9 Strategies to Reduce Your Taxes Partnerships - The Best and the Worst A Practice by Any Other Name A Couple of Rules to Help You Make Good Financial Choices Hard to Insure? Here is What You Need to Know (Part 2) Negotiating Resolution: Retain A Professional Selling A Practice: A Dentist’s Perspective
The
Professional
Advisory For Healthcare Professionals
9 Strategies to Reduce Your Taxes DAVID CHONG YEN CFP, CA 2 Partnerships - The Best and the Worst GRAHAM R. TUCK H.B.A. C.A. 3 A Practice by Any Other Name DAVID ROSENTHAL 1
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A Couple of Rules to Help You Make Good Financial Choices BARRY R. McNULTY
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CFP, RFP, CIM, FCSI
Hard to Insure? Here is What You Need to Know (Part 2) Dr. IAN WEXLER
Negotiating Resolution: Retain A Professional IAN TOMS B.Sc. (Hons) 7 Selling A Practice: A Dentist’s Perspective DR. RON WEINTRAUB 6
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9 Strategies to Reduce Your Taxes DAVID CHONG YEN CFP, CA Do you feel you are paying too much taxes? If yes, then the following ideas may alleviate some of your pain next year: 1. Hire your family members Consider hiring your spouse and children and paying reasonable amounts for services they render. Prepare job descriptions outlining the services they provide. Also, pay your family on the same frequency (weekly, biweekly etc.) and by the same method (cheque) as you would for any other employees. The family member should deposit their salary in their own separate bank account. Hence, payroll deductions should be deducted and remitted along with other amounts withheld from nonrelated employees. An employee working for a related employer may qualify for an employment insurance exemption. However, you must apply for a ruling from Canada Revenue Agency for such an exemption. If you are paying salary of $39,000 to one of your family members, you could be saving over $1,700 each year. The salary paid to family members could affect any government assistance they receive including Old Age Security (OAS), student loans, Guaranteed Income Supplement (GIS) and disability income. 2. Deduct your home mortgage interest For sole proprietors and partners who have accumulated value in their practices, you may be able to arrange your banking affairs differently to make your home mortgage interest deductible. With a home mortgage of $500,000 at 4%, you could enjoy an annual savings of $9,000
(assuming top marginal tax rate) by converting nondeductible interest into business expenses. 3. Loan to your spouse Consider loaning funds to your lower income spouse for investment. The loan however must be at the ‘prescribed interest rate’. The second quarterly interest rate for 2005 is 3% per year for loans made in the second quarter. (ie. April 1 - June 30, 2005) The loan to a spouse would be suitable if that person can achieve a higher return on the money invested than the interest he or she would pay you. The loan should be properly documented. The interest received from the lower income spouse’s loan is taxed in the higher income spouse’s hands and the income earned (net of the interest paid) is taxed in the lower income of the spouse. Interest on such loans must be paid no later than January 30 of the following year. 4. Incorporate your practice If you are operating as a sole proprietor or a partner in a dental partnership, please consider: Professional Corporation (PC) Certain provinces, including Ontario, allow dentists to incorporate their practice. This is called a Professional Corporation (PC). In Ontario, for fiscal year ending December 31, 2005, the first $300,000 of taxable income (revenues minus expenses) is taxed at 18.62%. One argument for establishing a PC, is that practice debt can be repaid with after tax PC dollars which were taxed at the low rate of 18.62%. With certain non-calendar year-ends, the PC can declare
bonuses and realize a tax deduction in the current year, while the recipients of these bonuses will be paid and taxed in a subsequent tax period. Secondly, by adjusting the salary and dividend mix, the dentist could reduce the annual tax bill. Thirdly, profits can be left in the PC and used to buy dental equipment and/or the building in which the dentist practices. If shares of a PC qualify for the $500,000 capital gains exemption, then the dentist will save taxes when the shares are sold, as the first $500,000 of capital gains on these shares will be completely tax-free if certain conditions are met. Additionally, upon your death, your PC can pay a $10,000 death benefit to your loved one and receive a tax deduction for this payment. The recipient of the$10,000 death benefit will receive this amount tax-free. Ensure an employment contact between the dentist and the PC is prepared to reflect this death benefit. Finally, ensure double wills are
prepared. One will should be for the PC shares only and another for your other assets. This will save probate fees. If your PC shares are worth say $1million, then more than $15,000 in probate fees will be saved. The May 11, 2005 Ontario budget proposes to allow family members to hold non-voting shares. This is another incentive to set up a PC. Caution: we do not have the full details of the proposed legislation. Watch for Part II, Tax-Saving Ideas - numbers five to nine - in the next issue of Professional Advisory. David Chong Yen, CFP, CA with an international firm background and more than twenty-four years of experience, advises healthcare professionals and owner-managers. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or E-mail david@dcy.ca. This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.
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Partnerships - The Best and the Worst GRAHAM R. TUCK
H.B.A. C.A.
Whenever I think of partnerships I see certain advantages for dentists:
1. the ability to take longer vacations as the partner keeps the practice, the hygiene program and the staff busy 2. there is another dentist to interface with and compare notes 3. sharing rental expenses as well as other assets such as sterilization, the suction, compressor and Panorex equipment 4. receiving assistance from the partner if a medical question arises 5. sharing the administration of the practice. When a partnership works, everyone benefits. However, too often things go wrong and the relationship sours. We are often called in to value partnership practices, assist with the severance and act as a go-between to keep the parties’ blood pressure down. Seldom is this termination of a partnership accomplished without a substantial amount of grief and aggravation. Each party sees only their own side of what went wrong. Too often one party feels justified in taking advantage of his partner during the breakup of the partnership. How does one protect oneself in a partnership situation? 1. know your partner really well before you start the partnership. The relationship is similar to a marriage 2. have an experienced lawyer draft up the partnership agreement with provisions for termination 3. consider a cost share situation rather than a partnership. The primary difference is that each dentist keeps his own patient base separate from the other. 4. keep the communications between the partners open with regularly scheduled partner’s meetings to solve
small problems before they get out of control 5. review the partnership agreement every few years to ensure that it is still viable for all partners and their changing situations. Generally speaking, I do not recommend partnerships. I have seen too many problems based upon changing situations. For example: 1. one partner changed his practice to 100 per cent composite where he was removing amalgam in favour of composite, while the other partner continued to use and praise amalgam. This broke up the partnership 2. in another situation the partner’s wives did not get along and that caused a break-up 3. recently I had a practice listing for a retiring dentist where the partner did not like the purchaser and told him so. The deal died and now the vendor is wondering what to do 4. poorly written partnership agreements can cause untold heartaches. I draft offers, associate agreements etc. but I do not draft partnership agreements. They have to endure well into the future and I may not be tuned into changes in legislation or court cases that could have a bearing on partnership agreements in future years. Partnership agreements are too important not to use a lawyer experienced in dealing with partnerships between dentists. Before entering into a partnership, be aware of the potential pitfalls and always use a well worded Partnership Agreement. Graham Tuck, H.B.A., C.A., is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sale of dental practices. He can be reached at (905) 472-6000 or 1 (888) 777-8825 or by e-mail at: grtuck@rogers.com
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A Practice by Any Other Name BARRY A. SPIEGEL
LL.M., Q.C
This article is written by Mr. Spiegel’s colleague, David Rosenthal. Often dentists carry on the practice of dentistry using a name other than their personal names. A ‘practice name’ is a name other than the name of a dentist who practises at the location to which the name applies. Before using such a ‘practice name’, that name must be registered at the Ontario Ministry of Consumer and Business Services (Consumer and Business Services) and approved by the Royal College of Dental Surgeons of Ontario (College). This article deals only with practice names and the College. If a member practises under a practice name, the dentist must: 1. notify the College of the names of all dentists who practise under the practice name and whether he or she is a principal member or an associated member 2. use a practice name that describes the practice location or has been approved by the College where the practice name refers to something other than the practice location 3. notify the College of any change in the dentists who practise under the practice name within 30 days of the change. Typically a practice name is used to describe the location of the practice, such as “Main Street Plaza Dental Centre”. Registration of the practice name with the College does not guarantee the use of that name if it conflicts with a pre-existing name. Another dentist who opens a dental practice also on a Main Street but is located in a different city might also use a similar practice name so long as it is not confused with your name. If a dentist has associates at the practice, a practice name commonly used is “Dr. Rosenthal and Associates” or, if there was only one associate at the practice location, the practice name would appropriately be “Dr. Rosenthal and Associate”. Where a dentist holds a certificate in a particular
specialty, the practice name could include a reference to that specialty, such as “Main Street Orthodontic Dental Centre”. However, it is professional misconduct to misrepresent to the public that the dentist is a specialist qualified in a branch of dentistry where the member dentist does not hold a specialty certificate. The College will carefully consider the proposed practice name before approving its use by a dentist where the practice name refers to something other than the location. In our example above, if the dentist did not hold a specialty certificate in orthodontics, the College would not permit the registration and use of “Main Street Orthodontic Dental Centre” as a practice name. However, even where a dentist does not hold a specialty certificate, he or she is permitted to represent to the public that his or her practice is limited to a branch of dentistry provided that the dentist clearly indicates at the same time that the dentist is a general practitioner. In this case the practice name approved by the College would be “Main Street Dental Centre” and the sign on the front of the practice location could read: Main Street Dental Centre Dr. Rosenthal, General Practitioner Practice Limited to Orthodontic Dentistry. The above names are examples for illustration purposes only. As I do not wish to misrepresent myself I must admit that I am not the dentist referred to above. I am a lawyer who advises dentists. But the term Dr. Rosenthal does have a nice ring to it. In a future edition of the Professional Advisory I will discuss the use of practice names as they relate to Consumer and Business Services. David Rosenthal is a lawyer practising in association with Barry Spiegel whose practice is devoted to corporate, commercial and business law, with special emphasis on advising and consulting for the dental profession. He can be reached at (416) 865-0736; or fax to (416) 363-8451; or e-mail to david@spieglaw.com.
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A Couple of Rules to Help You Make Good Financial Choices BARRY R. McNULTY
CFP, RFP, CIM, FCSI
A strongly held personal belief is that money is more than just a tradable commodity in our society. This is a concept I have written and spoken about for years. How you manage
your finances will have a major impact on the way you live your life. It can affect your relationships, self-respect, personal freedom and the very security of your family.
I had an initial meeting with a couple the other day that markedly illustrates this point. Let’s call them John and Susan Brown. Both are dentists. John operates his own practice while Susan associates in another office two days a week. By way of additional background, the Browns are in their mid-forties, have three children ages 6 to 14, and enjoyed a combined income in 2004 of over $300,000. You would imagine that life for the Browns is good, but unfortunately that’s not the case. The reason is money. They are under a lot of financial stress due to a combination of lifestyle spending and far too much debt, includingsome tax arrears. While making a relatively good income, certainly compared to most Canadians, it was going out faster than it came in. The Browns were also aware that time was passing rapidly and nothing was being set aside for the future other than RRSPs. I am glad to say the Browns are now on a financial path that should improve their outlook. Could they have done something different to avoid getting into these stressful circumstances? The answer is a definite yes! The Browns’ financial resources, and this applies to us all, are not infinite. The lesson we can learn from the Browns is that choices have to be made on how best to allocate our valuable resources. In order to make the right choices it is critical you have good information. In a dental context this means: a) Understanding the dynamics of your cash flow. This involves integrating the money that flows in and out of your practice with your personal fixed and discretionary expenditures b) Understanding your net worth. This is a statement similar to your practice balance sheet that details your assets
and liabilities. To make it truly useful, I recommend you segregate these items into these three categories: i. Practice ii. Investment iii. Personal Keep in mind that your financial security will not come from personal assets. It will come from your practice and investments. Also, personal liabilities, which are not deductible, are the worst kind of debt. Think of this information as your starting point for making any significant financial decisions. For example, the Browns could have used it to apply two general rules of thumb that would have helped them avoid their present financial challenges. They are: a) When your debt service is equal to 40 per cent or more of your after-tax income, debt reduction should be your main spending priority Or b) When debt levels are 40 per cent or more of your net worth (the amount you arrive at when deducting liabilities from assets) debt reduction once again should be the main priority. The moral of the story here is that you need first-rate information to make first-class financial decisions. Good Luck! Mr. Barry R. McNulty CFP, FMA, CIM, FCSI is an investment advisor with Raymond James Ltd., Independent Financial Services. Member CIPF. The opinions expressed by the author are not necessarily those of Raymond James Ltd. He may be contacted at 905-470-6222ext 216 or barry.mcnulty@raymondjames.ca.
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Hard to Insure? Here is What You Need to Know (Part 2) DR. IAN WEXLER Insurance Broker Incentives
In order to secure the best offer of insurance, a lot of time and effort go into researching and finding alternative insurance options that may or may not result in a standard plan (no rating or exclusions). Unfortunately, it has been my experience that applicants are rarely presented with additional options by their insurance advisor. If one’s insurance broker works alone or with few staff, it may be prohibitive from a time and cost point of view to research all of your options. Although alternative products are often available for the “difficult-to-insure,” they come with much lower commissions payable to the broker. Therefore, it is easier and less time consuming to sell other products or just tell the client that “alternatives are unavailable,” or that “all of the insurance carriers will underwrite you the same.”
Life Insurance Versus Disability Insurance Underwriting for life and disability insurance is not the same. For life insurance, insurance company underwriters are more concerned with systemic health conditions as well as family history. Examples include elevated cholesterol, in addition to a family history of heart disease. For long term disability insurance, underwriters are primarily concerned with health issues that may affect your ability to perform dentistry. Common exclusions include lower back, mental and nervous conditions. Are there other reasons for ratings or declines? Insurance underwriters do not look exclusively at your health when determining the type of offer to make. Other important issues considered are: 1. Hazardous sports or activities such as scuba diving
bungee jumping, mountain climbing, and piloting an aircraft 2. Poor driving record 3. Family health history 4. Unresolved or undiagnosed medical conditions What should you expect from your insurance advisor? Ideally, your advisor should: 1. Have experience in this area and know all your available options. 2. Have an ability to sell and have access to a number of company’s life and disability insurance products including those for the difficult to insure 3. Get additional underwriting opinions and offers from at least several companies 4. Notify you when exclusions/ratings can be revisited or removed 5. Ensure that all questions on the insurance application are answered as completely as possible Is less than perfect coverage better than no coverage at all? It depends. It may be prohibitive to purchase a plan if the premium is rated 100 percent or more. On the other hand, not purchasing a plan because of a few exclusions may be unwise. There are literally thousands of reasons for incurring a disability claim. Not taking a plan because you feel that “you are only going to get disabled from one of the excluded conditions” can be one of the poorest decisions you can ever make. Should you tell your insurance advisor or broker everything when you apply?
Absolutely! Withholding information that is deemed to be “material” by the insurance company can result in non-payment of a life or disability claim. Anyone applying should be as upfront and forthright as possible when completing any insurance application. In summary… It is the opinion of many, that insurance underwriting is only going to get more stringent over time. The ability to share information and the latest in medical technology will continue to provide an insurance underwriter with all of the data they need to assess one’s risk. The following are a few recommendations to minimize the risk of exclusions, ratings, and declines: 1. Purchase the best guaranteed non-cancellable renewable disability policies when you are young and healthy with a rider that allows you to purchase more coverage “yearly” without a providing new medical proof 2. Consider purchasing more “permanent” insurance, e.g. Term to 100, when you are young and healthy 3. Make sure your broker has the knowledge, capability, experience, and staff support to provide you with different options if you are declined or approved with ratings and/or exclusions Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect-a-dent and Protect Insurance Agencies Inc. in Toronto which provides life, disability, critical illness, and healthcare insurance products and services to professionals, executives, and business owners across Ontario. He can be reached at (416) 3913764 or drwex@protect-ins.com
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Negotiating Resolution: Retain A Professional IAN TOMS
B.Sc. (Hons)
An excited client calls and says “Wow! How did you do that? Why would the other side ever make a deal like that?” My answer isn’t exciting. What I did was to integrate needs in a calm, professional, and objective fashion following a few very basic concepts. There are three possible conclusions when resolving any difference of opinion between people, including realty lease negotiation: 1. one side prevails over the other 2. both sides concede and “meet ½ way”, or 3. both sides integrate needs. In the first scenario, the conclusion is that one side “wins” and the other side “loses”. Inevitably the loser constantly looks for a way to retaliate and get back at the winner. In the second scenario, both sides make concessions
leading to a “lose - lose” conclusion. Now both sides are looking for ways to retaliate! These two conclusions were not really resolution at all. They just created a potential starting point for a great deal of trouble and aggravation. In the third scenario, both sides integrate needs, which is the correct resolution. This way both sides “win”. What sets this outcome apart from the first two is that both sides proceed with harmony. Proper negotiation and resolution of commercial realty lease issues requires that the negotiator must: 1. understand that all problems have a resolution 2. have the skill and experience with both the realty market and commercial realty contracts to identify all possible solutions 3. clearly understand what all concerns and needs of
both tenant and landlord are, and 4. represent only one party’s interests to conclusion without creating a temporary resolution that is inevitably destructive. An arrangement as complex as an offer to lease, a commercial realty lease, or a lease term renewal can not be negotiated properly by anyone without extensiveexperience both with commercial realty contracts and the realty market. You need to retain the services of a professional who is properly qualified
to represent your position during negotiations. That “great deal” you believe you have, may in fact be a path to endless trouble that could end up costing you far more than you saved! Ian D. Toms, B.Sc. (Hons), acts as a tenant advocate on behalf of select retail and professional tenant clients primarily in the Greater Toronto Area. Mr. Toms is a real estate sales representative representing Professional Practice Sales (Ontario) Ltd. Mr. Toms was a multi-unit retail tenant and landlord for over 10 years and has since spent several years as a realty lease consultant. He can be reached toll free at (877) 216-1013, or by e-mail at iantoms@pipcom.com.
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The Impact of New Technologies on Dental Practice Dr. RON WEINTRAUB
Clients often seek advice about selling their practice. Of great concern to them are: • Should I sell my practice? • When do I sell my practice? • How do I sell my practice? The subject of this article and the next article addresses these three distinct areas of selling a practice. Should I sell my practice? The decision whether to sell often depends on where you are in the three phases of your practice career. Start-up Phase: The start-up phase begins with the opening of your first office. Initial challenges include finding the appropriate locale and selecting equipment for your new office. Hiring competent staff and establishing rapport with the community also demands time and expertise. Beginning a successful practice requires an on-the-job learning curve. Not only do you need to understand your patients, but you also need a challenging schedule of learning new techniques, procedures, and technology to promote growth. Establishing successful relationships with patients provides the opportunity for your growth to attain experience and maturity. By establishing a pattern for your practice, you pave the way for professional development. This phase generally lasts from one to eight years. Formative Phase: The middle period, characterized by discovery of modalities that work best for you, is the second and longest phase of your practice. With the new understanding of procedures within your comfort zone, you establish ease in focusing on your strengths and referring patients to specialists. Your practice, now based on a coherent philosophy, enjoys patients who have confidence in you and readily refer others to your office. In this phase, you realize growth primarily from satisfied patient referrals. As the longest phase, often in excess of 20 years, you benefit from the extent of growth in your practice and the realization that it has broughtyou close to maximum potential.
Final Phase: The plateau of your patient base in your practice signals the beginning of its finale. Assuming patients are generally seven to ten years older than you are, the natural attrition of this base reflects their age of retirement, increased mobility, and ultimate demise. Further evidence of attrition is your patients’ perceptions of a maturing dentist who may not welcome new patients or one who deserves more time off from a busy practice rather than making new commitments. Still other considerations are iatrogenic attrition characterized by other dentists who project the perception you are unwilling to accept children of your patient base or new patients into your practice. Furthermore, patients perceive you as reluctant to learn new procedures or integrate new technology to maintain a progressive practice. From your perspective, burdens of the administrative details and the practice itself may be onerous. Some dentists feel they are no longer “on top of the game” and are unwilling to learn new skills to remain abreast of changes and new modalities. Selling an active practice is not an easy decision. The timing of the sale of your practice depends upon where you are on the continuum. Transitioning a practice often opens new doors of opportunity to use your skills, experience, and insights. Making an informed decision requires an understanding of the three distinct phases of your practice. For an in-depth understanding of your situation, it’s prudent to seek outside advice. In the next article, I’ll address when to sell and the steps needed to achieve your goals successfully.
Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings to the Professional Advisory, over thirty years of knowledge and experience in the practice of general dentistry. Large companies such as Patterson Dental, Ash Temple Ltd. & the former Canadian Dental Co. have all sought his particular brand of expertise. Ron has been known to offer insight in the areas of practice enhancement. As a consultant to Innovative Practice Solutions, Ron can be found advising dentists on practice purchases, sales, location evaluations, associate buy-ins, and practice mergers. Dr. Weintraub can be contacted at (416) 224-1775 or admin@bvdental.com.
Q A &
Please address your questions to: The Professional Advisory for Healthcare Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 info@theprofessionaladvisory.com
Q I have just read the article entitled Negotiating Resolution: Retain a Professional in this issue which refers to poorly negotiated commercial realty deals. What is an example of a problem?
A A landlord owns and operates a window manufacturing business in north Toronto, and buys a small strip mall for “future consideration”. The recently graduated tenant has been associating for a year. Both parties want to save money, and neither really understands the complexity of a commercial realty lease. Ignorance is bliss. Landlord’s friend is a realtor who primarily brokers single family residential properties, but offers to “help” with the negotiation as a “favour” to the landlord. Landlord, the realtor, and tenant meet at a coffee shop and “negotiate” by editing a copy of a commercial realty lease landlord received from a friend, sign the product, and all walk away with big smiles. Several months later, the three parties have spent many thousands of dollars and sleepless nights while attending the court proceedings required to decide whose fault it was that the lease contained no provision for the tenant to pay additional rent! Q I am nearing age 60 and not sure what type of life and disability coverage I still need. As well, I am planning on working beyond age 65. What do you recommend?
Q Can I make money from Socially Responsible Investing? A The main objective of the average investor is to maximize returns. There are a growing number of investors however that are demanding more from their portfolios. A Socially Responsible Investor marries their risk return objectives with their social values. These individuals want to make sure their investments are not causing harm to their children’s future, to other nations and to their own community. Does this compromise return? In the US, the Domini Social Index as an example is an index of 400 socially responsible companies. This index has outperformed the S&P 500 on a total return basis and on a risk-adjusted basis since its inception in May 1990. In Canada, the Jantzi Social Index, an index of 60 Canadian companies selected on social responsibility criteria, was launched in February, 2000. Although it doesn’t have a long-term track record the data shows that the performance of the JSI index has been better than its conventional benchmarks. Our conclusion is that socially responsible investments can perform as well as conventional investments. In some cases, they have performed better
A Proper insurance planning at this time is extremely important. For example, you may not need certain types of coverage any longer and you may not require certain riders anymore, thus saving you money. At the same time, your disability needs may have changed from “income protection” to “wealth protection” necessitating the need for alternative types of coverage. Pertaining to your life insurance needs, they may be entirely different from what it was years ago when you first purchased coverage. You may still have adult children at home, have new tax issues, spousal income issues, or additional estate issues to deal with. Finally, if you are planning a transition career, there may be an additional set of insurance related issues that should be addressed. The bottom line in all of this is that it makes sense, even at age 60, to have a complete review of all of your insurance needs.
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”.