The Professional Advisory
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FOR DENTAL PROFESSIONALS
VOL. 77 November 2016
Build Well, Live Well
ProfessionalAdvisory.ca ProfessionalAdvisory.ca
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Contents
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Build Well, Live Well Ralph Crawford BA., DMD
How to Invest Your Practice Sale Proceeds Mark McNulty BA, CFP®, CM®
Tenant Advocacy in Office Premises
Ian D. Toms B.Sc. (Hons) Jennifer J. Miles B.A., HBA, M.B.A., Masters in Property Economics
The Crucial Importance of Empowering Our Support Team Dr. Ron Weintraub
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Salaries Versus Dividends: Which is Right for You?
David Chong Yen CPA, CA, CFP Louise Wong CPA, CA, TEP Eugene Chu, BAFM, MAcc, CPA, CA
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The High Cost of Dying David Lind
Shareholders Agreement for Your Dentistry Professional Corporation David E. Rosenthal BA., LL.B
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. Mark McNulty is President of McNulty Group, a firm responsible for managing $300 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. Dr. 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 is the Principal and Broker of Record at Professional Practice Sales Ltd., which was established in Ontario in 1991 and is a leader in dental practice valuations and sales. Prior to joining PPS, David lead the healthcare business for CIT Financial Ltd. This gave him a strong understanding of the personal and professional needs of dentists as they entered and exited the profession. 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.
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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:
Build Well, Live Well Ralph Crawford BA., DMD
crawford@dccnet.com
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Ron Weintraub in dealing with “The Crucial Importance e are all aware of the amazing changes in the housing market across Canada, particularly in Toronto and of Empowering Our Support Team” astutely outlines the Vancouver where million dollar homes are now the norm. quiet shift in the public’s realization that the level of satisMuch has been said that the bubble will burst and today’s factory treatment depends not only on the dentist but upon big questions are “Really?” and “When?” And recently all team members. If you build the power of the support while driving alongside a huge 500 plus housing project I team well you will all live well. In discussing “The High Cost was thinking about the bubble thing but then was distract- of Dying” David Lind reminds us that it is inevitable that we ed by the headlines of the building contractor’s huge sign, are all going to pass away someday but if the dentist takes Build Well, Live Well. Somehow those concentrated words steps to plan for the eventuality – that is, if you build well jumped out at me saying, “Sure, isn’t that what life is all – it will be your practice, your employees, and most cerabout?” Added to this were the words of wisdom of Nigeri- tainly your family that will all live well. David Chong Yen an born Ifeany Enoch Onuoha that I had come across some and Louise Wong open their article with “One of the most time ago. Visionary leader and author of Overcoming the common questions dentists with professional corporations Challenges of Life Onuha once quoted, “A great building will ask is how should I pay myself?” They then proceed to build – brick by brick – a wealth of knowledge on how the various never stand if you neglect the small bricks.” When reading through this Professional Advisory issue aspects of paying oneself can be accomplished so all can you will find numerous valuable aspects of Build Well, Live live well. It may have been only a sign on a multimillion dollar Well. For example, in David Rosenthal’s “Shareholders Agreement For Your Dentistry Professional Corporation” building project that initiated the concept but when reading you will realize that if you build well around the complex The Professional Advisory the reality is that every issue professional corporate laws you and your family will live carries an important message. Whether it’s houses, well. Selling your practice? Mark McNulty’s “How to Invest dental practices, investments, families and Your Practice Sale Proceeds” wisely outlines that you’ve even dying, we are all much better off worked over thirty years to make money, so don’t rely on if we strive to Build Well so we will all luck. Build your investments well and you will live well. Live Well. Renting a premises? Ian Toms warns that the complexities of site Colin selection, negotiation andPractice lease Sales management Ross islease a Partner in Professional Ltd. (www.ppsales.com), which specializes in the valuation and sale of dental practices. He can be reachedover at (905) or 1-888-777-8825 have increased significantly the472-6000 past 10 years and or e-mail at: colin.ross@ppsales.com your lease advocate should have many years of practical experience so that your particular tenancy transactions are built well so you will live well. VOL. 77 November 2016 | The Professional Advisory
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How to Invest Your Practice Sale Proceeds
Mark McNulty BA, CFP®, CIM®
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In the past year, five of the 99 families we work with have sold their dental practices. As a result these clients contributed in total over $6,000,000 to their investment accounts with us. Along with their other savings, we are now using these funds to finance their monthly lifestyle costs. On average these clients are receiving $14,500 per month ($175,000 annually) after-tax. The most difficult question we face is deciding when we should invest the practice proceeds into their long-term strategy. In 2000, our clients’ portfolios were down between eight and twelve percent. If you had sold your practice for $2,000,000 and contributed it to our retirement account in 2008 and we had just gone ahead and invested 100 per cent of the money, then you might have been down $240,000 in the first year. That is what keeps me up at night. The five dentists who sold their practices and contributed to their investment accounts this year have worked for over 30 years to build up that value. Just because they sold this year, does that mean it is the right time to put the money into the stock market? Those of you who have read our book or articles on investing to fund your retirement know there is a difference between growing your portfolio and living off your portfolio. For example, if you invested in the Toronto Stock Market from 2000 to 2010 your average annual return would have been 8.06 per cent. If you invested in the bond market your average return would have been 6.16 per cent. So if you are growing your portfolio you would have made more money investing in the Toronto Stock Market. However, if you were living off your portfolio like the five families mentioned above, then your situation is different. You see, in 2001 the stock market dropped 14 per cent, and if you were like our five clients you withdrew $175,000. The next year the stock market also declined and again you would have withdrawn
$175,000. When the stock market did recover to raise the average to 8.06 per cent annually, you had $350,000 less in your portfolio to participate in the increase. Surprisingly, if you were in a withdrawing portfolio you would have made more money investing in the bond market from 2000 to 2010 than in the stock market. Knowing how sensitive your long range plan is to the short-term fluctuations in the stock market, how should you invest the proceeds of your practice sale? First off, for most of you this will be the first place you withdraw money from to finance your retirement. Our five families who sold their practices and retired received $14,500 into their bank account the month after they retired. We need to sustain this monthly figure for the rest of their lives, which in some cases is over 30 years. And this figure needs to keep pace with inflation. So in order to finance $14,500 per month indexed for inflation, the return on our savings must outpace inflation. Inflation right now is averaging around two per cent. So if you were to earn two per cent you would simply be keeping pace with inflation, not outpacing it. Our plans require us to outpace inflation by three per cent in order to meet these retirement cash flows, so our target annual return to meet the monthly cash flow for these clients is five per cent. Conservative fixed income investments are currently only returning about two per cent, so we cannot invest in them to meet our return requirement. So what else should we invest in? In order to outpace inflation, we will invest a component of the practice sale proceeds into stocks. According to Dalbar, a market research firm in the United States, stocks (as measured by the S&P 500, which includes the largest 500 companies in the US) returned an average of 8.19 per cent over the past 20 years. However, here’s the problem:
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You’ve worked over 30 years to make this money, so don’t rely on luck.
Dalbar’s research also shows that the average investor only earned 2.11 per cent on an annualized basis for the past 20 years. Even bonds returned 5.34 per cent over the period. The reason for this is that investors make poor decisions and are guided too much by their emotions. In 2008, the World Stock Market index dropped by 40 per cent. Most investors get nervous and sell out after a decline. When the stock market recovers, they buy back in. In other words, most investors sell low and buy high. That is why the average investor has done so much worse than the stock market as a whole. How much should be invested into stocks? To determine this we recommend using at least three years of lifestyle costs and setting this amount aside in risk-
free assets. That way, even if you experience a substantial decline in the rest of the portfolio, you have the money set aside and can allow the portfolio to recover before you need it. So out of all the investment alternatives, I would recommend putting the practice proceeds into stocks…just not right now. In other words, hold onto cash and revisit this at the end of the year. If there is no major correction in the stock market by December 31, then we begin a dollar cost averaging program to move the practice proceeds into stocks over the next 12 months. You’ve worked over 30 years to make this money, so don’t rely on luck. The likelihood your practice closing date is on the same day it’s a good time to invest in the stock market is very low.
Feedback can be sent to info@mcnultygroup.ca
Mark is President of McNulty Group, a firm responsible for $300 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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Tenant Advocacy in Office Premises
Ian D. Toms B.Sc. (Hons)
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our practice location itself is a business tool that not only provides a place for you to practice but also projects your image to employees and patients alike. Whether you are staying where you are and renewing your lease, or contemplating a move, you are facing a very complex process with multiple moving parts. The complexity of site selection, lease negotiation and lease management has increased significantly over the past 10 years, especially in the office building market. The support of an experienced, academically qualified, technically skilled and savvy commercial real estate advisor who can manage diverse stakeholder relationships is essential. Your advocate should understand the office leasing market and have established connections within the landlord and brokerage community.
Did you know that vacancy in the downtown Toronto office leasing market is currently less than two per cent? When looking for space in this market just getting into the game can be a challenge without the right credentials and connections. In order to properly represent your interests, your advocate should have many years of practical experience navigating clients through all types of complex tenancy transactions, in all market cycles, and in various office communities. Steering tenancies through very tight landlord friendly markets requires superior ability. Your advocate should know the buildings and know the opportunities.
The right person, the right call, the right building and the right approach. You need an advocate who can take the lead in negotiations to address your current and future business needs, not settle for an “acceptable” tenancy arrangement as presented by the landlord. A competent advocate can have many issues adjusted in your favour that you may believe are non-negotiable, issues that you may not even realize could have an impact on your future business plan.
Jennifer J. Miles B.A., HBA, M.B.A., Masters in Property Economics
Your advocate should understand your business plan and work to negotiate a lease that supports it.
Your lease needs to be just right for you, so your advocate needs to know the business side of your practice as well as you do! Your lease and your practice environment should be the end result of expert market knowledge and carefully modelled financial arrangements created with your use and future practice plans in mind. Your advocate should protect your position by minimizing your risk, reducing your operating and occupancy expenses, mitigating your exit restoration exposures, and providing future flexibilities. By having the skills and taking the time to truly understand your needs, a skilled advocate can ensure that your location and lease documentation embody your ideas and requirements. Your advocate should understand how landlords function in order to integrate your business plan to your best advantage.
Most tenants run a specialized operation that has nothing to do with commercial real estate. They only deal with their lease once every 5-10 years, so the jargon and technical structures common to leases are not something that most tenants are familiar with. Your advocate should take the extra step to ensure that you understand what your lease actually does for your practice. • All of the industry-specific terms need to be translated so you clearly understand what your lease says, and the obligations you are committing to. • Large landlords typically have multiple budgets administered by various employees. If your advocate doesn’t know about these budgets, you won’t benefit from any of these opportunities. For example, did you know that many landlords have a space planning budget available to incoming tenants? • Many landlords are upgrading their assets. For example, many buildings are now “LEED” properties. LEED, or Leadership in Energy and Environmental
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Design, is changing the way buildings, and therefore tenancies, are planned, constructed, maintained and operated, using less water, energy and reducing greenhouse gas emissions. Your advocate should be able to explain to you what effects LEED certification has on your tenancy costs. Large landlords have complex lease documents which often require a team approach to negotiation, with specialized landlord employees handling each section. Your advocate should be fluent in lease-language in order to study, understand, negotiate and translate each section of the contract.
Your representative should work with you, and for you.
Your landlord has a team that includes a listing agent, an asset manager, a leasing manager, a lawyer, a construction manager and a property manager each representing the landlord’s needs. Each person is a specialist in their field with extensive academic training and practical experience. You need to level the playing field by retaining a specialist consultant who represents your best interests, and has expertise in each of these areas. Having an innovative and objective advocate become a temporary member of your team to strategically negotiate on your behalf is essential. Your advocate should be collaborative, imaginative and an excellent listener who understands the entire complex process from both sides of the table, and can provide objective advice and creative solutions. Your advocate should save you time, money and stress, while strengthening your relationship with your landlord, not weakening your position. Your advocate should know that representing your practice through strategic negotiations is a serious responsibility which needs to be treated with a high level of ethics, transparency and care.
Your advocate should save you time, money and stress, while strengthening your relationship with your landlord, not weakening your position.
Please send comments to info@realtyleaseconsultant.com
This article was prepared by Ian D. Toms, B.Sc. (Hons) and Jennifer J. Miles, B.A., HBA, M.B.A., Masters in Property Economics. Realty Lease Consultants, Inc. has been preserving realty leasehold value since 1986 and can be reached at (705) 743-1220, by email info@realtyleaseconsultant.com, or through the website at www.realtyleaseconsultant.com.
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The Crucial Importance of Empowering Our Support Team Dr. Ron Weintraub
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s the evolution of our dental practices continues at a swift pace, it befits us to refocus on the significant impact the support team has on patients’ overall dental experience. No longer is it deemed to be only Dr. X to whom patients seek to entrust their families’ oral health requirements, but they associate Dr. X more commonly as the “Dentistry on Hill Street”. To maintain this perception, empowering the support team will pay huge dividends.
PERCEPTION OF OFFICE ENVIRONMENT The underlying quiet shift in the public attitude reflects the realization that the level of satisfactory treatment depends heavily on their interface with not only dentists and other clinical providers but also on all team members attached to their visit. This is evidenced when one peruses the visually appealing websites that almost always portray the office story or brand to identify the personalities that current or potential patients may encounter during their visit. The human appeal is important as patients evaluate how comfortable they would feel in that particular environment.
EMPOWERMENT OF TEAM MEMBERS If we agree, as office owners, that the support team is worthy of our heightened awareness and of their significant value to the ongoing success of the practice, it behooves us to carefully examine the job descriptions that we have in place. Looking at our operation through the eyes of a new or prospective patient has benefits rather than accepting our current modus operandi as the optimal norm. One of the mainstays of empowering our team members is to define their responsibilities with clarity and collegiality. In order for the support team to function with maximum effectiveness, they have to have the ability to measure their relative success at agreed upon responsibilities. They need to have a clear understanding of these responsibilities and be held accountable for their execution. The use of metrics (the subject of a future article), particularly in administrative and hygiene departments, facilitates both of these points.
UNDERSTANDING THE MANDATE Team members need to understand the limits of their mandate, and if an issue overrides their position, they can raise it with a higher authority. We often hear the staff muttering, “G-d help me”, but that is not the higher authority to whom we refer. Some examples to empower them by giving the team to higher authority include the following: • Make independent decisions to take more time to bond with patients; • Assure they provide appointment slots to accommodate patients’ needs; • Provide extra time to inquire patients’ perception of their experience upon exiting the treatment areas and, perhaps, following up with a phone call, if needed, to provide post-operative support.
POTENTIAL RESPONSIBILITIES OF STAFF The investment of time taken by the administrative staff to foster an enhanced relationship between patient and support staff justifies incurred costs. Patients take away from their experience the competence and thoughtful interactions they enjoyed with the team. Upon exiting, they appreciate equally the thorough clinical treatment and supportive administrative management. The action of a Treatment Coordinator, for example, who had the time and interest to “take” a medical history as opposed to handing out a clipboard and disposable pen to check off the boxes makes a positive impression on patients. In addition to a Treatment Coordinator, often Clinical Assistants play a significant role in the total patient experience. They should begin with patients by explaining what is going to occur during their dental treatment thus attempting to alleviate any potential apprehension or anxiety. Re-care Coordinators play an important role, too, by keeping track of all calls made to confirm the hygiene schedule. Recording the interaction as to whether patients were spoken to, left messages, or could not be reached motivates the employee to schedule or reconfirm previously
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scheduled appointments diligently. Such attention to detail makes a huge difference in filling the schedule thereby reducing the downtime in the hygiene department. Recording these interactions allows coordinators to quantify their effectiveness. In addition, it gives office team members an awareness of their personal success in this area. Furthermore, it allows for the owner’s recognition and positive feedback of an exemplary performance. Hygienists are encouraged to suggest a recare examination yearly and a complete oral examination (COE) every three to five years accompanied with the formal series of panoramic x-rays (PAN), or formal mouth series (FMX) to patients who would benefit from them. Moreover, hygienists should encourage patients to book this level of care for the next re-care cycle through education. Successful motivations can be tracked with obvious benefits to patients for their enhanced care as well as to the office as calculable financial compensation. Enhancing the support staff’s self-image and performance has a multiplicity of benefits for the contemporary dental operation.
Patients take away from their experience the competence and thoughtful interactions they enjoyed with the team.
Please send comments to drronips@rogers.com
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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Salaries Versus Dividends: Which is Right for You?
Louise Wong CPA, CA, TEP
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ne of the most common questions dentists with professional corporations ask is “how should I pay myself?� While there is no simple answer, in general there are three options: 1) Salaries only 2) Dividends only 3) Salaries + dividends The three options are prerequisites to other tax breaks and supplementary tax features you may or may not value. Depending on your goals and preferences, one option may be better suited to you.
Salaries
Taking a salary opens up the most number of tax breaks and features, but may also leave you with the least amount of cash in your pocket. Many of the most prominent tax breaks offered by the government require salaries. See Table 1 for details. Only RRSP requires a significant salary to maximize the tax break. The other items can be obtained through a mix of salaries and dividends even if the salary is a small amount. The negative of salaries are displayed on Table 2
David Chong Yen CPA, CA, CFP
no withholdings but may result in tax installments being payable. Tax installments are easy to forget about, hence salaries may be better suited for individuals who do not want to be surprised with a large tax bill at the end of the year or have not saved sufficient money for taxes. Dividends
With dividends only, you forgo the tax breaks and features we have listed. This means, no RRSP, no CPP, no childcare expenses and no employee death benefit. What you get in return is more cash in your pockets since you do not have to pay CPP or EHT (if applicable), less administrative burden and no need to justify the amounts you pay to family members. Who Should Pay Dividends Only?
If you do not intend to contribute to RRSPs, would prefer not to contribute to CPP and do not have childcare expenses, then a dividend only strategy may be appropriate. In addition, family members who are shareholders and do not actually work or provide services for your practice should receive dividends only, if they have no other income.
Who Should Pay Salaries Only?
Salary and Dividend Mix
If you are a firm believer of RRSPs, you should consider a salary of at least $145,000. You can top off any additional income you require with dividends, but in many cases, if you have other low-income family members who are shareholders, it would be better to pay them dividends instead. While it may seem counter-intuitive, the administrative burden of payroll withholdings may actually be a positive for some dentists. Being forced to take money off each pay cheque does help some dentists budget and plan their spending accordingly. Dividends, on the other hand, have
This option allows you to mix and match the pros and cons of salaries and dividends. Some common salary and dividend mixes are shown on Table 3. Paying yourself is easy, but how to do it can be a difficult decision. The decision varies significantly from dentist to dentist, from one family member to another and can change from year to year depending on your circumstances. Speak with your accountant and financial advisors to see what is best for you.
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11 Table 1 Registered Retirement Savings Plans (RRSP)
Your RRSP contribution room is dependent on your previous year’s earned income. This includes salary and business income but not dividends or interest.
Canada Pension Plan (CPP)
CPP benefits are paid to you when you retire. In order to receive these benefits, one must pay into CPP, which is based on your earned income. If you receive only dividends, you would not have to pay into CPP, but you would also not receive any CPP upon retirement.
Child Care Expenses
Childcare expenses are deductible only from earned income of the lower-income spouse. An individual with only dividends would not be able to deduct childcare expenses.
Employee Death benefit
A $10,000 tax-free death benefit may be payable from the professional corporation to your loved ones provided you are an employee of the PC which requires a salary to be paid.
Table 2 Must be reasonable based on services provided
For dentists this is not a concern, however for family members receiving salaries, you may want to review their compensation. Ask: How much would a stranger be paid for doing similar work?
CPP Premiums
CPP premiums of up to $2,544.30 (2016) each for employer (i.e. PC) and employee (i.e. dentist) would have to be paid annually.
Employer Health Tax (EHT)
If your entire payroll for you and your staff exceeds $450,000 annually, an additional 1.95% tax will apply on the excess.
Administrative time and cost for payroll withholdings
Salaries require taxes to be withheld on each pay cheque.
Table 3 Salary of $3,500 and dividend the rest
Avoid paying CPP as CPP requires a salary of $3,500 or more, but eligible for employee death benefit and some child care expenses.
Salary of $20,000 to $40,000 and dividend the rest
Allows you to claim child care expenses, while minimizing income subject to CPP. The amount of salary will depend on number of children and their ages.
Salary of $55,000 and dividend the rest
Maximizes CPP and childcare expenses for those that do not believe in RRSP but want CPP.
Salary of $145,000 and dividend the rest
Maximize CPP and RRSP.
Please send comments to david@dcy.ca
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, BAFM, MAcc, CPA, CA 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/eugenechu@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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The High Cost of Dying
David Lind
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know it is a morbid subject and I have avoided writing about it for many years, however some of this stuff needs to be talked about. As is the case with most of our articles, the subject matter usually arises due to recent transactions or situations that we have been involved with and this issue is no exception. It is inevitable that we are all going to pass away someday, however it is remarkable how poorly most of us plan for it. When you consider the effort and expense we go to in order to plan for things that may happen, such as “we don’t want to downsize our home, because one of our kids may move back, or we may need the winding staircase for wedding pictures someday.” Or the effort dentists go to put their employees on contract because they may need to be terminated someday. There are countless examples of this kind of thing throughout our everyday lives, yet we don’t do a good job of planning for something we know will happen: our own death. Fear is a great motivator so I hope to instill a little fear in you in the hope that it will cause you to take steps to plan for this eventuality. You, as a dental practice owner have a unique set of circumstances related to your own death that many people in society don’t have to worry about. • You are self-employed; • You don’t have a pension; • You are usually the primary bread-winner of the family; • There is a miniscule percentage of the population to replace you; • You book your life in 10-15 minute blocks up to six months into the future. So what happens when someone with those characteristics dies suddenly (or becomes critically ill or disabled) without any forward planning? At the risk of being insensi-
tive, I am going to limit the content of this article to factors related to dentistry, though I am acutely aware that there are other, often more important things people must deal with during these times. First, the team at your practice have no idea where to start. There is not a go-to person who has all the answers, they feel empty and alone and don’t know what to tell the patients. The goodwill value of your practice, which regular readers will know, accounts for about 80 per cent of your practice’s value, starts to erode with that first cancelled appointment. Who will take control of things? Your spouse? Your family and friends? Not likely. In the early days they are too distraught to even worry about the practice. In one of the situations that caused me to write this article, a dentist’s wife contacted a cottage neighbour for help. He was a retired accountant whom she knew had other dentists as clients. He was someone she trusted who would guide her properly. The trouble is that initial contact was made three months after her husband had passed away. She knew very little about her husband’s practice and just assumed someone was taking care of things in the interim. The accountant put her in touch with us but the damage was done. We were able to move the balance of the practice to a neighbouring dentist but a large percentage of the patients had already moved on - therefore the value was severely impacted. Time is the enemy in these situations. Your patients are loyal to you and they like going to your practice, but when you’re gone there has to be a plan. The first thing to do is to write down clear instructions for people to follow in the event of your demise. It should be specific and contain contact names for people you trust to put an action plan into place immediately. Discuss your instructions with your spouse and possibly, your lawyer, accountant and practice
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broker. They all bring unique skills in dealing with these unfortunate situations, and importantly are one level removed from the emotion of the situation so can act appropriately for the benefit of your heirs, staff and patients. A locum dentist will need to be retained immediately to maintain as much normalcy in the practice as possible. Your practice valuation will need to be updated (not started) immediately and a plan put in place to transfer the ownership to another dentist. Have a team prepared and knowledgeable and let your family and friends know that you have done so and where to find your instructions. If you don’t have the support you think you’ll need, start setting yourself up. There are many professionals that dedicate their lives to working with dentists. They are most competent to take care of things for you when you can’t. Plan. Provide information. Sleep comfortably.
The goodwill value of your practice, which regular readers will know, account for about 80 per cent of your practices value, starts to erode with that first cancelled appointment
Please send comments to david.lind@ppsales.com
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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Shareholders Agreement for Your Dentistry Professional Corporation
David E. Rosenthal BA., LL.B.
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s I have discussed in previous articles of The Professional Advisory, the laws permit specific family members of a dentist to be non-voting shareholders of his or her dentistry professional corporation (PC). A “family member” means a dentist’s spouse, child or parent. Having such family members as non-voting shareholders of the PC can result in substantial tax savings for the family unit. There are many potential benefits to having your PC own your dental practice, with your specified family members (non-dentists) as non-voting shareholders of your PC. Benefits include the low corporate income tax rate, the ability to sprinkle dividends among family members and the capital gains exemption on the sale of PC shares. If structured and planned properly, family members might be able to use the capital gains exemption when they sell their PC shares. However, to ensure non-dentist family members can enjoy all such benefits, it is critical to plan well in advance as such plans may require two or more years to implement properly. Keep in mind that a PC’s business is restricted to the practice of dentistry and activities related to or ancillary to the practice of dentistry. Surplus funds can be withdrawn from the PC by dividends paid to the dentist shareholder or non-dentist family member shareholders. Or such funds can remain in the PC and invested by the PC. 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 (Dividend Only Shares) and/or in the PC’s growth and residual value (Equity Shares). Dividend Only Shares typically have the right to a variable dividend in an amount determined in each year by you,
the dentist, 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. Dividend Only Shares typically are redeemable by the PC at any time, meaning the PC can repurchase and cancel the shares. The shareholder’s consent is typically not required for such redemption of shares. 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 (Agreement) is essential if family members receive (i) Equity Shares or (ii) Dividend Only Shares that are not redeemable by the PC. A shareholders agreement is a private contract between the shareholders. Your 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. At some point in your career you will likely sell your practice by asset sale or a sale of all the PC shares. The dentist must be assured that all the PC shares or assets will be sold, whether or not the other shareholders (your family members) wish to sell or agree on the sale price or sale structure. The Agreement should provide that the dentist has the right to ‘drag along’ the other shareholders on the sale of the practice.
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Consider other events such as death of a family member or divorce or separation from your spouse. The 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 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 PC regardless of changing circumstances. A properly drafted Agreement will ensure this. The ideal time to complete the Agreement is at the beginning of the process when the non-voting shares are being issued to family members. The rules permitting family members to own shares of your 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 professional advisors who are very familiar with such structures and who regularly advise dentists on such matters.
The dentist must remain in control of the PC regardless of changing circumstances. A properly drafted agreement will ensure this.
Please send comments to david@drlaw.ca
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.
VOL. 77 November 2016 | The Professional Advisory
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Advisory TheProfessional Advisory FOR DENTAL PROFESSIONALS
The Professional Advisory
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FOR DENTAL PROFFESSIONALS
VOL. 63 February 2014
Progressus – a going forward, advance
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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 Realty Lease Consultants Inc. 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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