The Professional Advisory Vol. 71

The Professional Advisory

71

FOR DENTAL PROFESSIONALS

VOL. 71 September 2015

Don’t Ask and You Shall Not Receive

ProfessionalAdvisory.ca

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Contents

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Don’t Ask and You Shall Not Receive

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Caveat Emptor: Buyer Beware the Importance of Due Diligence in the Purchase of a Dental Practice

Ralph Crawford BA., DMD

Dr. Ron Weintraub

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Exemptions: Protecting Your Most Important Assets From Taxes David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP

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Smooth “Sale-ing”

Biographies Ralph Crawford is an Honours Graduate from the University of Manitoba and has enjoyed a varied dental career. Prior to being editor of the Canadian Dental Association Journal from 1989 to 1997, he operated a Winnipeg private practice concurrently with being a clinical instructor at the University of Manitoba. He served as President of both the Manitoba Dental Association and Canadian Dental Association.

Ron Weintraub is the founder of Innovative Practice Solutions (IPS) and former owner and founder of Bayview Village Dental Associates and Downtown Dental Associates. He practiced dentistry from 1963-2004 and has consulted on behalf of major dental suppliers, manufacturing companies, as well as individual dental offices for over 20 years. In 2004, Ron gave up clinical practice in order to focus solely on Practice Management.

David Chong Yen and his chartered accounting firm currently advise hundreds of dentists and healthcare professionals on tax, estate and financial planning, valuations and accounting. David obtained his Bachelor of Arts degree from the University of Toronto, attained his Chartered Accountant’s Designation while working at an international firm and has subsequently completed the CICA In-Depth Tax Courses.

David Lind MBA

Associate Professional Corporations – Include Your Family Members

David Lind is a Principal and Broker of Record 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

David E. Rosenthal BA., LL.B

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Be Retired and Grow your Portfolio!

Mark McNulty BA, CFP®, CM®

Current Trends in Dental Practice Leasing Ian D. Toms B.Sc. (Hons)

David Rosenthal is a senior lawyer whose law practice is devoted to business, corporate and healthcare law for dentists. David advises dentists on a broad range of legal matters, with particular emphasis and legal advice on purchases and sales of practices, corporate reorganizations and professional corporations. David also speaks frequently about such matters, including guest lectures at the faculties of dentistry.

Mark McNulty is President of McNulty Group, a firm responsible for managing $250 million of Ontario dentists’ retirement savings.

McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. Mark is the author of The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement, and The $6 Million Dentist: Successful Succession in 7 Modules.

Ian D. Toms is a nationally recognized real property lease consultant with over 27 years experience. He is considered an authority on tenancy issues, lease features, facilities and technicalities, and the art of tenancy negotiation. Ian has drafted and negotiated thousands of lease arrangements for national retail and medical professional tenants in 16 states and 8 provinces, with a specific emphasis on the GTA.

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“The Professional Advisory consists of a group of six independent professionals who provide services to the dental profession, each of whom 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.”

Notes from the editor:

Don’t Ask and You Shall Not Receive Ralph Crawford BA., DMD crawford@dccnet.com

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rowsing through my breakfast newspaper not long ago a column headline in The Vancouver Province caught my attention: Don’t ask and you shall not receive. Reading further I noted it was a Question and Answer column under the title of “Coach’s Corner” written by Linda Hamilton.

Linda is a Master Certified Life and Executive Coach and a winner of two Entrepreneur of the Year awards in 2003 and she writes the Province’s Coach’s Corner monthly. The question directed to her in this particular issue was from a couple of consulting business contractors who questioned whether they should bid on a contract they would love to have even though the particular contract had been awarded to another company over the past five years.

Ms. Hamilton’s response to the contractors was quick and positive: “Unless you throw your hat in the ring, you aren’t going to get the contract or grow your business”. She went on to develop her positive response with the headlines Don’t assume anything and Ask for the business and then went on to emphasize that asking demonstrates strength, confidence and initiative. She concluded by giving three tips for asking: ask clearly and confidently, keep it real and keep it simple.

When we take a moment and think about the title of our publication – The Professional Advisory – and even take “Advisory” to the Canadian Oxford Dictionary for clarity, we find that the dictionary’s definition having the power to advise: giving advice is truly what The Professional Advisory is all about. And by reading each of the articles you can ask yourself questions and you will be sure to get answers. If you don’t ask you shall not receive.

If you are thinking of purchasing a practice, read with care Ron Weintraub’s article, Caveat Emptor: Buyer Beware the Importance of Due Diligence in the Purchase of a Dental Practice. There you will find real answers to the many fac-

tors influencing purchases and sales. Thinking of retiring and asking yourself if you will have enough income? Mark McNulty’s Be Retired and Grow Your Portfolio, with its emphasis on what he calls The Portfolio Paycheque, answers the retirement question in four steps that shows growing your portfolio while retired is possible. And who doesn’t think family is important? In Associate Professional Corporations – Include Your Family Members David Rosenthal carefully outlines the many factors/questions involved in family benefits and concludes, “proceed carefully and with benefit of proper and expert professional advice”. Don’t Ask and You Shall Not Receive!

Day to day which one of us doesn’t give some thought and asks questions about paying taxes? In their article, Exemptions: Protecting Your Most Important Assets From Taxes, David Chong Yen and Louise Wong provide real answers to sheltering two of your most important assets from taxes – your principal residence and capital gains. In buying and selling a dental practice no doubt questions such as – what will happen to the patients and will the dental team stay with the new owner – will arise. David Lind’s Smooth Saleing” clearly answers these and other questions. Any reader wondering and questioning the status of their lease will certainly find answers in Ian Tom’s Current Trends in Dental Practice Leasing. Ian, step by step advises, “You need to change with the times or the times will change without you”.

Yes, within these pages there are excellent answers to questions you may be asking. Because here is a truth: none of us are perfect. And if we’re not perfect, ask for help. Because if you don’t ask, you shall not receive.

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Caveat Emptor: Buyer Beware the Importance of Due Diligence in the Purchase of a Dental Practice Dr. Ron Weintraub

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ransition (buying or selling) of existing ongoing dental entities seems to have significantly increased in the last few years. Many factors have influenced the heightened levels of purchases and sales. Among them are the following: 1. The increased evaluation prices attached to practices with a decent patient count.

2. The large numerical disparity between potential sellers and purchasers found in the market.

3. Extraordinarily low interest rates and the desire of financial institutions to attract dental clients by offering complete financing, often below prime.

4. The number of “Investor Dentists” who desire to own a number of different practices situated in various locations.

5. Corporate entities that have owned and run a significant number of offices purchased from transitioning dentists who remained in place for often up to five years to provide a level of continuity tend to drive up the “sticker price” on many practices.

6. A large number of internationally trained dentists who have run successful practices in their country of origin and do not wish to follow the associate route are frequently represented in the purchasers pool, and 7. The recent phenomena of Canadian dental faculties increasing their graduate numbers.

It is not unusual to see evaluations in the 1.4 to 1.8 K ranges for a practice in large urban areas having a reasonable patient base providing the potential of an ensuing bidding war.

This type of scenario could raise the actual outlay by as much as 20 per cent over the evaluated asking price.

ASSESSING THE EVALUATION Active practice brokers accurately represent the numbers that reflect the performance of the practice as it currently exists based on the information provided; for example: 1. Number of patients 2. Variety of multiple procedure codes 3. Number of actual patients of record that practitioners provide should reflect an honest opinion of the ongoing historical success of the practice. Practice brokers discharge their fiduciary responsibilities by reporting the data they

have requested from the vendor dental office.

The report can record only the data that has been provided to them, and they are not responsible for any deficiencies not made available. Production by departments, for example, hygiene department or denture therapy, is usually taken directly from computer reports, which may or may not accurately reflect reality.

4. NOTE: Crucial information not provided by typical practice valuation is subjective and requires independent analysis by the purchaser.

EVALUATING A POTENTIALLY TRANSITIONING PATIENT BASE What do we need to know about the patient base, goodwill, and staff when evaluating possible change in the practice?

PATIENT BASE

1. A demographic analysis of the patient base should indicate where patients are presently located in relationship to the office. Their proximity to the dental office is an indicator of their potential willingness to remain with the new owners of the office. Long-standing patients of the previous owner are at risk of leaving during the transition as they reassess their relationship to the new incumbent.

2. How easily will a patient accept the possibility of a more proactive approach to diagnosing pathology and subsequent treatment recommendations that could vary from the approach of the “Let’s watch it” habit of the previous trusted practitioner?

3. Is the practice philosophy of the purchaser compatible with what existing satisfied patients had become accustomed?

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4. How likely will extremely committed patients follow the vendor dentist if he/she sets up a new office even if it were just outside the territorial limits prescribed by the agreement of purchase and sale?

5. Does the existing philosophy seem to exhibit the flexibility and growth potential to embrace the inevitable changes that the new owner wants to adopt in the office?

6. Is the practice run on an insurance driven basis and may be hyper sensitive to attempt to diagnose a treatment plan for patients’ actual needs as opposed to what their coverage may be?

7. Has the potential purchaser been given a breakdown of the type of insurance benefits of patients? For example, does the purchaser know the number of patients on the Ontario Disability Support Program or who are welfare recipients?

GOODWILL

Many prospective purchasers look at the net profit displayed in the evaluation and forget to adjust for the fact that at least forty per cent of the dentist’s personal clinical production should be removed from the goodwill being purchased. This portion of the goodwill could be replaced by associate percentage fee allocation without having to pay for the privilege.

In multi-provider practices, what is the status of long serv-

ing practice associates who may feel that part of the goodwill allocation attributable to them, but the vendor dentist has no legal obligation to compensate the associate in the event of the sale. That individual, who often has no contract, may decide to move to a nearby facility and most of his/her patients and records could follow.

STAFF

1. How many of the long serving staff would have difficulty in transitioning their loyalty from the former owner to the new owner? For example, commiserating with patients who miss their previous relationship with their dentist can hinder a successful changeover.

2. What is the predominant ethnic distribution within practice providers and patient population?

These are only some of the areas that may not be fully dealt with by a typical practice valuation document. Many areas of the practice can be brought to light by intensive scrutiny during the due diligence phase. A number of professionals, if deemed necessary, could provide assistance during this crucial period. Many lawyers and accountants with dental knowledge, practice management groups, and perhaps dental supply personnel who are familiar with that particular practice would be able to smooth the way to a potentially successful conclusion for vendor and purchaser.

Please send comments to

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.

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Exemptions: Protecting Your Most Important Assets From Taxes David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP

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or many dentists, the two largest financial assets are your home and dental practice.

While you may want to hold on to these assets for your entire life, there may come a time when you choose to sell them or be forced to sell them in the eyes of the tax department due to death. With the appreciation in values of both home properties and dental practices, a sale of this magnitude could trigger an enormous tax bill. Fortunately, the government provides tax tools which allow you to minimize taxes on the sale and potentially pay no taxes at all. These tools would be the Principal Residence Exemption (PRE) and the Lifetime Capital Gains Exemption (CGE).

PRINCIPAL RESIDENCE EXEMPTION Your home is one of the few entirely tax-exempt personal assets you will ever have. Any gains on the sale of your home are tax-exempt provided you meet the following criteria: 1. The property must qualify as a principal residence. In general, the property could be a house, condo, cottage, mobile home, trailer or a house boat.

2. You and/or your spouse or common law spouse (if you are married or living common law) must own the property.

3. The property must be “ordinarily inhabited” by you, your spouse/common law spouse or child during the year.

In general, this means you lived in the property for at least a short period of time each year. The PRE does not apply to investment or rental properties.

Other rules to be aware of when claiming the PRE are as follows: 1. You and your spouse can only designate one property as a principal residence each year. If you own two homes (i.e., one house and one cottage), only one of the properties will qualify for the PRE (except if owned prior to 1982).

2. In the year of sale, the PRE rules allow you to effectively claim two properties as your principal residence for that year, saving you some taxes on the sale of your second property.

3. If you own more than one principal residence, you can pick and choose which years each property is designated as the principal residence. Depending on the year-to-year appreciation of the two properties, this could result in significant tax savings.

4. You only have to designate a property as a principal residence in the year of sale. Therefore, you can defer this decision and discuss it with your accountant when it comes time to sell.

5. You can multiply the PRE by helping your children over 18 purchase their first home or condo. When the child is ready to sell their home, the gains are tax-free.

With a single family home, claiming the PRE is simple. In most cases, you don’t have to report the sale of the home on your tax return. In the case of multiple homes, special election forms will have to be filed to designate the property as a principal residence and for which years this was done.

CAPITAL GAINS EXEMPTION There is also an exemption on the sale of your dental practice. The first $813,600 (based on 2015, indexed to inflation each year) of capital gains on the sale of qualifying shares is exempt from regular income tax due to the CGE. This exemption requires significant planning to ensure you qualify.

Here are the primary criteria to claiming the CGE. 1. The CGE applies only to small business shares. If you don’t have a Professional Corporation (PC) or hygiene/technical services corporation (HSC/TSC), you likely can’t claim the CGE.

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2. Your PC/HSC/TSC must meet the following tests: a. You and/or someone related to you must have

owned the shares for a period of at least 24 months prior to the sale. b. You cannot have more than 50 per cent of the value of your company’s assets in the form of excess cash and investments including stocks, GICs and non-dental real estate during the past 24 months prior to sale. c. You cannot have more than 10 per cent of the value of your company’s assets in the form of excess cash and investments at the time of sale.

3. You and other equity shareholders of the PC/HSC/TSC must have CGE available. Consider the following: a. If you have claimed the CGE on a previous sale, you would only be able to claim a tax break on the remaining CGE available. b. If you have reported large losses in the past on tax shelters or bad investments, this could significantly reduce the amount of CGE you have available.

Keep the following tips in mind if you are in a situation where you do not qualify for the CGE. 1. Pay dividends to yourself or family members to eliminate excess cash/investments from your PC and/or HSC/ TSC. Ideally, this should be done over a long period of time and on a regular basis to minimize annual taxes.

2. Pay dividends to yourself if you have reported large investments losses in the past. The dividends will help clear out your past investment losses and may help you re-qualify for the CGE. 3. If you have claimed CGE in the past and do not have any CGE available, consider whether your family members have any CGE available. Multiply your CGE by making other family members equity shareholders of your PC or HSC. Each CGE is worth up to about $201,000 in tax savings.

4. If you currently don’t have a PC, the tax laws may allow you to setup a PC and sell the share without having to own the shares for at least 24 months.

5. Planning for the sale of your PC shares should start well in advance (i.e., at least three years) of the sale. This will help you reduce mental stress and minimize taxes.

Tax relief is rare. Being able to shelter two of your most important assets from taxes should not be taken for granted. With the right planning, there could be significantly more money for you and your family.

For many dentists, the two largest financial assets are your home and dental practice.

Please send comments to

This article was prepared by David Chong Yen, CPA, CA, CFP and Louise Wong, CPA, CA, TEP of DCY Professional Corporation Chartered Accountants who are tax specialists and have 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 / louise@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.

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Smooth “Sale-ing” David Lind MBA

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y three children have all been involved in a sailing camp near our cottage for many years. They have all been students, racers and instructors there over the last 15 years. During this time the club has had about five different Commodores and new Head Instructors every two years. Despite this, enrollment of students has remained strong and the sailing community is very vibrant. What does this have to do with dentistry and the buying or selling of a dental practice? The parallel is that while the leadership and instructors at the camp change, the membership and students continue on, just as it should be when the leadership or principal dentist changes in a dental practice.

One of the biggest concerns expressed by both our buyers and sellers during the time they are considering buying or selling a practice is “what will happen to the patients?” The sellers worry whether they will stay with the new owner and whether they will be treated fairly and compassionately. They also worry about the team. Will they be treated respectfully, and will they stay with the new owner? The buyers worry about attrition and will they be able to retain a healthy percentage of the patients. Given that the goodwill component of the purchase price of a practice is averaging around 80 per cent of the value, these are very valid concerns.

In order to make the transition from seller to buyer go smoothly and in order to transfer the goodwill successfully, there are several important steps to take before, during and after the sale. Before the sale, the seller must recognize that while we are in a very good market, buyers are smart and well advised, so nothing will be kept from them. There is no point in trying to paint a picture that is not real. Your practice will be assessed on its merit, and will be based on what has happened over the last three years, not what might happen in the next three years. What you can do is de-clutter, purge your charts, make sure the office looks fresh and clean, and have good competent staff members who are paid reasonably.

You also should decide fairly early in the process if you will stay for a transition period. If the practice is large enough to allow for a transition, this is the best way to insure maximum

goodwill transfer. I will write further about the stay or go decision in a future edition of The Professional Advisory.

During the sale process, remember that your practice will be analyzed meticulously.

Keep the practice vital, and the new patients flowing. Remember that everything you do or don’t do will be looked at. Try to keep the practice in a steady state, do not “have one foot out the door” until the deal closes. Assuming you are working with a broker, inform them of your wishes for timing, transition and let them know the kind of person that would be an ideal fit.

The fit is determined by practice philosophy, protocols of treatment care, and patient expectations.

The best chance for a successful transition is by putting a round peg in a round hole. Both buyers and sellers should be supported by an experienced team of experts during this process.

Buyers should be flexible in their desires but have a clear vision of what they would like to buy. Become educated on the market and get to know all the brokers. When the time is right, act swiftly and confidently and be prepared to be aggressive. Think about your practice as a 20 plus year investment and make an offer with that time horizon in mind.

During the purchase process, be prepared to spend time analyzing the practice financial metrics, patient charts and demographics and the geographic area. Utilize experts in the field for help in this analysis and remember that nothing is perfect. You may find the perfect patient base but the practice is not digital. Things like that should not stop you. What should stop you is if you determine that you have major philosophical differences or a large skills gap with the vendor.

Those differences would be hard to overcome and a successful transition would be difficult. After the closing, remember

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that what you bought was not broken. You do not need to fix it! Resist the temptation to put your stamp on the practice immediately. The most important things to do are treat the staff with the utmost respect, you need them to help you with the goodwill transfer and, treat the patients gently and with kind compassion. You will have lots of time to make the changes you want over time. During the first year, the fewer changes, the better.

If you follow those steps both buyers and sellers can enjoy smooth “sale-ing�, just like my kids sailing club does!

The best chance for a successful transition is by putting a round peg in a round hole.

Both buyers and sellers should be supported by an experienced team of experts during this process.

Please send comments to

David Lind is a Principal and Broker of Record 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

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Associate Professional Corporations – Include Your Family Members

David E. Rosenthal BA., LL.B.

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n volume 63 of The Professional Advisory I wrote about associate agreements from the associate’s perspective. As stated in that article, the associate can be an individual dentist or a dentistry professional corporation (PC). Due to space limitations that article did not discuss the use of a PC. This article considers some benefits of a PC as the associate.

Before you proceed, an initial step is to review your existing associate agreement to confirm it permits you to use a PC as associate. Typically the agreement will provide the associate can do so upon prior notice to the principal, provided the associate dentist personally guarantees the PC obligations under the associate agreement. If the associate agreement does not permit use of a PC, then you need to speak with the principal dentist to obtain the principal’s prior consent to use a PC as associate.

There are many potential tax benefits in using a PC as the associate. Those benefits can extend to the dentist’s specified family members. It is always worthwhile to contact your accountant to determine if it is appropriate to use a PC as the associate and involve your family members.

The laws permit specified family members of an associate dentist to be non-voting shareholders of the dentist’s PC. A “family member” means a dentist’s spouse, child or parent.

Having such family members as non-voting shareholders can result in substantial tax savings for the family unit.

Creating the proper share structure for your PC with non-voting shares is a critical step and your tax and legal advisors will assist you in that process. Consider in particular whether the PC non-voting shares to be issued to your family members participate in the annual profits only (‘non-equity’ shares) and/or in the PC’s growth (‘equity’ shares).

For an associate PC, issuing ‘non-equity’ shares to your family members is the typical route. These shares have the right to a variable dividend in an amount determined in each year by you in your sole discretion. For maximum flexibility

each family member should have a different class of shares. That way in each year you can declare different dividend amounts on each class, depending on the needs of each family member shareholder. For example, your parent may need assistance with living expenses, while your spouse needs nothing at all that year.

Minor children (under age 18) cannot own shares in their own name. Shares for your minor child must be issued to a trustee on the child’s behalf. Current tax laws discourage paying dividends to shares held in trust for minor children.

Typically no dividends are paid on the minor child’s shares.

When the child reaches 18, the shares are transferred directly into the child’s name.

A shareholders agreement is essential if family members receive (i) ‘equity’ shares or (ii) ‘non-equity’ shares that are not redeemable by the PC. A shareholders agreement is a private contract between the shareholders. Your associateship dental practice is your livelihood. It is critical that you, the dentist, and not your family members, have absolute control of your PC at all times.

You might be surprised to learn that non-voting shares of a PC (or any corporation) have voting rights under the Ontario Business Corporations Act in certain cases. In some circumstances shareholders are entitled to vote separately as a class, whether or not that class of shares carry the right to vote. Imagine the scenario where you do not have a shareholders agreement and you need to reorganize your PC share structure, but your family member will not agree. This can be

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dealt with in the shareholders agreement by family members giving a voting trust or power of attorney in favour of the dentist relating specifically to the PC shares.

Consider other events such as death of a family member or divorce or separation from your spouse. Those events are stressful enough. The shareholders agreement should specify what happens to the family member’s shares. For example, the shares might be redeemed by the PC or purchased by the dentist. The shareholders agreement should deal with how those shares are going to be valued and the terms of payment.

The dentist must remain in control of the associate PC regardless of changing circumstances. A properly drafted shareholders agreement will ensure this. The ideal time to complete the shareholders agreement is at the beginning of the process when the shares are issued to family members.

The rules permitting family members to own non-voting shares of your associate PC present significant tax planning opportunities and potentially substantial tax savings for you and your family. However, the laws are complex. Proceed carefully and with the benefit of proper and expert professional advice.

There are many potential tax benefits in using a PC as the associate. Those benefits can extend to the dentist’s specified family members.

Please send comments to

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.

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Be Retired and Grow your Portfolio!

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any of the professionals we work with have reached the ultimate level of financial independence. They have saved enough money to fund their retirement lifestyle from their portfolio, without eating into any capital. In other words, they can live off the income their portfolio generates and their nest egg continues to grow.

Take Dr. John and Mary Doe as an example. On December 31, 2010 they had a portfolio with us of $5,012,695. Every year they withdrew just under $150,000 and at the end of 2014 their portfolio was worth $5,896,515. They spent $150,000 annually after-tax in retirement and their portfolio grew.

Another family who joined our firm in 2012 started with a portfolio of $5,574,518.

They withdrew an average of just over $260,000 annually. Today their portfolio is worth $5,874,806. They enjoyed $260,000 in retirement spending after-tax and still their portfolio grew.

THE MATH Many dentists we meet have a history of what we call “bar napkin planning”. For example, they might say, “If I sell my practice and wind up with $5 million in total savings and earn five per cent on my investments, I should be able to spend $250,000”.

Unfortunately, there is problem with that line of thinking. Their computation doesn’t account for: 1. Income tax: if you are like most professionals we work with, you have money saved in RRSPs, corporations, etc. When you withdraw this money to fund your lifestyle, it is taxable. As well, the investment income you earn is taxable. In the case above, if you were making five per cent on $5 million, then that $250,000 is taxable.

2. Inflation: $1,000 today will not be worth $1,000 in 10 years.

3. Variability of investment returns: while you may assume an average return of five per cent, the reality is this will not happen every year. In 2008 your portfolio might have been down 10 per cent, so then what happens?

4. Reality: there is a big difference between talking about how you are going to fund your retirement and doing it. In other words, one day you actually have to retire. Properly

Mark McNulty BA, CFP®, CIM®

managed means you will get a steady paycheque into your bank account from your portfolio the day you retire.

This requires much more planning and organization than happens in “bar napkin planning”.

HOW WE DO IT We take a formal approach to living off the income from the portfolio through a system we call The Portfolio Paycheque. The first step we took in developing this system was to recognize there are too many variables (one through four mentioned above) to guarantee a cash flow for a long period of time, as is required for your retirement. Therefore, this is a calculation that needs to be run every year. We look at all those variables and investigate probable outcomes. We determine cash flows with which there is a high level of certainty and put risk protocols in place to minimize the volatility of cash flows that have a lower level of certainty.

For simplicity sake, assume your retirement assets look similar to those found in Column A (in the Chart on the next page). Suppose with these assets you would like to fund a lifestyle of $150,000 after-tax and indexed to inflation without encroaching on capital.

Step 1: Calculate your high certainty income

Carefully selected stocks and bonds will make periodic payments to reward their investors. Over the short-term, these cash flows can be known with a relatively high degree of certainty. In Column C, we calculate the net yield, or the interest and dividends expected to be earned over the next 12 months after management fees.

Step 2: Calculate high certainty after-tax income

Each year we would forecast the taxes for a twelve month period to help understand the level of after-tax cash flow we

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A Retirement Assets Classes

Portfolio Value

Canada Pension Plan

B

C=AxB

D=C-(Cx20%)

High Certainty Income: Annual Net Yield

Net Yield After-tax

E

F=AxE

G=F-(Fx20%)

H=Ax1.7%

Net Growth After-tax

Inflation Re-invested

Lower Certainty Income: Annual Net Growth

13

N/A

N/A

$

24,000

$

19,200

0.00% $

-

$

-

$

-

Cash and Bonds

$

3,089,524

2.55% $

78,739

$

62,991

0.00% $

-

$

-

$

52,522

Canadian Stocks

$

1,543,237

2.27% $

35,055

$

28,044

3.98% $

61,348

$

49,078

$

26,235

US Stocks

$

1,927,642

1.52% $

29,389

$

23,511

5.27% $

101,562

$

81,250

$

32,770 14,495

Global Stocks

$

852,620

1.90% $

16,200

$

12,960

1.42% $

12,073

$

9,658

$

Emerging Market Stocks

$

331,905

0.15% $

497

$

398

3.04% $

10,101

$

8,081

$

5,642

Total

$

7,744,928

2.37% $

183,880

$

147,104

2.39% $

185,084

$

148,067

$

131,664

Required $

150,00

Required to meet shortfall $

2,896

$

145,171

After-tax shortfall -$

2,896

Available of re-investment $

145,171

$

13,507

should expect. In the case above, this was roughly 20 per cent.

Using 20 per cent average tax, we can calculate high certainty after-tax spending in Column D. In our example above, we plan to have 98 per cent of the after-tax spending required for the next twelve months to come from high certainty income sources. A further $2,896 will need to come from lower certainty income sources.

Step 3: Calculate lower certainty after-tax income

We consider capital appreciation of stocks and bonds as lower certainty sources of income. While this growth has historically produced positive returns over the long run, over a twelve month period the track record is less certain.

Our estimate of future growth begins with historically observed price growth across broad market categories. We then consider whether this level of growth could be expected to continue in the future given what we know today, and adjust downward if required.

In Column G we arrive at our estimated income from net growth after-tax. Taken at face value, this income may appear to be significantly greater than what would be required to fully meet the $2,896 of shortfall from high certainty income. All this growth should not be considered surplus growth however, but rather growth critical to the portfolio. Sufficient income must be re-invested to the portfolio over the long term to help it outpace the effects of inflation (the rate at which goods and services go up in price over time).

Over the last ten years, inflation has been 1.7 per cent in Canada. Therefore, we estimate that 1.7 per cent of the portfolio’s value at the beginning of the year must be re-invested by the end of the year to allow the portfolio to maintain its true purchasing power. The growth required is calculated in Column H and, as indicated, would allow for sufficient re-investment to offset inflation. In fact, there would be a projected $13,507 surplus of growth which could be re-invested to

increase the percentage of high certainty income from the portfolio as a risk protocol in future years.

Step 4: Do it all again

Laws change, geo-political events occur, you may decide to give money to your grandchildren today so you can experience them enjoying it... these changes make it necessary to re-do this process frequently to keep your plan adaptable to your needs and to future events not envisioned yesterday.

Growing your portfolio while in retirement is possible, but it requires an often time-consuming focus on organization and repetitive income modelling, elements generally not present in typical investment strategies.

There is a big difference between talking about how you are going to fund your retirement and doing it.

Feedback can be sent to info@mcnultygroup.ca

Mark is President of McNulty Group, a firm responsible for $250 million of Ontario dentists’ retirement savings. McNulty Group helps professional families transition from a life of successful practice to a stress-free retirement by using a holistic approach of practice and personal retirement planning. In addition to multiple television and radio appearances, Mark is the author of The Transition Coach 2.0–A Canadian Dentist’s Guide to a Perfect Retirement and The $6 Million Dentist: Successful Succession in 7 Modules.

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Current Trends in Dental Practice Leasing Ian D. Toms B.Sc. (Hons)

T

he commercial real estate industry has changed dramatically in the past five years.

As a tenant you need to be aware of the changes and manage your position accordingly.

Remember when Sam the Record Man and A&A Records sold vinyl LPs at their flagship stores on Yonge Street? Vinyl was replaced by cassette tapes, then by CD’s, then by downloads, and now we enjoy our music streaming online. Sam’s and A&A are gone.

The buildings they inhabited are being replaced.

Remember Blockbuster Video? They rented VHS tapes from thousands of 6000 square foot retail locations, which locations were downsized when VHS was replaced by smaller DVDs. Then the chain vanished with the appearance of Netflix and Apple TV. If you have been following the news, you will have noticed that recently many retailers including Blacks, Cleo’s, Reitman’s, Ricky’s, Pier One, Target, Future Shop, Bombay, Excess Cargo, Eaton’s, Zellers, KFC, Taco Bell and Hudson’s Bay have closed or dramatically changed.

How many storefront travel agents have you seen lately? The same factors which affected these retailers affect your practice premises, and you have to adjust your approach to avoid being left behind.

Consider the reasons for this change.

▶ The internet. The internet based Facebook recently surpassed bricks and mortar based Wal-Mart in value on the New York Stock Exchange. Stunning when you think that the internet did not even exist 20 years ago. ▶ Canada is different. More people now in metro Toronto speak English as a second language than as a mother tongue. ▶ Oral healthcare has changed from a relatively low volume professional practice to a high volume retail venture.

In order to remain competitive your practice premises and therefore lease needs to change with the times.

First, your lease needs to be written to enable you to make

effective use of the internet. Many leases now require the tenant to use an internet service provider dictated by the landlord. ▶ If the internet service provider designated by the landlord does not have the capacity for you to email scan matrices, your practice will be impaired because you will not be able to send and receive patient data. ▶ Recall that not too long ago patients paid by cash, cheque and VISA. Now most payments are processed electronically over the internet. Again, you need to make sure that the internet service provider dictated by the landlord will permit you to process payments or you may lose your patient population.

Secondly, the style of real estate is changing. Your premises and lease needs to change accordingly. ▶ Big box developments are slipping out of vogue, with the mid-sized retail tenants closing or not renewing their leases.

Empty store fronts do not attract new potential patients. ▶ 10 years ago there was no storefront retail space available for lease in downtown Toronto. Now significant store front retail space at the bottom of residential condominium is available. ▶ Relocation from office space to premium retail space produces spectacular results. In some cases production doubles. Imagine relocating your practice into a former of KFC, Harveys or DQ free standing building. Retailers call these premier locations “category killers” as the location provides the operator a significant competitive advantage.

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▶ Signage is now built differently to be more attractive and consume less electricity. Your lease needs to permit you to change with the time and attract new patients. ▶ Premise size reflects much higher rent costs. Tenants are building: • smaller, well designed and efficient (boutique) practices, or • large high volume group practices offset the overhead.

Third, the type of real estate and therefore patient demographic in many areas is changing, especially in terms of age, cultural background, and patient density per square kilometre. With this change comes increased traffic congestion. The new demographic changes the rules of clinic site selection. ▶ 15 years ago downtown Toronto was empty between 5 p.m. Friday and 7 a.m. Monday because the real estate was almost entirely office towers. This area now has a vibrant residential population composed of young and older singles and couples with few families. ▶ It’s 2015. You have to market to the younger patient demographic by smart phone apps, and be immediately assessable to public transit. ▶ In a high density residential community, the population is distributed vertically rather than horizontally. This has the effect of enabling more clinics to thrive in a smaller area. It also means that you must have a long term lease, because a move of even 500 metres will change your access to your patient base significantly. Further, patients will no longer travel distances to your clinic, because the traffic is simply too congested.

You need to change with the times or the times will change without you.

You need to change with the times or the times will change without you.

Please send comments to

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

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Advisory TheProfessional Advisory FOR DENTAL PROFESSIONALS

The The Professional Professional Advisory Advisory

70

63

FOR DENTAL PROFESSIONALS

FOR DENTAL PROFFESSIONALS

VOL. 70 June 2015

VOL. 63 February 2014

Progressus

Yes Can! – aYou going

forward, advance

ProfessionalAdvisory.ca

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Left to right: David Rosenthal, BA., LL.B. Spiegel Rosenthal Professional Corporation Barristers and Solicitors Ron Weintraub, DDS Innovative Practice Solutions David Lind Principal, Broker of Record Professional Practice Sales Ltd. Ian D. Toms, B.Sc. (Hons) Broker of Record Mark McNulty, BA, CFP, CIM Director, Private Client Group McNulty Group, HollisWealth David Chong Yen, CPA, CA, CFP DCY Professional Corporation Chartered Accountants

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