Notes From the Editor: When in Need Consult an Expert RALPH CRAWFORD BA., DMD (Editor)
Partnerships and Shotguns GRAHAM R. TUCK H.B.A. C.A
The Future of Dental Hygiene Services DAVID ROSENTHAL B.A., LL.B.
Is Your Successful Transition at Risk? BARRY R. McNULTY CFP, RFP, CIM, FCSI.
Do You Really Know? DR. IAN WEXLER
What You Don’t Know About Your Lease Will Hurt You IAN TOMS B.Sc. (Hons)
Achieving a Personal Approach in a Multi-Provider Practice DR. RON WEINTRAUB
Income-Splitting Opportunities That Avoid Attribution Rules and Tax Traps (Part 2 of 4) DAVID CHONG YEN CFP, CA
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.
When in Need Consult an Expert RALPH CRAWFORD
BA., DMD (Editor)
I was recently skimming through one of my books of yesteryear, The Profitable Practice, and a particular comment under the heading SECURING BUSINESS ADVICE caught my eye: The dentist who would conduct his practice well must accustom himself to two lines of thought, one professional and the other commercial. Along professional lines he may develop his knowledge, imagination and skill as far as circumstances warrant. On business lines, he needs only plain commonsense and knowledge of what things cost him, and the importance of collecting what is due him. If he finds difficulty in developing this line of thought, he will do well to adopt the practice he expects others to adopt toward him - that is, when in need, consult an expert. This sage advice was written by George Wood Clapp, DDS and published in 1916 by The Country Life Press of New York. Dr. Clapp was indeed a giant of his time and one of the first to author a full text on dental practice management. Although there have been tremendous changes in the art and science of dentistry over the past century Dr. Clapp’s particular guidance, when in need, consult an expert, is as valid today as it was 91 years ago. He surely would be very pleased with the consulting experts found in every issue of The Professional Advisory. Even though Dr. Clapp’s average dentist grossed $2,500 a year with a net income of $1,710 the business of dentistry appears unchanged. When he addresses “the landlord needs his rent” Clapp could certainly relate to Ian Toms’s What You Don’t Know About Your Lease Will Hurt You, and Barr y McNulty’s Is Your Transition at Risk? falls
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right in line with Dr. Clapp’s reference to retirement: “Alas for him if there are no savings to call upon”. Even though all Dr. Clapp’s 1916 dentists are solo practitioners, his section on “how to render patients service of great benefit to their health, comfort, appearance and efficiency”, are the same principles Ron Weintraub addresses in Achieving a Personal Approach in a Multi-Provider Practice. Within the pages of this issue of The Professional Advisory there are topics that Dr. Clapp doesn’t address at all. In Canada there was no such thing as personal income tax until 1917 and the first legislation to regulate dental hygiene didn’t occur until introduced in Saskatchewan in 1950. And even though insurance has been around for thousands of years he didn’t find it necessary to include it in his book. However, in the realm of these essential aspects of modern dentistry taxes, hygiene services and insurance - we are positive that Dr. Clapp would be in full agreement that when in need we consult an expert: experts such as David Chong Yen who continues his series on Income Splitting Opportunities, David Rosenthal as he leads us into the Future of Dental Hygiene Services and Ian Wexler as he questions our insurance coverage knowledge with Do You Really Know? It is heartening to know that good advice, reason, enlightenment and the wisdom to consult an expert in time of need, never grows old. Thank you, Dr. Clapp.
crawford@dccnet.com
Partnerships and Shotguns GRAHAM R. TUCK
H.B.A. C.A
As I have stated before, I am not a big fan of partnerships but maybe that’s because I’m prejudiced by my experience with poor partnership agreements. Only recently I’ve had to deal with a couple of partnerships in
trouble - mostly because of the poor to impossible partnership agreements. If the partnership is in trouble there should be a provision to have it dissolved in a fair and amicable way.
I feel this can be arranged by a well written “shotgun clause” that would be valid in a number of potential changes in partnership. A “shotgun” is an escape hatch mechanism. In a shotgun arrangement, when one shareholder makes an offer, the shareholder receiving the offer can either accept or not. If the offer is not accepted, then the shareholder who turns down the offer, in turn, must buy the other partner’s interest for the same terms as the original offer. It is harsh, but it provides protection for both parties and a mechanism to exit as well as to determine price and terms. In any separation there should be provisions for unequal size partnerships where one partner’s practice is small and the other’s considerably larger. The concept of a single offer fixed value to accept or turn the shotgun around would not be fair to both parties. There should be recognition that the value of one practice needs a modifying factor to reflect the difference in values of the partners. To think that one partner sets a price and the other partner must accept or offer the same price for his partner’s practice is not fair. Potentially, an offer as a percentage of last years gross would be fairer; i.e., 90% of the other partners last years gross (on $500,000 gross the other partner would offer 90% or $450,000). But if the other party wished to pick up and reverse the shotgun he would have to pay 90% of his partners gross (say 90% of $700,000 = $630,000). The $630,000 reverse offer would be a fairer relationship if the partnership is going to be dissolved.
You would be surprised how many partnership agreements do not even have a shotgun clause. In fact you would be surprised how many partnerships do not even have an agreement with provisions for separation. And I’ve even dealt with a few partnerships where a Partnership Agreement doesn’t even exist. Good shotgun clauses make fairer relationships in a separation situation. Professional Practice Sales drafts many agreements, such as Agreement of Purchase and Sale or Associate Agreements and we always recommend that all new partnership or cost-share agreements be drafted by an experienced lawyer specializing in dentists’ legal issues. It should be unique to the two or more partners who are forming the partnership or cost-share. The agreement should lay out a resolution for as many potential changes as possible with a fair outcome. There should be a provision for such things as altering the profit sharing arrangement when circumstances between the partners change - such as one doctor wishing to cut back a day or two a week. Partners should review their agreement about every five years to ensure that it is still as valid as when they formed the partnership. 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 1-888777-8825 or e-mail at: grtuck@rogers.com
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The Future of Dental Hygiene Services DAVID ROSENTHAL
B.A., LL.B.
Dental hygienists have been a self-regulating profession in Alberta since 1990, operating under the Dental Disciplines Act. Under that framework dental hygienists were required to work under the supervision of a dentist and could not engage in dental hygiene practice independently. The Government of Alberta recently passed a new regulation that removes the requirement for dental hygienists to work under the supervision of a dentist. The amendments came into force October 31, 2006. As a result, dental hygienists in Alberta may now provide certain services, including scaling and root planing, directly to patients. The new regulation will permit dental hygienists and dentists to compete in the provision of dental hygiene services. Several other provinces in Canada are also currently considering changes to regulations governing dental hygiene services. What is the status in Ontario?
In Ontario dental hygienists are also self-regulated professionals. The College of Dental Hygienists of Ontario is an independent regulatory body which governs dental hygienists in the best interest of the public and the dental hygiene profession. The current law in Ontario, the Dental Hygiene Act, permits a dental hygienist to perform: (i) scaling teeth and root planing including curetting surrounding tissue; and (ii) orthodontic and restorative procedures; however those procedures may only be performed by the dental hygienist if the procedure is Ordered (my emphasis added) by a member of the Royal College of Dental Surgeons of Ontario. A dental hygienist that performs such procedures without the order of the dentist would be committing an act of professional misconduct. The Ontario Ministry of Health and Long-Term Care
has proposed a framework and there have been discussions with various stakeholder groups in Ontario regarding development of alternative models of dental hygiene services to allow dental hygienists to “self-initiate” and provide scaling and root planning under certain circumstances without the order of a dentist. As part of this framework no doubt there will be various requirements including additional training, education, required skill levels and experience before dental hygienists will be permitted to self-initiate. If or when implemented this could change the landscape for dental hygiene
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services in Ontario. I believe it is a question of when, not if, these changes will be introduced by the Ontario provincial government. My colleague, Barry A. Spiegel, LL.M., Q.C., and I will continue to monitor these developments and keep you advised of the changes to the legal and regulatory requirements in future volumes of The Professional Advisory. 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) 8650736; or fax to (416) 363-8451; or e-mail to david@drlaw.ca.
Is Your Successful Transition at Risk? BARRY R. McNULTY
CFP, RFP, CIM, FCSI
In my experience, the answer to this question is that it very well could be: if you are within 10 years of the date you would either like to or be in a position to retire, or you are in your late 50s, and find yourself in any of the following four circumstances. 1) You have not accurately assessed the amount of annual cash flow (not income), indexed for inflation, you will need to finance a retirement lifestyle with which you and your significant other (if you have one) are going to be happy. Common wisdom advises that the average family will need at least 70 per cent of their current after-tax income to get by during retirement. In my view there are two problems with this rule of thumb. First, dental families don’t always fit the profile of an “average family”. And secondly, most dental families I know don’t want to just “get by”. A critical component of a successful transition plan is specifically identifying what retirement funds you will need for your individual ideal retirement experience. 2) You don’t know precisely the amount of capital (including what you might get from the sale of your practice ) you are going to need given an accurate assessment of your retirement cash flow needs as mentioned above. Statistics Canada figures indicate that if you reach your mid 60s in reasonable health today, a couple has a 40 per cent chance of having at least one of them live to age 90. Of course, while that is a very positive statistic it is also quite worrisome. If you have not accurately assessed your retirement living needs and have therefore consumed more capital than you should have…well the prospect of being poor at that age is definitely something you want to avoid! 3) You are still treating your investments with a philosophical viewpoint of someone in the accumulation stages of life. I have written a good deal about this. When you are approaching retirement, even with still a few years
to go, the emphasis of your investment strategies has to change. Getting the best return, given a level of risk you are comfortable with, is no longer the main point. Preservation of capital and having it organized to provide you with what we call your retirement paycheque - packaged in the most tax-efficient manner - should be in my view, the guiding principals. The impact of losing money causes irreparable damage to your transition and retirement plans. Risk and reward are linked in the investment world. The more reward you want, the more risk you must undertake. Acquiring that extra 2%, 3%, 4% or more in return is not worth risking a loss of 10%, 15%, 20% or more of your capital!
The more reward you want, the more risk you must undertake. 4) You still have personal debt. To pay off $50,000 of personal debt at the top marginal rate in Ontario, you have to earn $93,808 pre-tax. Assuming your costs associated with that additional production are 20 per cent, you will have to produce an additional $117,000 at chairside to pay off $50,000 of personal debt. If you have personal debt prior to transition, make it a priority to pay it off. If you have practice debt, make sure you factor in the after-tax cost of paying it off no later than when you sell your practice and ensure you have deducted this sum from the amount of capital you estimate you will need to retire comfortably. 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 905-470-6222 ext 216 or barry.mcnulty@raymondjames.ca.
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Do You Really Know? DR. IAN WEXLER The following are the main excerpts of a conversation that I had over the recent holidays with a close friend of my brother-in-law over dinner one evening. He is in his early fifties, a partner in a major accounting firm, is married with several children and someone who I have always considered to be highly intelligent. I will call him Mike instead of using his real name. Mike: How’s the insurance business these days Ian? Me: Changing as we speak…underwriting has been getting tougher and the number of companies available to independent brokers like me keeps shrinking. What companies do you have your insurance plans with Mike? Mike: If you’re talking about disability coverage Ian, I think it’s with the accountant’s association plan or with Paul Revere… but I’m not sure. The firm looks after this stuff for the partners. Me: Paul Revere is no longer around Mike. Without going into a lot of detail, around half dozen years ago or longer, they were taken over by Provident, then Unum, and now it’s RBC Insurance. Mike: Doesn’t really matter to me…if something happens to me, the firm will make sure that I’m OK. Me: How do you know that? Mike: I just do. Me: Sounds like you don’t really know too much about your coverage? Mike: No, but as I said, I’m not worried…the firm won’t let me down if something happens to me. Me: No problem Mike! If you’d like though, as a friend and as a favour, I’d be happy to have a look at things and also to have your life coverage looked at by one of our life insurance specialists. This way, at least you’d know exactly what you have and how the plans work. Mike: Thanks for the offer Ian, but the firm will be sure that the family or I will be well looked after if something
happens to me. Me: Great! How about those Raptors?! I came away from this conversation with several thoughts. 1) How can someone in his position, at his income level, and with a family, have no idea as to what insurance protection he has? 2) How can someone with his level of education put all of his faith blindly in his accounting firm to look after him in the event of a disability or death? 3) What would his family think if they knew that Mike had no idea about any of his insurance plan details if something unforeseen happened to him? This Scenario Is Not Uncommon On the questionnaire that I ask all prospective clients to complete is a question that asks, “Do you think that you have the right amount, type, and structure of insurance coverage?” Quite often, many answer “Yes”, when in reality; they have not looked or checked their coverage for some time. If You Don’t Know…Don’t Take Chances! Now is a good time to dig out your insurance policies, blow off the cob webs, and see what you actually have. Finally: 1) Make sure that you have an up to date one or two page summary of all of your coverage. 2) Never assume that everything is OK - especially if you have not reviewed your coverage or your insurance needs for some time. 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.
What You Don’t Know About Your Lease Will Hurt You IAN TOMS
B.Sc. (Hons)
I’m sure you check to ensure your staff is paid according to legislation, your bank account charges and loan payments are as agreed to with the bank, and that you are only paying what you agreed to pay for equipment and supplies. Why then would you not administer your
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premises lease to make sure you are being treated fairly? Apparent lease issues are ongoing, chronic and expensive “gottcha’s” that appear in at least 30 per cent of the leases I review. For example, are you overpaying rent?
• typical overpayment of additional rent is $3,000 per year because tenants pay for items that they didn’t agree to pay for and don’t check their lease against additional rent statements. • time and time again I see base rent payments of $1,000 or more per month than is reasonable because tenants don’t check the realty market when negotiating base rent either at the beginning of the tenancy or at term renewal. • frequently tenants pay more than the lease indicates simply because either they or the landlord have misread the lease. For example, at $30 per square foot, a 200 square foot mathematical error can cost a tenant $6,000 each and every year of the tenancy! Hidden lease issues in one form or another appear in almost every lease I review and include a collection of very nasty “traps” which, like land mines, are set years in advance and surprise tenants at an inopportune time. For example: • can you assign your lease, or are you “on the hook” long after retirement? Did you agree that your landlord can terminate your lease instead of letting you assign it to your successor?
• did you agree to grossly overpay rent during term renewals by agreeing to a ridiculously landlord friendly renewal term rent determination formula? As you read this, are you thinking “not me?” Nonsense. Very likely your lease DOES contain at least one of the problems indicated above. Administering your lease periodically can save you thousands of dollars by identifying and enabling you to deal with issues on a proactive basis. Every lease should be reviewed by a skilled, experienced and capable professional within the first six months of the tenancy, and annually thereafter. The review should be inexpensive (no more than two hours of professional time), should identify material issues to be corrected now or at some future point, and should result in a report which includes an action plan designed to implement the corrections. 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, by e-mail at iantoms@pipcom.com, or through his web site at: www. iantoms.com.
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Achieving a Personal Approach in a Multi-Provider Practice. DR. RON WEINTRAUB Patients value a small dental office offering them a sense of belonging and a relationship with practitioners as opposed to a feeling of “being processed” in a welloiled system of a larger practice. To meet financial requirements and perceived patient-driven demands for the latest in technology, however, dental offices are leaning toward a larger, multi-provider model. The new paradigm poses challenges for practitioners to offer their patients the personalized attention to which they have become accustomed. Achieving a personal approach in the practice overcomes patient fears of anonymity and benefits patients and practitioners. Staff plays an important part in allaying patients’ fears by focusing on their needs and expectations within a welcoming environment. Administration’s Initial Involvement Administration is the first to greet patients. A warm, friendly approach in making the appointment for new patients puts them at ease while it begins a relationship with staff that engenders trust. When staff personally takes patients’ medical history and identifies new patients by name, they send welcoming signals. In booking re-care appointments, receptionists can more
efficiently guide patients’ future requirements if they have ready access to notes highlighting the current treatment. Another task reception desk can accomplish is to familiarize patients with other office professionals. Among those to know are coordinators, hygienists, clinical assistants, and doctors. Helping patients put a face to a name contributes to their sense of belonging in a large dental office environment. Additionally, knowing who is involved in their dental experience increases their comfort level as to the quality of their care. At the end of the session when booking the next appointment interval, administrators include patients in decision making by asking whether the same time works best for them. By giving patients choices, we are accommodating them and synchronizing their prescribed interval of treatment with hygienist and doctor. Hygienists’ Participation Hygienists also play a role in making patients feel comfortable. They discuss the goals of the appointment. In addition to talking about hygiene protocols, including insights into x-rays, doctor examination, and further treatment
tells patients their oral care is in the hands of a team of competent dental practitioners with a personal plan for treatment of their oral condition. Giving patients a “loot” bag as they leave their appointment is becoming more common in dental offices today. Filling the bag that prominently displays the office logo with dental floss, toothbrush, and/or toothpaste gives us an excellent opportunity to encourage patients to promote good oral health. If a toothbrush is included, having the name of the dental office inscribed on the handle accomplishes two things: 1. It is a constant reminder the office wants patients to have the tools they need to promote good oral hygiene, and 2. It is a form of internal marketing. Doctor’s Role in Establishing A Welcoming Ambiance The doctor’s attitude plays a major role in contributing to patient comfort. Doctors and clinical support staff put patients at ease immediately when they express happiness at seeing them and welcome them rather than leave an impression they are performing something more important in the next operatory. Another contributing factor to foster a positive feeling of comfort is in a follow up telephone call after a reasonably involved session or treatment.
By scheduling time to enquire whether the patient is experiencing any discomfort or swelling, doctors dramatically demonstrate concern for their patient’s well-being. A personal call from the doctor has a positive effect on patients and extends to others when they tell their friends about it. This personalized experience is not routine, and it is sure to identify your office as special. The obvious economic reason in creating large, multiprovider practices that includes up-to-date technology in a contemporary environment does not have to sacrifice personalized service clients enjoy in solo practices. Administrators, oral healthcare practitioners, and dentists need to provide a welcoming atmosphere, orchestrate their understanding of patients’ needs, and communicate effectively among staff and with patients. 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 contacted at (905) 4706222 Ext. 221 or drronips@rogers.com.
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Income-Splitting Opportunities That Avoid Attribution Rules and Tax Traps (Part 2 of 4) DAVID CHONG YEN CFP, CA This is the second part of a four-part series. Previously, tax traps associated with using family members to save taxes were outlined. In this article, we will outline income-splitting opportunities which avoid attribution rules and tax traps. 1. Shifting tax bill Attribution rules may be avoided if you gift money or property to your children/grandchildren who are 18 years and older. Once you have gifted the money and/or property, any additional growth in investment value will be taxed in the hands of your children/grandchildren. Moreover, they can also make use of their principal residence exemption in the future to shelter/reduce taxes arising from the sale of real property used as a principal residence. The higher income spouse can lend money to the lower income spouse at interest rates specified by the Canada Revenue Agency. Interest will be taxed in the higher income spouse’s hands and deducted by the person paying the interest provided that the loan proceeds are used for business or investment purposes.
Interest for the current year must be paid no later than January 30 of the following year. Consider this maneuver if the lower income person can achieve a return on the money higher than the interest charged. 2. Changing spending habits The higher income spouse should pay for all personal expenses including vacations, food, clothing, home, mortgage, etc. This enables the lower income spouse to invest their income and be taxed at a lower tax rate on the investment income. Maintaining a proper paper trail to be able to prove the sources and usage of the money is important. Hence, spouses should keep separate bank accounts. 3. Hiring family members Hire your parents, spouse and children at reasonable amounts for services rendered. As with your nonrelated employees, job descriptions should be prepared and each family member should also be paid on the same pay cycle, using the same methods as other non-related employees. Payroll deductions should be deducted and remitted along with other amounts withheld
Any salaries paid to your spouse or children will boost their RRSP contribution room, even if they do not currently contribute to their RRSPs. Conversely, salaries paid to family members could affect their entitlement to government assisted income or loans. Provided certain conditions have been met, the dentist, spouse, parents and children may receive a refund for Employment Insurance (EI) premiums paid over the past three years, and would be exempt from paying EI premiums in the future. Please note that an EI exempt employee cannot claim EI benefits (i.e., maternity or parental leave). 4. Building education funds You can contribute up to $ 4,000 per child per year for up to 21 years to a maximum of $42,000 in a Registered Education Savings Plan (RESP). The government also contributes up to 20 per cent of the first $2,000 of an annual RESP contribution to a maximum of $400 for each child. Income earned in the RESP will be taxed only when distributed for educational purposes in the
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children’s hands (i.e., low tax rates). 5. Incorporating your practice Consider making your parents, spouse and children shareholders of your Professional Corporation and your in-laws, cousins, etc., shareholders of your technical or hygiene service corporation. This may enable your parents, spouse, each of your children and other relatives to utilize each of their $500,000 capital gains exemption (which translates into a tax savings of as much as $116,000 for each $500,000 capital gains exemption claimed) to shelter taxes arising from the sale of your practice. Using a trust is also an effective tax reduction technique, which will be covered in Part 3 of this series. David Chong Yen, CFP, CA with an international firm background and more than twenty-six 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.
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 My insurance advisor keeps trying to convince me to purchase a large permanent life insurance policy to put inside my new Professional Corporation. He claims it will build up lots of cash value over time to help me with retirement planning, and that there is really no downside. What do you think? A Utilizing your “PC” for life insurance planning can be a very powerful tool for life, estate, and tax planning if it is structured properly and if you (and your accountant) are aware of the potential upsides and downsides. It is imperative for anyone considering this that they • Understand how the plan and the planning strategy works, and that this is a “long term (over 10 year)” strategy
• Carefully understand the choices available for plans, e.g. Universal versus Whole life • That your advisor compares all major plans avail• able before choosing the best one for you • That you include your accountant in the process • That you and your accountant understand the short and long term risks
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