Notes From the Editor: Only One in Five Know Their Retirement Income!? RALPH CRAWFORD BA., DMD (Editor)
Insurance Schemes and Scams Tips on Being Consumer Savvy DR. IAN WEXLER
Site Selection: Practice Locations that Work IAN TOMS B.Sc. (Hons)
When... If Ever, Should I Seek Proactive Management Enhancement Advice? DR. RON WEINTRAUB
Incorporation of Your Dental Practice - Tips and Traps DAVID CHONG YEN CFP, CA
Matrimonial Practice Valuations GRAHAM R. TUCK H.B.A. C.A
“Family Members” vs. Family Trusts DAVID ROSENTHAL B.A. (Hons.), LL.B.
The Three Phases of Transition BARRY R. McNULTY CFP, RFP, CIM, FCSI
The
Professional
Advisory For Dental Professionals
The Professional Advisory consists of a group of seven independent professionals who provide services to the dental profession, each of who specializes in a different field. They have gathered to keep each other informed of the latest developments relating to the profession, and to produce this publication which is designed to provide expert information and advice solely for dentists and their advisors.
Notes from the Editor: Only One in Five Know Their Retirement Income!? RALPH CRAWFORD
BA., DMD (Editor)
I was browsing through a recent edition of MACLEAN’S magazine when a short topic caught my eye: The results of a poll last week showed that just one in five Americans actually knows what their retirement income will be. Meanwhile, four per cent of Canadians believe they are well positioned to make the psychological transition to a retirement lifestyle. Surely, I thought, this can’t include dentists. But then I recalled a social event a few months back when a couple of dentists who had been in practice 30 plus years surprised some of us “seniors” by revealing they couldn’t retire because they can’t afford it. Even if we do make allowances that the one in five who have no idea of their retirement income are Americans and that the meager four per cent who are well positioned psychologically for transitions represent all Canadians, it is still shocking and disturbing that these statistics may well include dentists who, as we all know, are not among the lowest income citizens in our land. What can be done to change these statistics and what about the two long-serving dentists - and probably numerous others like them - who are having difficulty facing retirement? It is my strong belief that the best guidance we can give is, “Look to the professionals who can help the most. And do it now”. In this issue Barry McNulty makes it easy by breaking transition into three parts, warning that the pre-transition phase should be spread over at least ten years. Between the lines we’re left with a message that waiting 30 plus years may not be a great idea.
Ron Weintraub’s Proactive Management Enhancement theme, when followed through with I’m Ready, Now literally rings out loud and clear to that pathway of financial success and comfortable retirement That is, if your site selection, as recommended by Ian Toms, is in a Practice Location that Works and within the community of patients you want to service. Ok, you’re ready, practice success is here, and the future and transition are your bywords, but Oops! You’re caught among the more than 70,000 divorces in Canada a year. Now what? Graham Tuck has some great thoughts on Matrimonial Practice Valuation. A “wise” man once said, “Taxation is the best gauge of civilization”. With this in mind and with a desire to measure your own personal “civilized” taxation status - particularly as affected by the new regulations on incorporation and family trusts - then David Chong Yen and David Rosenthal have just the right advice. And what’s the point of planning transition, enhancing a practice and saving taxes if much is lost through insurance schemes and scams that don’t work. Ian Wexler offers some great Tips on Being Consumer Savvy in the perplexing world of insurance. I repeat, “Look to the professionals who can help the most. And do it now”.
crawford@dccnet.com
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Insurance Schemes and Scams Tips on Being Consumer Savvy DR. IAN WEXLER
The other day while in my car, I was flipping through radio stations and happened to hear an advertisement for critical illness insurance. I found the ad both interesting and disturbing. The ad led listeners to believe they should consider purchasing this coverage because, among other reasons, premiums were going to
increase and the return of premium rider was disappearing. It also mentioned that in order to qualify for a return of premium, all you need to do is stay healthy. This rider allows you to receive some or all of premiums paid towards the policy at a specified point in time, if you do not have a critical illness claim.
The reality concerning critical illness insurance is, in fact, different. • Although premiums have increased in the past, no one can guarantee that premiums will continue to rise in the future. • There is no evidence that the return of premium riders are disappearing. As a matter of fact, companies have been offering more return of premium options over recent years. • You do not qualify for a return of premium just by “staying healthy.” You qualify for a return of premium (this includes some or all of the premium) if you: - Do not receive a critical illness benefit per the terms of your contract; - You pass away and your beneficiaries receive the return of premium (can be a rider or form part of the base contract). While I firmly believe critical illness insurance plays an important role in many insurance portfolios, it is not for everyone, and if you are considering it, do not base your decision on a radio advertisement. Other Insurance Schemes and Scams Advertising the lowest rate life insurance. Usually these rates are only applicable to a small percentage of the population, may be with a small company, have high renewal rates, and no convertibility to a permanent plan. Buyer beware: These ads are often an attempt to sell you more expensive types of coverage. Failure to disclose loss of an insurance contract with a company I am aware of at least three separate situations where
prominent insurance brokers in the insurance world for dentists have had a contract revoked with a major insurance company for extremely improper actions. You should ask your broker or any prospective broker which companies they represent, as they may not disclose this information. They may also try to switch your plan from the company they can no longer represent to a new one. Bottom line, be extremely careful and ensure your broker represents all of the major carriers. Offering special rates and discounts Insurance companies offer the same rates to all brokers. No broker can offer a better deal on insurance than another. Brokers who only focus on overfunded universal life Be extremely careful when purchasing permanent life insurance. Although these plans can form an important component of one’s insurance portfolio, they are not for everyone. Often, plans are poorly structured and the purchasers are uninformed about the risks. If considering one of these plans, make sure you first undergo a comprehensive review and analysis. Also, take the time to ensure you understand how the plan works in detail. Finally, make sure the broker is truly independent and even specializes in life insurance.
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) 391-3764 or drwex@protect-ins.com
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Site Selection: Practice Locations that Work IAN TOMS
B.Sc. (Hons)
Frequently I am asked whether I “know of any good spots” for a new dental practice. The potential tenant’s site selection criterion often include “beside a Shoppers Drug Mart, in a growing area with no competition, at a great rental rate, with phenomenal signage, and within walking distance of home”. Don’t waste your time, or gamble your future building your new practice in “the spot” chosen by a friend or a high pressure realtor. You must proceed by first identifying the community of patients your new practice will service, and then “find the spot” to service the community within that area. The following series of site selection steps are based on my own successful completion of hundreds of site selections for dental practices and national chain retailers southwestern Ontario and national chain retailers in the
New England states. 1. Choose the community of patients you want to service. a. Confirm the potential for providing the services you are trained to provide with the need for the services in the patient community. Consider demographic information that describes: i. the number of potential patients within the specific group you wish to treat; ii. the ability of patients to pay for the services; iii. the willingness of patients to pay for the services; iv. the fit of the patient community cultural background with your own; v. the community of referral sources including health care providers, patients, and personal sources;
vi. The demographic flux over the course of: • a day (residential or office workers patients); • a week (Monday through Friday 9 - 5, or on weekends); • the period of your expected practice (30+ years). b. Survey the location of practices of potential competitors. Consider whether they: i. offer the exact same services you would like to provide; ii. are they busy providing those services. 2. Choose the key realty location that will most appropriately address all of the needs of the patient community identified above. Consider realty location in the context of: a. public transportation routes including bus, GO, subway, streetcar, and roads; b. time of day when the potential patient community will be available to attend your practice; c. proximity to potential patient drawing features such as a shopping centre, referral sources, or community centre;
d. specific details related to the premises including parking, signage, business terms, conditions and size. 3. Make the key real estate become available. Lease the space. Buy the property. Ask an existing tenant to leave. Buy out an existing lease. Buy an existing practice. Ask a landlord to build a custom location. Clearly know that site selection is a critical step and it’s not as simple as it sounds. Site selection is absolutely not based on selecting “a good spot”. My best advise is to retain a qualified professional to complete this work on your behalf; the cost will pay for itself many times over during the course of your career. Based on more than 20 years business experience Mr. 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. and can be reached at (705) 743-1220, or by e-mail at iantoms@pipcom.com
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When... If Ever, Should I Seek Proactive Management Enhancement Advice? DR. RON WEINTRAUB
The answer to this question may be never, at a later Sometimes we wish for greater success than we currently enjoy. With intervention, the first task in determining stage, or as soon as possible. readiness requires a realistic assessment of our current Maybe I Don’t Need Help practice position. Understanding where we are helps Me? My practice doesn’t need intervention! Some us articulate our vision and objectives for the future. believe they are on the right course. Practitioners who Another readiness factor is attempted communication may not benefit from outside help to guide their progress with staff to encourage commitment to change since are those within practices currently intervention requires cooperation. We are unlikely to 1. enjoying full engagement at a comfortable pace and experience different outcomes without changing our having an optimal variety of treatment; manner of operation. Staff reluctance, however, should 2. meeting all their patients’ needs in hygiene and not veto the endeavor. By seeking an objective third dentistry in a timely fashion; party’s help before initiating change, we avoid wasting 3. accommodating new patients in a timely manner time and resources. Therefore, an honest evaluation with sufficient appointments available to address their of our patient base, range of services provided, and immediate and projected needs; communication with staff gives clarity to our readiness. 4. replacing inevitable attrition with new patient flow to compensate for patients’ changing practitioners, moving, Attempting a project when owners are not completely convinced of the validity and potential value of third party or death; 5. maximizing the use of the hygiene department and involvement leads to frustration and unnecessary cost. offering a full range of recare and periodontal services; Staff commitment and cooperation begins with owner 6. offering comprehensive care for all treatment modalities leadership and mutual interest to buy into the project. with as many in-house solutions such as periodontal, However, owners convinced the uniqueness of their crown and bridge, implants, pedodontics, removable practice excludes them from the benchmarks related and fixed prostodontics, and cosmetic solutions as skill to other practices may not be ready or may not want intervention. Although each practice is special, many sets allow; and 7. planning long-range transition with strategy already problems throughout dentistry are universal and are amenable to generic solutions. well in place much earlier than anticipated retirement. Maybe I’m Not Ready for Practice Enhancement Intervention
I’m Ready - NOW!
Our readiness for practice enhancement intervention For owners who see gaps in their long term planning needs introspection about our current practice performance process and require guidance by an objective party practice enhancement intervention makes sense. and attitudes.
We can attempt to convince staff that change is non-threatening and that we will give them the tools necessary to support the change. The staff need to believe in the merit of the project, to be willing to participate, and to dedicate themselves to prepare realistically for the process.
of current position, a positive attitude of the practice leader, and staff cooperation are as important as the actual mechanics of the project itself in determining its ultimate success.
Therefore, prior to embarking on an office enhancement protocol, identifying the need and expressing a willingness to accept change are readiness indicators. Lacking cooperation could prejudice the success of the endeavor leading owners, office personnel, and consultants to risk frustration, and ultimately, to failure.
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 a consultant to Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contact at (905) 4706222 Ext. 221 or drronips@rogers.com.
In fact, the timing of intervention, an understanding
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Incorporation of Your Dental Practice - Tips and Traps DAVID CHONG YEN CFP, CA Who should consider incorporating? By now, you’ve all heard that dentists can incorporate i.e., convert their dental practice into a professional corporation (PC). However, a common question that arises is: Which dentists should incorporate? Dentists who earn in excess of $115,000 in taxable income and who have a practice loan (loan used to finance the dental practice) should consider incorporating regardless of whether they need all of the money for their personal use. Why? Because they stand to save $62,000 for every $100,000 of practice loan. Dentists who have no practice loan and who earn in excess of $115,000 in taxable income and can afford to leave money inside the corporation should also consider incorporating. Why? Because each year, the PC’s tax rate is only 18.6 per cent (vs. 46 per cent) on the first $300,000 of taxable income (revenues minus expenses) saving significant tax dollars. The money saved can be invested in the PC’s name. This savings inside the PC serves as a tax effective way to save for your retirement. Yes, the PC serves as a super sized pension plan. Also, when selling your practice, consider selling the shares of your PC as each shareholder may be able to shelter the first $500,000 of capital gains from any taxes. Who can be shareholders of your PC?
then dividends can be paid to them. Such dividends will be taxed at a much lower tax rate. Approximately $31,750 may be received virtually tax free by an individual 18 years of age or older who has no other source of income. This is also a very tax efficient way for paying for your children’s university education. Tips and Traps When adding family members, consider the following and ensure these issues have been addressed with your accountant and lawyer: 1) Divorce 2) Children becoming wayward 3) Death of shareholder 4) Dispute between the tax department and yourself involving the valuation of your practice 5) Ability to pay dividends to one or more shareholders without having to pay to other shareholders.
Effective January 1, 2006, the dentist, spouse, children and parents of the dentist are permitted to be shareholders of the PC.
Effective January 1, 2006, the dentist, spouse, children and parents of the dentist are permitted to be shareholders of the PC. However, in-laws, cousins, nephews, brothers, sisters, grandparents and grandchildren of the dentist Traps associated with a PC include: are not permitted to be shareholders in the PC. Why make additional family members shareholders of the a) If you are currently in a partnership, the tax savings PC? If these family members are low income earners, outlined above will be reduced.
b) Where more money than profit is drawn from the practice, thereby resulting in a deficit in their capital account, they may not be a good candidate for a PC. Dentists who pay their RRSP, personal taxes, disability and critical illness insurance from their practice are often in this position. c) Shareholders must be Canadian residents. Summary: The legislation permitting family members of a dentist to be shareholders of a PC has created tax saving opportunities for many dentists. Dentists who
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previously had a PC should consider adding permitted family members to be shareholders of their PC. Dentists who do not have a PC should request their advisors perform a cost/benefit analysis of setting up a PC. David Chong Yen, CFP, CA with an international firm background and more than twenty-five 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 advise.
Matrimonial Practice Valuations GRAHAM R. TUCK
H.B.A. C.A
In the last three months we have completed eight matrimonial practice valuations. One was for a spouse and the other seven were for doctors. This is not the most pleasant time for the doctor but one should try not to be too upset. You are going through something that many others have experienced before. From our position as an appraiser, we recommend having the valuation done as soon as possible after the separation date. The valuation will be presumed as if it was done on the date of separation. Subsequent events are not considered when doing the valuation. Counting the charts in the practice and documenting the assets should be completed as close to the separation date as possible. We represented the spouse in one of our valuations, as the original valuation was unacceptable in form and value. The valuation should be written on the basis that it will stand up in court. Ideally, the appraiser will not be required in court as both sides would see the valuation as realistic and representing fair market value. Last month I received a letter from a spouse’s lawyer stating, “Your report was instrumental in settling the issues between the parties, and the trial will not proceed next week given the settlement�. Remember, the practice value does not include bank accounts, accounts receivable, accounts payable, artwork and personal items such as automobiles. The value is based on an asset sale not a share sale even if the dentist is incorporated. If the dentist owned a practice on the date of marriage a Letter of Opinion as to the value on that date may be necessary to offset the current value of the practice. Information back that many years makes a full comprehensive valuation impossible. Typically, we rely heavily on current financial statements because it
is impossible to count charts or look at equipment back when the marriage took place. We have, in the past, been able to use our previous valuations to up-date the asset value for matrimonial purposes. This also lends credence to the current fair market value. Past valuations can also come back to haunt you. If your past valuation was higher than fair market value you would have a hard time explaining why the value declined in the matrimonial valuation when the billings and patient base had both increased in the interim. This specifically happened recently where others had overvalued the practice prior to the separation date, then considerably reduced the matrimonial valuation. We were called in to review the situation. In essence, the error was in the first valuation as our value was a little higher than the matrimonial value but the original valuation was not in the realm of reasonableness. I highly recommend that the dentist use their accountant to produce financial statements prior to preparing the tax returns. There is more weight given to an accountant produced financial results than the report that comes from your computer. This is quite incongruous as the accountant uses your computer report to prepare the financial statements. Remember, the appraiser is independent of both parties. They are there to establish fair market value and document why the value is reasonable and to detail the basis of the valuation, which should also be supported by other sales of similar practices.
Graham Tuck, H.B.A., C.A. is the broker/owner of Professional Practice Sales (Ontario) Ltd., which specializes in the valuation and sales of dental practices. He can be reached at (905) 472-6000 or 1-888-777-8825 or e-mail at: grtuck@rogers.com
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“Family Members” vs. Family Trusts DAVID ROSENTHAL
B.A. (Hons.), LL.B.
In the last edition of The Professional Advisory, my colleague Barry Spiegel discussed the new regulations permitting your family members to own non-voting shares of your Professional Corporation (PC). The regulations took effect on January 1, 2006. This is particularly interesting for business lawyers as this legislation is completely new and as with most laws, the regulations are not crystal clear and are open to different interpretations. Dentists and their professional advisors must proceed carefully and there is a need for creative thinking and planning. The Royal College of Dental Surgeons of Ontario conducted a “Roadshow” in Toronto, London, Ottawa and Sudbury to explain the legal and tax implications of having “Family Members” (as defined in the new laws) own non-voting shares of a PC. Barry Spiegel and I both spoke at these Roadshows about the legal aspects. For those who were unable to attend, a DVD of the Toronto presentation is available for purchase (and no, Barry and I unfortunately do not receive royalties from DVD sales). Now that Family Members of dentists can own nonvoting shares of a PC, is there still a need for a separate hygiene services corporation? Absolutely. A hygiene services corporation (HSC) performs the technical component of dental hygiene services that are not required to be performed by a dentist or his/her professionally trained assistant. Typically members of the dentist’s family are shareholders of the HSC by way of a family trust. A trust is a rather strange hybrid entity (neither a person nor a corporation), administered by one or more people known as trustees. Most often, the trust agreement is a discretionary trust specifying the number of beneficiaries who may receive income from the trust each year and the trustees in turn determine which of the beneficiaries is entitled to the income.
That decision is wholly discretionary and may vary each year. Family Members are defined in the new PC regulations as your parents, your children and your spouse (being someone to whom you are married or with whom you are living in a conjugal relationship outside marriage). This may be quite different from the beneficiaries of a family trust (the shareholder of the HSC) who can be anyone. Beneficiaries are not limited solely to Family Members. Therefore a dentist can provide for a much broader group of beneficiaries who can receive dividend income from the HSC. (I know many of you will be pleased that you can include your mother-in-law as a beneficiary under such family trust. In a PC, your mother-in-law is excluded.) If structured properly so that the two companies are not associated, your PC and HSC may each enjoy the small business tax rate of approximately 18 per cent on the first $300,000.00 of income. Depending on the size of your practice, this could result in significant tax savings far and above the amount realized when using only a PC. The new rules permitting Family Members to own nonvoting shares of your PC present further tax planning opportunities and potential tax savings for you. However the laws are becoming more complex. As Barry Spiegel advised in the last edition, proceed carefully and with the benefit of solid professional advice.
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 and consulting for the dental profession. He can be reached at (416) 865-0736; or fax to (416) 203-8592; or e-mail to david@spieglaw.com.
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The Three Phases of Transition BARRY R. McNULTY
CFP, RFP, CIM, FCSI
It is my belief that successful dental transitions are divided into three distinct phases. The first is the PreTransition phase. I think of this as the preparation stage where basically you get organized for the next two phases.
“Getting all your ducks in a row” aptly describes what you need to do in this important phase of your transition. In my experience you need, depending on your particular circumstances, upwards of 10 years to manage this phase properly.
The next phase is the Transition itself. As you are no doubt fully aware, there are many variations of this phase. No matter what variation is right for you, there is a great deal of complexity on how you address both the legal and other issues. Among those other issues is not only the negotiation of the sale of the practice - if that’s appropriate in your circumstances - but also the goodbyes to staff and patients in a manner in which you feel comfortable. It also includes executing and finalizing all the components of your Pre-Transition planning as they relate to taxes and the organization of your retirement pools of capital so that they can supply your retirement funding needs in the most efficient manner. The final phase of a successful dental transition is what I refer to as the Post-Transition phase. This phase is extremely important. After all, it’s in this phase that you will spend the rest of your life. To be candid, if the first two phases are handled properly then this one should be what is known as a “slam dunk”. At this point your plans should have all been made. All the hard work should be done. Ideally, from here on your job will be to enjoy! Oh, and while you are enjoying your retirement, it will also be your task during this phase to monitor what is actually happening in relation to the finan cial aspects of your retirement relative to how it was planned. Plans are useless but planning is invaluable is one of my favourite Winston Churchill maxims.
Q A &
What Churchill was basically saying is that plans quickly become obsolete.You have to constantly monitor them and be prepared to make needed adjustments. Some of the issues that you have to keep on top of include inflation - is it higher or lower than anticipated? You could (and hopefully will) live a lot longer. If you reach age 65 in reasonable health you have an excellent chance of living into your eighties and even beyond. Investment returns could be higher or lower than you expected. There could even be a decline in the market that takes 10 or 15 years to recover as opposed to what we have seen recently with peaks and valleys coming within a matter of a few years. Tax regulations and many other factors can all influence the financial aspects of your retirement. Each of these three phases - Pre-transition, Transition and Post-transition - offer both opportunity and potential pitfalls. I encourage you to be proactive in all three. I feel very confident in saying that doing so will significantly enhance the likelihood of a successful transition. 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.
Please address your questions to: The Professional Advisory for Dental Professionals 308-7050 Woodbine Avenue, Markham, Ontario L3R 4G3 T. (905) 470-6222 F. (905) 475-4082 info@theprofessionaladvisory.com
Q Recently I was told that even though I have been paying substantial premiums over the years for my long term disability insurance through CDSPI that I may not get the benefit I have been paying for at claim time. Is this true?
A Unfortunately, the answer is “Yes!” Unlike private plans that guarantee your monthly benefit when you receive their contract, the plan offered through the Canadian Dental Service Plans Inc. offers no such guarantee. They determine how much they are going to pay you at claim time. They specifically state “Claims are calculated based on either… Your average monthly
income, during the 24-month period prior to your disability; or by taking the highest average of your earned monthly income for any 12 consecutive months in the 24 months immediately prior to the month in which your disability commenced”. The bottom line is that if your income has dropped prior to your claim, you may not get the benefit you expect. Q What if I can’t find the perfect location? A Wait, or consider an alternate patient community to service. Consider that locating in the wrong area will impair your personal and financial life throughout the remainder of your career. Take it seriously.
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”.