. Second, the most recent Canada/US Tax treaty increases this non-resident exemption from $60,000 US up to $5 million per person or $10 million per couple.

To be eligible for the $5 million US exemption, the process is much more involved. For starters, you must disclose your worldwide assets to the Internal Revenue Service (IRS) by filing Form 706. Because the majority of large estate tax returns are audited by the IRS, executors will most likely assume this added burden which can be time consuming and expensive.

When calculating your worldwide estate, you must follow IRS rules which can be much more onerous than those in Canada. For example, your life insurance may be included as well as the present value of any future benefits that you leave your spouse, like the spousal benefits of your pension.

After you have determined the worldwide value of your estate according to IRS guidelines, the formula to determine if you are eligible for the greater than $60k estate tax exemption is as follows: 1. Take your US taxable estate and divide it by your worldwide assets.

2. Then multiply that number by the current US estate tax exemption of $5 million US, which will determine what your non-resident estate tax exemption is.

For example, if a non-resident Canadian owned a property in the US with a market value of $500,000 and had a worldwide estate of $2,000,000 (including the US property), then they would receive a $1,250,000 US estate tax exemption (500,000 divided by $2,000,000 multiplied by $5,000,000 = $1,250,000).

However, if you had gains on the American property you would still be faced with the Canadian deemed disposition tax when you died back in Canada. However, as a result of the recent tax treaty amendments, if you do pay US non-resident estate tax you get to claim a tax credit against your Canadian deemed disposition of the US property upon your death.

For Canadians with significant US holdings, it will be well worth the time and expense to apply for the newly increased estate tax benefit. However, for Canadians with smaller estates it is likely best to do

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what you can to keep yourself onside with the $60,000 estate tax exemption. This is because the process of applying for the basic $60,000 estate tax exemption is much simpler. For this, you only need to complete the IRS Form 706A which is much shorter and only includes US property that is subject to the estate tax.

When calculating your worldwide estate, you must follow IRS rules which can be much more onerous than those in Canada. For example, your life insurance may be included as well as the present value of any future benefits that you leave your spouse, like the spousal benefits of your pension.

Possibly the easiest way to help reduce the value of your US property is joint ownership. Each nonresident is entitled to the basic $60,000 exemption, so if the property is jointly held in you and your spouse’s names then the first $120,000 is exempt from US estate tax. A word of caution though - joint ownership is different in the US than in Canada.

Finally, as we tell each of our snowbird clients, it’s best to consult a US estate tax specialist because this could save you or your family a lot of time and money! PA

Mr. Mark McNulty BA, CFP, CIM, is a nancial advisor with Raymond James Ltd., Independent Financial Services. Securities are offered through Raymond James Ltd. - Member Canadian Investor Protection Fund.

Insurance and estate planning are offered through Raymond James Financial Planning Ltd., not a member Canadian Investor Protection Fund.

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 905-470-6222ext 209 or mark.mcnulty@raymondjames.ca.

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Do You Know Your Insurance Priorities - Part 1 DR. IAN WEXLER www.protect-ins.com

If you are like one of the over a thousand dentists that I have met within the last seventeen years, you a) feel that you are paying a truckload of money for your insurance, b) do not know exactly what coverage you have and c) do not know whether you, your practice, or your family are adequately insured. The purpose of this article is to help you gain a better understanding of how to prioritize your insurance planning.

What insurance do I really need?

The easiest way to think about insurance is to break it down into two basic areas, general and individual or personal insurance - which will be the focus of this article.

Individual plans include: 1. Professional liability 2. Long term disability 3. Life Insurance 4. Business overhead expense 5. Critical illness 6. Long term care 7. Healthcare 8. Partnership related 9. Legal expense These are just some of the main ones! There are literally dozens of insurance plans that one can purchase and that insurance advisors would love to sell you. So, how do you decide which plans you should focus on and purchase, which ones you should put off, and which are a waste of money?

Step 1 Choose the right firm and advisor It is preferable to choose an insurance firm that specializes in the dental profession as well as the particular area of insurance you are looking for, e.g., general versus individual. Within that firm, it is highly

recommended that they have a number of advisors who specialize in specific areas of individual insurance such as living benefits (long term disability, long term care, etc.) and life insurance. It has been my experience that you are best not to choose an advisor who is a generalist, and represents and sells all types of insurance. Also, your advisor MUST have a history of having managed a number of claims with dentist clients.

Step 2 Undergo a comprehensive needs analysis This is extremely important and will serve as the foundation for determining your insurance priorities.

This is no different than the general oral examination performed by you. In completing this analysis, all important and relevant data must be analyzed or the ensuing recommendations will be not be complete or correct. This includes, but is not limited to: • A thorough review of individual, family, and practice financial risk and needs; • All personal and practice related financial data including a review of all assets, liabilities, tax returns, financial statements, and financial structure, e.g., PC, Hygiene Corp, Technical Services Corp.; • Insurance history and a detailed review of all current insurance plans; All details pertaining to your family including children, spouse, parents, etc.; • A comprehensive look at every relevant variable pertaining to your practice and determining the financial impact in the event of death, disability, etc.; • A review of all associate, partnership, and

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shareholder agreements; • A review of your financial plan if you have one; • A review of short and long term practice planning including transitions, etc.; • If it is a brand new practice or one being purchased, a pro forma statement, appraisal, and even loan documents should be reviewed; • A short health and travel review.

Step 3 Express your primary financial concerns in the event of death, disability, etc.

It is also of paramount importance that your advisor listens closely to your specific concerns with regards to financial outcomes that will impact your family, practice, etc., in the event of an unexpected disaster.

You would be wise to also consider short, medium, and long term time frames in order for your advisor to build flexibility into your insurance program.

Step 4 Formulate an insurance budget Most dentists do not have one, and are unsure of how much they should be spending on insurance coverage. Your advisor should provide a breakdown of all premiums for plans being considered, and help you formulate a budget. Also, your advisor should understand the most ideal manner in which to structure plan payment from a tax perspective. Please be aware that there are high levels of variability in terms of insurance cost associated with sex, age and other risk factors.

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Step 5 Obtain a prioritized list of insurance recommendations Your advisor, if he or she has listened to your primary concerns, and after having analyzed all relevant data, should come up with a prioritized list of insurance recommendations. Your advisor should even have consulted with your other professional advisors if necessary. Included with this summary, you should receive explanations that include: 1. Reasons for the priority order 2. Why specific plans and companies were chosen (including a disclosure of compensation). Ideally, your advisor should be completely independent meaning they should find you the best plan for your needs and not one based upon the highest compensation 3. Understand how your current plans fit in to the list and overall plan. In other words, are they adequate, or in need of change or replacement?

Step 6 Develop a plan with your advisor to obtain the appropriate coverage now and in the future Part 2 will discuss in greater detail which specific types of insurance most dentists should consider and in what stages of their career. PA Dr. Ian Wexler is a leading authority on insurance issues for dentists.

He is the founder and President of Protect Insurance Agencies Inc. in Toronto which has provided specialized expertise in life, disability, critical illness, long term care, and other insurance products and services to professionals, executives, and business owners across Ontario for over 16 years. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@protect-ins.com

Tenancy Management Opportunities incorrectly - assume that once the lease is executed their fate is sealed. I guarantee that every tenant reading this article has a number of re-negotiation leverage positions included in their lease.

IAN D. TOMS A lease defines the terms and conditions under B.Sc. (Hons) which a landlord shares hundreds of property rights www. iantoms.com with a tenant on a temporary basis in exchange for Have you ever wished you could change a term or rent. Because a lease is a static agreement written to condition after signing your lease? Tenants often - describe a dynamic process, inevitably something that

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seemed like a good idea at the time becomes a problem when the point of view shifts, creating an opportunity for a leverage position.

How can a tenant use these opportunities?

1. Recognize leverage positions.

There are three classes of leverage opportunities.

• Examples of obvious and certain leverage positions include rights to renew the term, assign the lease, increase or reduce size, display signage, and early termination. Usually these rights are associated with a certain time line and operating mechanism, and are clearly stated in the lease.

• Examples of silent and sudden leverage positions include presentation of estoppel certificates, broad use clauses, landlord refinancing, premises relocation, and landlord ownership change. These opportunities suddenly arise because of a changing circumstance, and are often challenging to identify.

The rule of thumb is that when your landlord approaches you with something that seems to involve changing a lease term or condition, ask yourself “is this a threat or an opportunity?”

• Leverage positions can be created by actively researching and exploiting existing and documented lease terms and conditions. Common examples include additional rent and premises area audits.

Note that a properly negotiated lease will ‘plant’ all three classes of leverage opportunities triggered by circumstances likely to occur at some point during the tenancy.

2. Understand the realistic power of the leverage position.

The strength of each leverage position depends on specific circumstances at the time, and how the leverage position is presented and administered.

3. Use the leverage position to effect a positive change.

You know what you need! Recognize and understand your leverage position, then use it to effect a change in a prudent manner. Working with the landlord helps to effect a solution rather than focus on the issue.

Consider the following examples of lease management opportunities.

Obvious and certain Use the renewal negotiation process described in your lease to set your rental rate, and possibly address other tenancy issues. Typically, a properly administered renewal negotiation will save $2-3 per square foot.

An option to give up space can be used to reduce

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overhead by either exercising the option and reducing the premises area, or by agreeing not to exercise the option in exchange for other concessions such as reduced rent.

Silent and sudden Complete that estoppel certificate - completely and accurately. A client retrieved a two month prepaid rent deposit which landlord had previously refused to acknowledge in exchange for completing an estoppel certificate.

A tenant’s right to terminate their lease can create a very potent leverage position if it prevents landlord from refinancing their property! A client agreed to defer its early termination provision in exchange for landlord agreeing to install an elevator which corrected negative patient flow to a second story practice.

A landlords right to relocate the premises is an opportunity for a new premises, not a death sentence.

Cooperate with the landlord to effect a relocation – in exchange for better space, new leasehold improvements and better signage!

Created Faced with no options to renew, high rent and poor signage, a tenant demonstrated that its premises actually measured 947.5 square feet compared with the 1100 square feet indicated by the lease, equating to an accumulated rent overpayment of more than $20,000.00. Instead of suing the landlord, rent was adjusted on a going forward basis to compensate for the overpayment, renewal options were added, and significant signage installed.

A quick additional rent audit resulted in a cheque for almost $30,000 being issued to tenant. Landlord’s math was wrong.

If you have a lease issue, remember that you do have opportunities to administer your position during the term. You should have your lease reviewed to inventory the strength and type of leverage positions. Plan to use the obvious and certain leverage positions as time passes. Be certain that each time a circumstance presents itself which may provide either a silent and sudden, or a created leverage position, seek the expertise and service of a qualified professional. PA

Mr. Toms has been creating and preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by e-mail at iantoms@ pipcom.com, or through his web site at: www.iantoms.com.391-3764 or drwex@protect-ins.com

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Dental Practice: An Increasingly Complex Endeavour DR. RON WEINTRAUB www.innovativepracticesolutions.ca

Today’s dentists find ourselves at the helm of an increasingly multifaceted organization in contrast to the more intimate offices of yesteryear. Many of us nostalgically remember dental practices easily managed with small non-departmentalized professional and support staff including a dentist, a chair- side assistant, front desk receptionist, and possibly a part-time hygienist. These practices served the needs of a respectful, compliant patient base. The pace of change was manageable then. The relaxed style of dental practice, however, has, in some cases, morphed in a relatively short time into a highly sophisticated association of practitioners resembling a mini version of an outpatient hospital department.

This change should alert dentists of the need to plan.

The Contemporary Dental Office A significant number of offices in the contemporary environment have developed into multi-provider entities supported by treatment coordinators, greeters, dismissers, office managers, and clinical assistants.

Such offices can be a daunting task for the owner/ dentist to oversee the entire operation and consider the sophisticated clinical demands of an activist patient base. Not only is it important to address the needs of staff and patients, but also to keep abreast of clinical innovation to maintain an up-to-date practice.

This colossus is demanding.

These developments might be resignedly viewed as a burden that accompanies our passion for the profession. They might also be viewed as opportunity to streamline and enhance the practice resulting in a greater ability for the clinical team to focus on excellent clinical outcomes for our patients.

Embracing the viewpoint of opportunity suggests a

number of prerequisites. Primarily, having a high practice management modalities, we can support this team. To begin the process, we can help them enhance their high quality knowledge by exposing them to formal continuing education in their areas of responsibility and to in-office training. Encouraging their professional growth empowers them while keeping them accountable. Another successful strategy is to set up clinical teams with appropriate internal leadership to encourage proactive activity.

By instituting the proven system of daily huddles discussed in an earlier article, we enable team members to be aware of patients’ needs as they progress through the appointment.

It’s important to organize dental personnel according to their area of expertise to provide that for which they are predominately responsible; for example, dentists may want to delegate lengthy explanations or discussion of fees following their appropriate professional input, or satisfy patient scheduling requirements. By instituting monitors to track each department and be accountable for remediation of problems keeps the office running smoothly.

Patient service levels should also constantly be reviewed. Such an important area is sometimes neglected, but with vigilance, this is an effective vehicle for new patients to provide further new patient referrals.

And new patients sustain our practice. Yet another strategy to maintain a well organized day is to institute a customized functioning patient grading system in order to minimize last minute cancellations and no shows, thus keeping the daily schedule maximally productive.

New Reality Poses Challenges Although the new reality poses some challenges for us, it should also be a priority for moderate sized practices aspiring to grow as well as for the larger, more complex entities that currently exist.

Moderate sized or newer start-up practices can evolve from a number of factors. Most difficult for this size practice is acquiring costly technologies such as digital radiology, electronic diagnostic aids, computer generated

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prosthodontic solutions, and computer access in operatories to increase the ratio of administration to patients. Such innovations provide enhanced customer service levels that patients have come to expect. Although expectations in rural areas differ from those in highly serviced urban areas where most Ontario dentists practice, generally speaking, expectations of having these technologies is gaining momentum. One of the requirements to grow a start up practice in a crowded environment to make it viable quickly is the office’s need to satisfy the potential patient base’s expectation of what a dental office should provide.

Larger well-established group practices may be so busy that they haven’t devoted time to planning for the future even though they are experiencing difficulty in servicing their current patient complement. They may not appreciate the danger of losing their popularity by the next generation of tech savvy, privacy-oriented, and efficiency demanding demographic.

Most of our practices, somewhere in the middle, need to seize the opportunity to grow thereby insuring the feasibility of the future of the operation. Using foresight, we should enhance our practice to reflect the demands of a growing demographic of families headed by 35-40 year old parents.

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Opportunity Or Albatross With a long-term goal in mind, we need to take full advantage of the opportunity to enjoy the rest of our practice at the same time as we prepare to maximize the transition value of possibly our most valuable financial asset. This process may need outside professional assistance. Among the many resources in the dental community to call upon include financial planners, dentally knowledgeable accountants and lawyers, practice brokers, collegial discussions with our peers who may have previously embarked on this endeavour, and one of a number of excellent practice management organizations.

A good adage to follow is “If I could do it myself, I would have already done it.” Planning is paramount to long term success. 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.

Incorporation: More Questions You Should Ask DAVID CHONG YEN CFP, CA www. dcy.ca

While there are approximately 8,500 dentists in Ontario, there are approximately 4,500 dentistry professional corporations (PC) registered with the RCDSO at end of 2010. In other words, more than 50 per cent of the dentists in Ontario are incorporated. This percentage does not include hygiene and technical services corporations. To determine if a PC

is suitable for you, consider the following: Who? Regardless of whether you are the principal owner of your dental practice or an associate dentist, you can incorporate.

For principals, if you own more than one practice, you may choose to incorporate one PC for all locations, or incorporate separate PCs for separate locations. A dentist can have more than one PC. Also, consider whether a hygiene or technical services corporation, PC, or both, is more suitable in your situation. Often, the spouse is a dentist as well and both dentists can own the same PC or each can own separate PCs. These considerations should be addressed with

The Professional Advisory

your advisor vis-à-vis your financial situation before you incorporate.

Associates can incorporate and generate tax savings as long as they have taken steps to avoid the Personal Services Business (PSB) rules. The PSB rules were designed to deny employees who incorporated themselves the tax benefits of incorporating. If these rules apply, the tax benefit of incorporating would be significantly reduced since such a corporation (PSB) would not enjoy the low corporate tax rate of 15.5 per cent and tax deductions for expenses would be very limited.

You should discuss your circumstances with your advisor to determine the steps necessary to avoid the PSB rules when incorporating. Your advisor should also review the potential tax consequences and impact on your PC if you have an associate agreement with noncompetition and/or non-solicitation clauses.

Why? There are tax benefits for dentists with professional corporations. If you answer yes to the following questions, then a PC may be to your advantage: • Will your annual profit (i.e., billing less business expenses) exceed $128,000?

• Do you have a stay-at-home spouse, a spouse that makes little or no income, or will your spouse have children in the next few years?

• Will you have adult children going to university?

• Do you have parents who make little or no income?

• Do you have business debts (not including student loans)?

• Are you planning to sell your practice soon and want to enjoy the lifetime capital gain exemption of $750,000?

Although you may qualify for the lifetime capital gain exemption when selling a practice, there are some exceptions. A review of your personal tax history before incorporating might reveal that incorporation is not beneficial for you.

When and What to Consider?

• The incorporation date cannot be backdated since authorization must be obtained before you begin to operate your associateship or practice through your PC. It is always better to plan ahead; allow at least six to eight weeks to get everything in place.

• Although there are exceptions, a PC should exist at least 24 months before your intended sale of a dental practice.

VO L. 49 : A P R IL 20 11

• When selling your practice and in spite of the lifetime capital gains exemption, you may have to pay some taxes on the sale (minimum taxes).

Since such taxes may be refundable to you over the following seven years if you have income and/ or taxes to pay, you should have a tax plan beyond the sale date of your practice.

• Consider adding your family members to the PC in order to utilize a portion of their lifetime capital gains exemption. Although the incorporation process takes only a few weeks, these issues should be considered before you incorporate and/or start negotiating with purchasers of your practice.

Other Issues With the introduction of the Harmonized Sales Tax (HST) at 13 per cent in July 2010, you might have to pay HST on the transfer of certain assets from your dental practice to your PC when incorporating.

Consider double wills. For an Ontario resident, the probate fees are 1.5 per cent for an estate in excess of $50,000. If your PC shares are worth $1,000,000, you will save more than $14,500 on probate fees by having a second will.

A special election should be filed with the tax department if you wish to have a tax-free transfer of assets from your dental practice to your corporation. A late filing could result in a penalty of up to $8,000. If no such filing is done, you could face an unexpected tax bill if and when the tax department reviews your file.

Consider an employment contract. This permits your PC to deduct and pay your beneficiary $10,000 in tax-free money at time of your death.

Summary When a dentist incorporates, a PC may yield tax savings. However, consideration should be given to future plans, timing and past tax history to determine if a PC is appropriate for you. Proactive planning and corporate structuring will result in less tax and will avoid unnecessary revisions to a poorly established or poorly timed professional corporation. PA

David Chong Yen, CFP, CA of DCY Professional Corporation Chartered Accountants is a tax specialist and has been advising dentists for decades.

Additional information can be obtained by phone (416) 510-0888,fax (416) 510-2699,or e-maildavid@dcy.ca,www.dcy.ca. This article does not replace professional advice.

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”.