Issuu on Google+

The

57 Professional

Advisory For Dental Professionals

IN THIS ISSUE A PrActice By Any Other nAme David E. Rosenthal BA., LL.B.

the issue OF “the micrOmAnAger” - revisiteD

tAx Free investment incOme

Dr. Ron Weintraub

Mark McNulty BA, CFP, CIM

DeclineD Or rAteD FOr cOverAge... KnOw yOur OPtiOns! Dr. Ian Wexler

time tO test yOur Premises leAse smArts Ian Toms B.Sc. (Hons)

tAx trAPs AnD OPPOrtunities when selling yOur PrActice David Chong Yen CFP, CA

whAt Are AssOciAtes thinKing? David Lind

plus the right Keys OPen vAluABle DOOrs nOtes FrOm the eDitOr

Vol. 57 : NoVember 2012


The Professional Advisory

Vo l. 57 : NoV ember 2012

The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different field. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.

The Right Keys Open Valuable Doors what The Professional Advisory is all about. In every issue its authors strive to provide keys that open doors that make dental practices more valuable and personal lives more meaningful.

RALPH CRAWFORD BA., DMD About four months ago I went through a rather annoying experience. I lost my car keys. Following a community meeting I drove into our apartment parking lot, parked and locked the car before proceeding up to our apartment. A few hours later needing to go to the grocery store, lo and behold, I couldn’t find the keys to the car. Looking around briefly I gave up the hunt and used my wife’s keys - the spare set - to pick up the groceries. Believing and rationalizing the keys must be in the apartment somewhere - after all, didn’t I park and lock the car - I looked everywhere. I looked in drawers, behind cupboards, in jacket and trouser pockets - everywhere - to no avail. Feeling we needed another set of cars keys I went to the local auto dealer where they programmed a new car key and supplied a new remote transmitter at a cost over $250.00. Then, because the garage door opener “clicker” was on the lost key ring, I had to spend another $50.00 to replace it. A total of more than $300.00 just because I lost the keys. Then, surprisingly, everything changed. As we prepared to drive out of town for the Thanksgiving Weekend I rearranged the car trunk in order to fit in the travel luggage and there, partly obscured in the corner of the trunk, were the lost keys. And looking back I knew what happened. Upon arriving home from the meeting I opened the trunk to retrieve my briefcase and a parcel and apparently dropped the car keys in the process. How dumb can you get! The whole experience taught me a valuable lesson. The right keys can open valuable doors. And isn’t that 1

Take Mark McNulty’s article Tax Free Investment Income. Here Mark offers a key that opens the door to “tax alpha” that in the mist of low interest environments and low returns a certain dentist saved $25,630 in taxes. And in his article What Are Associates Thinking? David Lind provides some of the right keys that he believes can open great career paths for dentists to gain valuable experience. David Chong Yen’s Tax Traps and Opportunities When Selling Your Practice indeed opens the door where it makes sense to begin well in advance to think about good tax planning and keep as much as possible of what you are paid for your practice. Similarly, in his article Declined or Rated for Coverage...Know Your Options! Ian Wexler provides the key that opens the door to understanding the complexities that “life underwriting is far more an art than a science”. Who would ever guess there are so many different doors to be looked at in naming your practice? David Rosenthal in A Practice By Any Other Name provides the right keys to unlock the right name on your door. It’s budget time and Ian Toms says it’s Time To Test Your Premises Lease Smarts. In so doing he offers a 15 part quiz that provides the key whether you know enough to assess and administer your own lease affairs. And when Ron Weintraub revisits The Issue of the Micromanager he aptly provides the key to open the door so “Micromanaging practitioners can avoid many pitfalls”. Yes, losing the car keys was annoying and frustrating - and dumb - but it provided a lesson. You can’t open a door unless you have the right key. And time and time again the contributors bring to The Professional Advisory wonderful keys that open doors to more successful dental practices and brings more meaning to personal lives. PA

crawford@dccnet.com


The Professional Advisory

Vo l. 57 : NoV emb er 2012

A Practice By Any Other Name example: Dental Centre, Dental Office, Dental Clinic, Dental Group or Dental Art are all generic. However, if you add a descriptive element or word, then the name becomes a specific practice name and requires registration. Adding for example the word “Aurora” to DAVID ROSENTHAL any of those generic names will create that descriptive BA., LL.B. element and trigger registration requirements. If the practice name is “reasonably referable to and describes the location of the practice”, then registration Please send comments to david@drlaw.ca. is required, but the approval of the College’s Executive Originally dentists were required to practice dentistry Committee is not required. Names such Bay Street using only their personal names as registered with Dental Centre or Main Street Dental Office would be the Royal College of Dental Surgeons of Ontario acceptable under this category. Often a dental practice (College). However, changes to the regulations under is located in a shopping mall or plaza, so if the practice the Dentistry Act, 1991 permit dentists to carry was located on Bay Street at the Bay Plaza, a name such on dentistry using a practice name other than their as Bay Plaza Dental Centre would also be acceptable. personal names. Before using a practice name, that name must be registered at the Ontario Ministry of Government and Consumer Services, as required by the Ontario Business Names Act (BNA). The fundamental requirement of the BNA is straightforward. No individual shall carry on business or identify his or her business to the public other than his or her own name unless the name is registered under the BNA. The same restriction applies to corporations, including dentistry professional corporations. The name registration is valid for five years and may be renewed for additional five-year terms before the expiry date. A practice name is not a separate legal entity but rather However, any other name that does not refer to the a business style. The BNA requires that when carrying location of the practice does require the Executive on business using a practice name, the practice name Committee’s approval. As the College’s Practice Name and the person’s name (or your dentistry professional Advisory states, the College will not approve a name corporation if it owns your dental practice) be set out in that contains an adjective if that adjective (1) may be all contracts, invoices, negotiable instruments and orders potentially misleading, (2) is not verifiable by the facts, involving goods or services issued or made by the person. (3) makes comparisons to other practices suggesting Before using a practice name, that name must also uniqueness or superiority, and/or (4) is likely to create be registered at the College, and depending on the expectations of favourable results or appeals to the practice name possibly be approved by the College’s public’s fears. Executive Committee before its use is permitted. The College’s Practice Name Advisory lists some of Note that generic names that do not contain a the adjectives which have not been approved, such as descriptive element would not be considered a practice “best”, “quality” and “painless”. Other adjectives not name and therefore do not require any registration. For listed but which I understand will not be 4 2


‘‘

The Professional Advisory

Vo l. 57 : NoV ember 2 012

The fundamental requirement of the BNA is straightforward. No individual shall carry on business or identify his or her business to the public other than his or her own name unless the name is registered under the BNA. The same restriction applies to corporations, including dentistry professional corporations.

approved include “pure” or “white”. Historically the word “Smile” was not approved or permitted in a practice name. However I understand the College changed its policy some time ago and now permits ‘Smile Dental’ as part of a practice name. The word Dental must be included, likely so there is no confusion with a hygiene clinic. Adjectives are not permitted. Therefore practice names such as Big Bright Smile Dental or Best White Smile Dental are not acceptable. The purpose of a practice name is to identify your own dental practice. If you wish to use Smile Dental

‘‘

as part of your practice name I suggest adding the location also to the practice name. If your dental practice is located on Bay Street, then names such as Bay Street Smile Dental or Smile Dental on Bay are practice names that would be approved by the College. When purchasing a dental practice, typically the purchaser acquires the rights to use the practice name associated with the practice. This involves filings at both the Ontario Ministry of Government and Consumer Services and the College. Your lawyer can assist you in ensuring proper registrations and approvals, if necessary, are obtained. 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 dentists. He can be reached at (416) 865-0736 or e-mail to david@drlaw.ca.

3


The Professional Advisory

Vo l. 57 : NoV ember 2012

Tax Free Investment Income MARK McNULTY BA, CFP, CIM www.yournumber.ca

Please send comments to mark.mcnulty@raymondjames.ca. In the investment world, alpha refers to by how much a money manager can beat the market. The real world investment alpha can be fleeting in a given year, as few managers are able to consistently beat the market year-in and year-out. There is, however, one type of alpha you should expect every year which can consistently boost investment returns--tax alpha. Tax alpha is the additional investment performance you earn by managing the type of investment income you receive for tax purposes. So how does tax alpha work? Consider the case of Dr. John Tyler (not his real name). NexGen  Canadian   Bond  Tax  Managed   Fund

Spro5  Private   Credit  Trust

Dr. Tyler is 64 years old and has accumulated one million dollars in his professional corporation. The investment income on this money does not receive the favourable tax treatment that active business income does. In fact, if Dr. Tyler invested this money in a GIC earning 2.5% right now, he would likely incur a tax bill in the corporation of around $11,500 on interest income of only $25,000. This leaves $13,500 of income to distribute to Dr. Tyler as a dividend, so he would receive $9,000 personally after-tax. Thus the corporate return of $25,000 is only worth about $9,000 to Dr. Tyler after-tax (or a return of 0.9%). See the chart below for what we did instead. You can see that investment income earned in the corporation as interest income would have earned your professional corporation $24,947 after-tax. Dr. Tyler’s professional corporation earned $37,336 aftertax by exchanging the interest income for capital gains or return of capital investment income. This was a tax alpha of $12,388. This tax alpha savings is compounded further when you consider what happens when Dr. Tyler took the money out of the corporation into his own hands. 4

CIBC  Government   Bond  Fund

CIBC  Alerian   Master  Limited   Partnership

iShares  Advantage   Short  @uraAon   High  Yield

Total

Layer  Zne  Tax  Alpha:  Professional  CorporaAon Market  Value

$250,281

$303,316

$126,800

$186,836

$132,767

$1,000,000

2012  Investment  Income

$10,887

$28,139

$4,101

$2,037

$1,181

$46,345

Corporate  aPerQtax  return   if  earned  as  interest   income

$5,861

$15,147

$2,208

$1,096

$636

$24,947

McNulty  aPerQtax   investment  income

$8,374

$21,643

$4,101

$2,037

$1,181

$37,336

Corporate  Tax  Alpha  

$2,513

$6,496

$1,894

$940

$545

$12,388

Layer  Two  Tax  Alpha:  Personal Personal  aPerQtax  return   on  Corporate  interest   income

$3,952

$10,214

$1,489

$739

$429

$16,822

Personal  aPerQtax  return   on  McNulty  Corporate   investment  income

$7,010

$18,118

$2,766

$1,373

$796

$30,064

Personal  Tax  Alpha

$3,058

$7,905

$1,277

$634

$368

$13,242

Combined  Tax  Alpha

$5,572

$14,400

$3,171

$1,574

$913

$25,630

4


The Professional Advisory

Now Dr. Tyler’s tax alpha is an additional $13,242 thanks to a portion of the income being paid out of the corporation tax free. In total, Dr. Tyler saved $25,630 in tax.

Vo l. 57 : NoV ember 2 012

In today’s low interest environment, returns are low and great investment management is about pinching pennies and focusing on the basics. With tax alpha, Dr. Tyler pinched an additional 2,563,000 pennies! PA

Mark McNulty BA, CFP, CIM is the managing principal of the McNulty Group of Raymond James Ltd., member of Canadian Investor Protection Fund. This article is for information only. Its opinions are those of the author, not necessarily those of Raymond James Ltd. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Mark may be contacted at 905-470-6222 ext 209 or mark.mcnulty@raymondjames.ca.

5


The Professional Advisory

Vo l. 57 : NoV ember 2012

Declined or Rated for Coverage... Know Your Options! • what they know; • what they think they know; and • what they don’t know. The first category contains just the facts, while the second category could include inaccuracies that the DR. IAN WEXLER underwriter thinks are facts. Maybe the underwriter www.protect-ins.com mis-read the facts. (The line between these categories is usually invisible). The last category may include Please send comments to drwex@protect-ins.com. information that the underwriter would like to see, but cannot. For instance, the underwriter might want to see Do you know someone with a rated insurance the pathology report on the lesion that was removed policy…meaning they pay higher rates due to a higher from your back 10 years ago, but now, no longer has the risk? How about an application for coverage that has access because the report is not in your physician’s file been declined or postponed? Are you having trouble and the specialist who did the incision has long since making any sense of a recent underwriting decision? retired. Was it malignant? Certainly critical information Underwriting, to simplify, includes the entire process for the underwriter to make a decision. of determining your insurability, and is the most important aspect of the individual insurance application process. The insurance industry promotes the perception that underwriting is a fact-based assessment of your risk. However, scratching beneath the surface reveals that life underwriting is far more an art than a science. The traditional underwriting processes for life and living benefits insurance can be a trying experience for clients and advisors alike. Long delays are Supporting Evidence Is Crucial commonplace. Once the application is submitted, control is given over to the insurance company’s Before rendering a decision, underwriters need to underwriter who makes highly subjective decisions gather evidence and information on the health, about the applicant’s insurability - often without finances and lifestyle of an applicant - test results, enough information. There is no transparency into medical files, reports from physicians and specialists, how the applicant is being evaluated. And, since you tax returns, motor vehicle reports, etc. need to pick one insurer based only on a quote, all Here’s where the problems start. Medical records of this occurs without any meaningful competitive can be tricky to assess for a number of reasons. It is not uncommon for one’s medical records to business process or accountability to the client. Many clients have asked, “If I am willing to pay the include incomplete, inaccurate or entirely incorrect premiums, why do I have to subject myself to this scrutiny?” information or diagnoses. Medical records can be difficult to interpret and understand. If you’ve ever had Anatomy of a Decision a prescription, you know what a doctor’s handwriting Insurance underwriters base their decisions on three looks like - not pretty. How is an underwriter supposed broad categories of information about your health: to make any sense of this? 4 6


‘‘

The Professional Advisory

Vo l. 57 : NoV ember 2 012

It is important throughout the insurance application process that you and your advisor strive to eliminate inaccuracies and unknowns in your medical, lifestyle and financial history.

Underwriting is a Business Process Underwriting decisions are business decisions made in the context of an insurer entering into a policy contract to provide a benefit to a client. A number of real world factors influence these decisions. Most underwriters in Canada are under enormous pressure to process more files and do it faster than ever before. As a result, underwriters have no time or resources to contact your doctor and clarify dates, facts, or their illegible handwritten notes. Whether or not they are able to obtain the information they need, underwriters still need to render timely decisions on insurance applications. Thus, many underwriting decisions are as much a result of what the underwriter thinks they know and don’t know, as it is about what they, in fact, do know.

‘‘

Clarify “knowns”, Eliminate “unknowns” It is important throughout the insurance application process that you and your advisor strive to eliminate inaccuracies and unknowns. Any gaps in the information should be clarified before any evidence is submitted to the insurers. And contextual information can be added to help insurance company underwriters understand the big picture - why are you seeking insurance coverage, what are you doing to promote your health and wellbeing, why do you have so many traffic violations, etc. My firm Protect Insurance has recently partnered with the only Private Underwriting firm in Ontario, and perhaps Canada, that actually specializes in ensuring that all evidence collected is documented, accurate, and complete, and that all insurance offered provides the best plans, with the best underwriting decision, and the lowest rates or premiums. 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 provides specialized expertise in life, disability, critical illness, long term care, and other insurance products and services to over 900 dentists across Ontario for the past 17 years. He can be reached for questions or other enquiries at (416) 3913764 or drwex@protect-ins.com. 7


The Professional Advisory

Vo l. 57 : NoV ember 2012

Time to Test Your Premises Lease Smarts IAN D. TOMS B.Sc. (Hons) www. iantoms.com

Please send comments to iantoms@pipcom.com. It’s your annual budget time. You start thinking about ways to lower premises rent cost. In order to decide whether you know enough to assess and administer your own lease affairs, complete the following test by choosing the most correct answer to each question. Sharpen your pencil, put on your thinking cap, good luck and no peeking! You have 90 seconds to complete the test…. Ready, set, GO! 1. The industry standard administration fee rent component is typically: a. 15% of additional rent. b. 15% of selected additional rent elements c. 5% of rent d. none of the above. 2. The way a premises is measured: a. can effect the monthly rental payment by up to 25%. b. is set by an industry standard applied at landlords convenience. c. often does not correspond to criterion expressed in the lease. d. all of the above. 3. In most tenancies: a. landlords are required to accurately measure and report premises space. b. landlords are required to base additional rent statements on audited financial statements c. tenants overlook rental overpayment because they do not check or understand their annual additional rent statement. d. none of the above.

4. Realtors who represent a tenants interest during a lease negotiation while being paid a commission by the landlord: a. risk being in a conflict of interest position by representing the party hiring them while being paid by the “other side”. b. are often more experienced listing, selling or leasing real estate than negotiating subtle tenancy issues. c. both of the above are correct. d. neither of the above is correct. 5. A tenant which is: a. a corporate body, means that personal assets are always protected. b. two persons, means the liability is shared equally. c. a person, protects his family assets by having a professional corporation d. a person in trust for another entity, could be considered a personal tenancy. 6. Annual rent expressed as a percentage of annual production in a well managed practice should be: a. 1% to 3% b. 4% to 7%. c. 8% to 10%. d. none of the above. 7. Additional rent calculations and the resultant additional rent statements are: a. always accurate. b. never accurate. c. challenging to enforce without auditing rights and a very precise additional rent description. d. none of the above 8. Lease assignment clauses: a. are standard lease facilities. b. if impaired can cost a practitioner approximately 1/3 of the sale value of the practice. c. have nothing to do with an associate working for you. d. do not typically affect practice financing. 4 8


The Professional Advisory

9. Lease term renewal options: a. guarantee a tenants ability to renew the term of the lease on reasonable terms and conditions. b. are precise mechanisms. c. need to be treated with great respect. d. are standard lease facilities in dental practice leases. 10. The best time to approach a landlord to begin discussing renewal term arrangements is: a. 6 months prior to term expiry. b. 6 months prior to renewal option expiry. c. 12 months prior to lease expiry. d. every option should be carefully evaluated and planned to determine the best time to approach the landlord. 11. The major opportunities to save money during an offer to lease negotiation are: a. agreeing to an initial 10 year term. b. fixturing period, free rent, landlord work and tenant improvement allowance. c. it depends on the net effective rent. d. ensuring that net effective rent, assignment, renewal options, relocation and early termination provisions are all tenant favourable. 12. Detailed additional rent clauses in leases are intended to: a. provide both the landlord and the tenant the ability to manage and control additional rent costs. b. provide the landlord with a long winded, confusing and open-ended ability to charge as much as the landlord thinks it can get away with. c. create a working partnership arrangement between the landlord and the tenant.

Vo l. 57 : NoV ember 2 012

13. Dental practice leases are: a. significantly different from pizza store leases because of the amount of plumbing and wiring involved. b. always written on legal sized paper because they are legal documents. c. often standard documents which landlords are unable to negotiate. d. none of the above. 14. While searching for a new premises location, the first step is to: a. contact a realtor because all potential locations will be listed on MLS. b. contact all landlords to see if they have space for lease. c. drive around and mark all possible practice locations on a base map. d. define the geographical area you wish to practice in. 15. Which of the following is not true. a. the primary opportunity to negotiate tenancy terms is during the offer to lease negotiation. b. lease term renewal negotiation can offer an opportunity to renegotiate some terms of the tenancy in addition to the rental rate. c. a status certificate can effectively change the terms of the tenancy, and can be an opportunity to adjust certain tenancy terms and conditions. d. assignment always releases the assigning party. Answers: 1. a. 4. c. 7. c. 10. d. 13. d. 2. d. 5. d. 8. b. 11. d. 14. d. 3. c. 6. b. 9. c. 12. b. 15. d. A less than perfect score means that your lease matters are best left to a competent lease specialist. 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.

9


The Professional Advisory

Vo l. 57 : NoV ember 2012

The Issue of “the Micromanager” - Revisited Commonalities of Micromanaging Practitioners Micromanaging practitioners seem to display common characteristics.

DR. RON WEINTRAUB www.innovativepracticesolutions.ca

Please send comments to drronips@rogers.com. Management styles continue to give rise to debate among professionals. One of the styles prevalent within organizations often discussed is micromanagement. To understand the rationale for this management style popping up in dental practices deserves a close look since its negative effects plague a number of them. The most pressing question to ask is what changes have occurred within the practices affected that cause the issue to become more prevalent and reveal dramatic negative effects on the operation. What is the rationale for this style? What are the common threads within the practices? What are the effects of such a style? Micromanagers of dental practices have characteristic commonalities, negative influences on staff, and experiences of personal stress. Current Trend in Dental Practices One noticeable change in dental practices is the recent trend of having larger operations that are more complicated to manage. Some owners feel the need to oversee every facet of office interactions closely on an hourly basis. Not only does this behaviour invariably lead to fragmentation of their concentration, but also irritates and disempowers team members. The larger the environment, the more apparent the ensuing deleterious effect on productivity and office morale becomes. The current prevalence of this problem and the resultant limited success of otherwise potentially effective practices are the motivating force to investigate.

Clinically Advanced Though clinical expertise itself is not a precursor to having micromanaging tendencies, one of the most surprising findings is realizing that many micromanagers are, in fact, outstanding clinicians (to some extent because of their overarching attention to detail.) These practitioners’ extensive skill sets allow for outstanding clinical results. Many offer expanded in-house services and have completed appropriate post graduate education to provide them. Some examples include advanced surgical procedures, complex implant placements, larger occlusal rehabilitative services (crown and bridge), and multi-rooted endodontic therapy. Perfectionists Many of the affected practitioners are fastidious about exacting procedures with very little tolerance for lack of seeming perfection. Non-Collaborative Leaders A common link among them is the shared perception that their “vision” of the dentistry and protocols leading up to their visions were solely determined and implemented “their way”. Outsider input, when sought, had to be reframed through the personal lens of the particular practitioner. Perhaps the most ubiquitous trait noted among micromanaging practitioners is the third point on our list. Non-collaborative leaders are often surprised to fall short of their expectations and presume that it was the lack of team members “getting it”. Most of them had trust issues concerning many aspects of the practice as well as of their team. Each one took an authoritative “top down” stance on decisions and sought very little, if any, input from those charged with the responsibility of implementing policy 4 10


The Professional Advisory

while expecting seamless compliance on the part of the staff. Trauma Experienced By Team Members Resulting from Micromanagement Common threads found among team members resulting from micromanagement are the following: 1. Loss of confidence in their abilities to problem solve independently. Consequently, they attempt to emulate what they believe the owner wants them to do rather than what they think they should do thereby eliminating one of the effective approaches to problem solving. 2. Resentment is created in response to top down management edicts. Additionally, team members “play it safe”, shy away from independently problem solving and think “inside the box”. Such behaviour eliminates creativity and possible solutions to a problem unknown to the micromanager; therefore, this limits the effectiveness of human resources. 3. Refusing to take responsibility. Team members “distance themselves” from negative outcomes and shift blame to others in the practice. 4. Negative job satisfaction results from being on the receiving end of significant micromanaging consequently ends in high staff turnover, which is perceived negatively by patients. Trauma Experienced By Micromanaging Practitioners Practitioners with micromanaging tendencies also suffer trauma.

Vo l. 57 : NoV ember 2012

1. Lack of perceived success. Many practitioners become frustrated by the perception that there is insufficient success proportionate to the significant effort they expend. 2. Decrease in productivity. As a result of split focus between that which only they can provide and the responsibilities for which they are paying others to manage, they have less time to fulfill their main objective of providing optimum oral care for their patients. 3. Ineffective use of time. Because practitioners often supervise staff closely to ensure complete compliance, they have less time to complete their professional objectives. 4. Lack of confidence in staff. Not trusting staff manifests in leaders’ inability to have confidence that things are being handled “correctly” unless they have had a hand in it. 5. Control of finances. Micromanaging practitioners often insist that they are the only ones capable of discussing financial components of treatment with patients thus producing stress of providing care for patients and needing to consult with them about finances. Micromanaging practitioners can avoid many pitfalls of this management style by remaining open and committing themselves to team management concepts whenever possible. If necessary, there are many organizations designed to assist with these important transformations. Empowering our team to think and act independently will ultimately liberate owners and provide the greatest opportunity for success! PA

Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-five years of knowledge and experience in the practice of general dentistry to the Professional Advisory. Large companies such as Patterson Dental, Ash Temple Ltd, Henry Schein Arcona, & the former Canadian Dental Co. have benefited from his insight. As 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.

11


The Professional Advisory

Vo l. 57 : NoV emb er 2012

Tax Traps and Opportunities When Selling Your Practice DAVID CHONG YEN CFP, CA www. dcy.ca

to qualify for the CGE. • Before you sell your PC/HSC shares, non-practice assets such as cash, investments, insurance policies and sometimes real estate must be removed. This also takes careful advance planning in order to minimize taxes payable when these assets are removed from the PC/HSC.

Please send comments to dcy@dcy.ca. The time to plan for the sale of your practice is usually several years before the actual sale, since most sellers want to sell shares of their professional corporation (PC), not assets. This is because sellers of shares often qualify to get the first $750,000 of profit tax-free under the capital gains exemption (CGE) rules, with tax savings up to $174,000. Here are some things to consider if you plan to sell shares: • Even if you are fully sheltered by the CGE, you may have to pay the alternative minimum tax (AMT). Because AMT paid one year can be offset against taxes due in the following seven years, it is closer to a prepayment of future taxes than a real tax, but can still be an unwelcome cash flow hit in the year it first comes due. • If you can organize the PC to include more shareholders than just the dentist, you can There are often other provisions which can be included multiply the CGE, but this can take several years’ in the sale contract which will benefit the seller: planning. • If the seller’s spouse was getting salary from the • Even dentists who have not incorporated their practice before 1995, there may be scope to pay practices during their career can, with proper the spouse a “retiring allowance”, which is taxplanning, set up a PC before selling the practice, deductible to the PC but can be transferred taxand benefit from the CGE rules; however, the free into the spouse’s RRSP. CGE cannot be multiplied in this case. • The seller may own the premises, and become • Some dentists have transferred their hygiene/ the buyer’s landlord, so the terms of the lease technical services to a new hygiene/technical agreement, and possible option or first right of services corporation (HSC), to be owned by refusal to buy the building in the future, must be another family member, in order to multiply the carefully structured. The lease should address CGE, since the new HSC must be sold at the questions such as the renewal options, and who same time as the PC. Again, the HSC must be bears the risk of future increases in insurance, set up at least two years prior to the sale in order property taxes, etc. 4 12


‘‘

The Professional Advisory

Vo l. 57 : NoV ember 2 012

For most dentists, their practice is their biggest asset, and selling their practice is a huge financial, and emotional issue. For that reason, dentists will often spend years to secure their own financial future, and ensure their patients’ long-term needs are well taken care of.

• The seller can arrange to have payment for his services as an associate paid to his new PC, with ownership perhaps shared with a spouse to allow for future income-splitting/tax savings. • Even if the seller is not staying as an associate, there may be scope for setting up a training or transition administration contract, with payments fully deductible to the buyer, and payable to the seller’s new PC, which could offer further income-splitting/tax saving opportunities. • The buyer will usually insist on a restrictive covenant in the agreement, covering where and for how long the seller may not set up a competing practice, which the seller should review with a lawyer. Contracts for sales of shares generally include extensive warranties given by the seller, since when buyers take over shares, they are also assuming any debts or legal obligations attaching to the PC. One legal issue which you should discuss with your lawyer at this point is who bears any liability for severance or retirement payments for staff who do not fit the buyer’s staffing needs. The seller must be alert to what future commitments are made in the agreement. Sellers should also review any possible extra payments/

‘‘

penalties required to terminate equipment leases. The sale may be structured as an asset purchase, either because the seller has used the CGE already (or intends to in future), or because it is more tax advantageous to do so. Most buyers prefer asset purchases, since assets can be written off over time for tax purposes, whereas the price paid for shares cannot. Sellers of assets should review carefully the allocation of the sale price to the various assets being sold, given the very significant implications for both buyers and sellers of how this allocation is made. Although most dental PC’s are not registered for HST, this still can be an issue in asset sales: for example, sales of leaseholds are subject to HST, so the buyer may want to minimize allocations to this asset class. For most dentists, their practice is their biggest asset, and selling their practice is a huge financial, and emotional issue. For that reason, dentists will often spend years to secure their own financial future, and ensure their patients’ long-term needs are well taken care of. It only makes sense to begin well in advance to think about good tax planning to be sure you keep as much as possible of what you are paid for your practice. 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) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. Visit our website at www.dcy.ca.This article is intended to present tax saving and planning ideas and is not intended to replace professional advice. 13


The Professional Advisory

Vo l. 57 : NoV emeber 2012

What Are Associates Thinking? DAVID LIND www. ppsales.com

Please send comments to david.lind@ppsales.com. If you have a great associate consider yourself lucky but be very aware that things are not always as they seem. The associate role in dentistry is a long-proven way for principal dentists to expand their practices, take more time off, offer additional services, cover the evenings and weekends, find a potential purchaser, perhaps mentor a young dentist, and a myriad of other factors. From the perspective of the associate, it is an opportunity to “practice” dentistry to become better, faster, and more capable of handling the tough situations that arise. It is also an opportunity to see how different styles work, to gain some insight into the business side of dentistry, learn to partner with the entire dental team, determine what kind of practice suits you (large group, small professional building, retail setting, etc.) and Oh Yes, earn some money. In essence, those two sets of objectives provide benefits to both the principal and associate dentists. If both of these groups understood and respected these objectives this would be the end of this article and the lives of dentists and associates would be far better. Unfortunately, that is not the case. Over the last few months I have been made aware of several situations that have arisen between associates and their principal dentists that to my mind defy logic. However, I am old enough to know that I certainly do not have all the answers. I do, however, have a strong sense of right and wrong and some of these things are wrong on every level!

mediate a discussion on the merits of the plan and the go-forward strategy. In general, I am not a fan of the “staged buy-in” for the reasons explained in my article in issue #47 of The Professional Advisory, since we are asking people at the opposite ends of their careers to become partners, their objectives are at opposite ends of the spectrum. In this case, the young associate expected to be granted the right to buy a small percentage of the practice at their option. There is an expectation that the price would be reduced both to reflect improvements to the practice from the implementation of their ideas and because they have established relationships with patients There is also an assumption that they would be involved in all decisions in the office and that they would have first right of refusal on any future equity stake, with the future price based on current results. Really? What are associates thinking?

Then there is the case of the young dentist who moves to a small town and joins a mature dentist’s practice on the understanding that they will buy the practice in a few years when the mature dentist retires. A few years pass and everything is going well until one day the principal hears through the grapevine in town that the construction taking place a few doors down is actually a new dental office….for his associate. When Let’s start with the new associate who has been confronted the associate says, “I have been meaning to associating/working in the practice for a few months. tell you about that”! Needless to say, the relationship They are full of energy, have some great ideas that have ended in a strained manner. As it turns out, the people been implemented, and have started developing some in the small town were not too thrilled about the bonds with patients and staff. The topic of “buying-in” associate’s tactics and most patients have stayed with comes up. I am retained to meet with both sides and the principal dentist. What are associates thinking? 4 14


The Professional Advisory

‘‘

Vo l. 57 : NoV ember 2012

From the perspective of the associate, (the associate role) is an opportunity to “practice” dentistry to become better, faster, and more capable of handling the tough situations that arise.

Lastly, there is the case of the long-term career associate who is just a little younger than the principal dentist who is preparing his practice for sale. This associate has treated the same patients for many years and the patients consider the associate their dentist. No contract exists. The associate does not wish to buy the practice but when advised that the practice is going to be sold, advises the principal that they would like to be compensated for “their goodwill” in the practice. Further, they will try out the new situation and stay on only if they are satisfied and, if the already overpaid compensation they receive is honoured. If they are not satisfied, the associate will leave and will be entitled

‘‘

to take “their patients” with them. . The vendor’s plans were held up for several months as he tried to reason with the associate. In the end, expert dental lawyers got involved and were able to convince the associate that they had no “ownership” of the practice. What are associates thinking? I harbour no malice towards ethical associates. I believe it is a great career path for dentists to gain experience. It is not a way, however, to build goodwill. That is done by building or buying a practice and assuming the risk and responsibility of being a dental practice owner. 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

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”.


The Professional Advisory November/2012