The
44 Professional
Advisory For Dental Professionals
IN THIS ISSUE A WARNING TO FIXED INCOME INVESTORS Mark McNulty BA, CFP, CIM
IF IT SOUNDS TOO GOOD TO BE TRUE... IT USUALLY IS! Dr. Ian Wexler
THE FUTURE ISN’T WHAT IT USED TO BE Ian Toms B.Sc. (Hons)
DEVELOPING AN IDEAL PRACTICE Dr. Ron Weintraub
12 POSSIBLE SYMPTOMS OF POOR TAX PLANNING David Chong Yen CFP, CA
ONLY TRUSTED STAFF CAN DEFRAUD YOU Graham Tuck H.B.A C.A
SHAREHOLDERS AGREEMENT FOR YOUR PROFESSIONAL CORPORATION David E. Rosenthal BA., LL.B.
plus IF IT IS TO BE, IT IS UP TO ME! NOTES FROM THE EDITOR
VOL. 44 : APRIL 2010
The Professional Advisory
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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 eld. 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.
If It Is To Be, It Is Up to Me! RALPH CRAWFORD BA., DMD One of the privileges we enjoyed involving the highly successful 2010 Winter Olympics was an invitation to attend a pre-event reception a few weeks prior to the opening of the Games. A highlight at the reception was a presentation by Richmond BC resident Darcy Marquardt, a highly qualified 31 year old athlete whose Woman’s Rowing Eights came in fourth in the 2008 Beijing Olympics. Ms. Marquardt gave an extremely interesting and informative overview of her lifetime involvement in athletics and what led her to become interested in rowing while a first year student at the University of Victoria: I fell in love with the sport as soon as I set foot in a rowing boat - something about the rhythm of the stroke, the physical challenge and the unbelievable teamwork required drew me in and has kept me going. But what particularly grasped our attention was Darcy’s personal motto that helped drive her to the top of her chosen Olympic event in 2008: If it is to be, it is up to me! Undoubtedly, each one of us upon reflecting back on our lives depended immensely on the nurturing and direction of our parents and the instruction and leadership provided in our early schooling. As maturity set in and we headed off to college and a professional career, unquestionably our success depended more and more upon our own individual choices and reliance on: If it is to be, it is up to me. And so it is today and will remain so for the rest of our lives. Reading through each of the seven individual articles within Professional Advisory reinforces again and again that individual success and fulfillment depends
on “me”. In Shareholders Agreement for your Professional Corporation David Rosenthal makes it clear: “The dentist must remain in control of the PC regardless of changing circumstances.” And in 12 Possible Symptoms of Poor Tax Planning David Chong Yen strongly suggests “Reducing your tax bill should be done on an ongoing basis, much like preventing cavities.” Graham Tuck in dealing with the problem of trusted staff defrauding you, strongly suggests that it is up to me (you) to set up good internal control procedures in your practice. Thinking of Developing An Ideal Practice? Ron Weintraub points out another if it is to be situation requiring focused thinking and planning. And even when The Future Isn’t What it Used to Be Ian Toms has advice: “Actively manage both your location and your lease obligations based on practice, objective and realistic expectations.” Ian Wexler outlines that the old adage If It Sounds Too Good To Be True... It Usually Is is still around and uses eight valid points to show that it is up to me to Know The Real Deal. Mark McNulty has A Warning to Fixed Income Investors and concludes that your first goal (like his) is not to lose money and if that goal is to be then follow his advice pointed out in “What Should I Do”? Reminded of the achievement of all the athletes, and particularly the Canadian athletes, in the 2010 Olympics we can’t help but reflect on how important Darcy Marquardt’s personal motto - If it is to be, it is up to me - has on how we conduct a dental practice, run a business and manage every aspect of our lives. PA
crawford@dccnet.com
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A Warning to Fixed Income Investors MARK McNULTY BA, CFP, CIM With the record volatility in the stock market and money markets paying next to nothing, many dentists we meet have turned to bonds. Bonds pay higher interest rates than money markets and are less volatile than stocks. In fact, the families we manage have been over-weighted in bonds since the beginning of 2008. However, all that is about to change. In April 2009, the Bank of Canada (BOC) followed the U.S Federal Reserve’s lead and reduced its overnight lending rate to 0.25% and it has remained there ever since. The BOC also announced it was prepared to keep the overnight lending rate at this historically low level until mid 2010. That is, of course, unless they determine a compelling reason to raise rates sooner. Why should I care about the overnight lending rate? As interest rates rise, bond prices will fall. So when the BOC starts to raise interest rates, the value of your bond holdings will decrease. With interest rates today being at rock bottom levels, rising interest rates are a certainty at some point down the road. Although bonds are less volatile than equities, in a rapidly rising interest rate environment bond prices can fall quickly. For example, a 1% increase in interest rates today would result in a five-year government bond decreasing by around 4.75%, a 10-year bond decreasing by around 7.75% and a 30-year bond decreasing by almost 14%. Is the Bank of Canada actually going to start to raise rates in June? It’s hard to say. However, as June 2010 gets closer the answer will become clearer for a couple of reasons. First, I believe that right now the BOC itself probably doesn’t know for certain. If all goes well between now and June the BOC would certainly like to start to increase interest rates. Second, between now and June the BOC will give us monthly updates on the
state of the economy which will give us a better idea of when they plan to start increasing rates. So as June approaches and it becomes clearer as to what the BOC plans to do with interest rates, you’ll need to determine how best to position your fixed income holdings.
What should I do? When we have greater clarity on interest rates, you will have two options. The first option is to make no adjustment. If the economy is still very sluggish and the U.S is still committed to low interest rates then there is likely a good chance that the BOC with either leave the overnight lending rate unchanged, or only increase it by a token amount. On the other hand, if the inflation rate or economy heat up and the BOC seems committed to more aggressive rate hikes of say 0.50%, then depending on how your portfolio is currently positioned it may well be time to make some changes. In Conclusion If, like us, your first goal is not to lose money (and it should be), then now is a good time to be considering a reduction in your bond weightings. As always, we recommend you get the advice of an expert. PA Mr. Mark McNulty BA, CFP, CIM, is a Financial Advisor with Raymond James Ltd., Independent Financial Services - Member CIPF. He may be contacted at 905-470-6222ext 209 or mark.mcnulty@raymondjames. ca. The views of the author do not necessarily reect those of Raymond James. This article is for information only. Securities are offered through Raymond James Ltd., member CIPF. Financial planning and insurance are offered through Raymond James Financial Planning Ltd., which is not a member CIPF.
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If It Sounds Too Good To Be True... It Usually Is! DR. IAN WEXLER www.protect-ins.com
Although over 15 years have passed since I practiced dentistry, I vividly recall taking CE courses where the presenter would tout the latest bur that would magically transform the way I could prep a tooth in record time… or the newest composite that would ensure my patient could bite through steel without fracturing their newly restored central. I recall that if I didn’t order the particular product at the meeting (at a special discount), that I would be sure to contact the company rep first thing when I returned to the office to order some of the new miracle product. Funny thing though is that in reality, rarely did the product or equipment actually live up to its hype, and change my life OR the way I practiced. Interestingly, I have found that products sold in the insurance world are not so different! The Sales Pitch How many of you have received flyers or attended a “complementary seminar” where you were going to find out “The Secret to Retiring Rich” or “How to Avoid Paying Taxes Forever?” So, you attend and listen to an insurance advisor who shares with you the secret to utilizing your professional corporation to tax shelter money through purchasing a Universal Life insurance plan that will wind up netting you millions by the time you are nearing retirement age… all with little or no risk! Knowing The Real Deal The harsh reality is that not every dentist is a candidate for purchasing an insurance program that includes Universal or Whole Life to be utilized for retirement, cash accumulation, and-or tax sheltering purposes. All too often, dentists purchase these plans without understanding the risks, complications, and potential downsides. The following are a list of issues prepared with the assistance of the life insurance
specialists at Protect Insurance, which every dentist MUST consider before he or she contemplates or has already purchased one of these plans. 1. Have you undergone a comprehensive insurance needs analysis first? • Before purchasing ANY insurance product, it is of paramount importance that you undergo a comprehensive insurance needs analysis. As with every oral cavity, every dentist’s insurance needs are different. An insurance advisor focusing on one insurance product is no different than a general dentist focusing on one dental procedure. 2. What is my insurance priority list? • The vast majority of dentists should not consider any type of permanent life insurance plans as noted above without first considering disability insurance planning. This would be akin to agreeing to crown and bridge before periodontal, endodontic, or even orthodontic treatment first! 3. Do I have a long term life insurance need? • Do not even consider Universal or Whole Life unless you have a long term life insurance need. No matter how fantastic the numbers seem to look, there is a cost to the insurance. 4. Do I understand ALL of the risks and downsides? • There are significant issues that must be addressed and openly discussed with you, before you sign on the dotted line. Included are: 1. Plan charges called “ MERs or Management Expense Ratios”; 2. Penalty fees for temporarily or permanently stopping the plan; 3. If the plan is designed for “leveraging down the road”, how much can you actually leverage of the accumulated cash? 4. What if the investment returns do not perform as projected? 5. What happens if I sell my practice or PC? 6. What happens if my insurance needs change and I want to change the plan? 5. Are the investment return projections that I have been given realistic?
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• Always be sure to obtain several return projections including a “worst case scenario”. I have seen too many cases where dentists were given unrealistic interest rate projections when they purchased the plan, only to realize the plan or strategy was not proceeding as planned. 6. What if I change my mind down the road? • This question is extremely important! What if you cannot afford the plan at some point in the future or require funds for a home purchase, a wedding, or health related care? 7. Does this insurance advisor primarily focus on “Overfunded Universal Life?” • If this is the case AND no other insurance planning has been discussed, as aforementioned, this should be an immediate red flag. You owe it to yourself and your family to get a second opinion. 8. What if I already purchased one of these plans? • If you are not 100 per cent comfortable with what you have purchased, get a second opinion
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from an “independent life insurance specialist” to offer you your best options. Who are the best candidates for these programs, often called “Corporate Insured Retirement Programs” (CIRP)? At the very minimum, dentists should: • Have a long term life insurance need • Have little to no personal debt • Be maximizing RRSP/TFSA contributions • Have no financial strain saving inside their PC, to take advantage of the lower tax rate • Utilize this program with others inside their PC, for savings and investment purposes • Have an exit strategy PA Dr. Ian Wexler is Canada’s leading authority on insurance issues for dentists. He is the President of Protect Insurance Agencies Inc. in Toronto which provides specialized expertise in life, disability, critical illness, long term care, annuities, and other insurance products and services to professionals, executives, and business owners across Ontario. He can be reached for questions or other enquiries at (416) 391-3764 or drwex@ protect-ins.com
The Future Isn’t What it Used to Be IAN D. TOMS B.Sc. (Hons) www. iantoms.com
The economy is very different than imagined or predicted even two years ago, and we all need to shift our field of vision to adjust to the new reality. The party is over, and a big hangover has set in. No aspirin will cure this one - and it’s not going to go away any time soon. So what’s in the forecast for commercial tenants? Consider the current realty leasing market. As we now know, the free spending habits of times past are over and won’t return anytime soon due to increased unemployment and high personal debt. Interest
rates are expected to increase, squeezing the already pinched consumer even further. Reduced consumer spending means reduced sales and reduced ability for tenants to pay rent. When tenants aren’t able to pay their rent, less space is leased. The Toronto Real Estate Board reported that 5,829,559 square feet of space was leased in 2009, down 51 per cent from the 11,961,934 square feet leased in 2008. Tenants failed, or did not renew their lease terms and closed. Decreased demand for space has put pressure on landlords to maintain profitability by aggressively looking for rent. Surviving tenants are being squeezed to the maximum extent permitted by their leases, and then some! In this context, neither landlords nor tenants are rubbing their hands with glee. As the saying goes, when the water hole dries up, the animals start looking at each other.
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The Forecast For the next few years, the leasing weather will be unsettled, with primarily cool and overcast conditions. Look for occasional sunny breaks. Beware of two major storm systems approaching. The first storm will arrive July 1, 2010 when rent will be subject to HST, which will have the net effect of increasing rent by eight per cent. That’s $320 per month, or $4339.20 per year on rent of $4000 per month. The second storm will gradually creep into our area over a period of several months if not years. As interest rates increase, consumer spending will decrease further. At the same time, rental rates will have to increase to offset higher mortgage payments by landlords. But tenants will also face higher financing costs. An already aggravated situation will become critical. Look for additional rent to increase as pressure builds on landlords to improve profitability without the ability to charge more base rent. Tenants need to audit their additional rent statements carefully. You can bet the landlord will be! Landlords will look closely at leases to make sure they are collecting all possible rent. I am watching landlords announce lease audits and collecting “forgotten” rent charges retroactively. Space is being re-measured to increase rentable area and therefore rent. Landlords will also be looking at lease terms and conditions very carefully collecting all information available to design and improve their negotiating position. Woe to tenants in older buildings with demolition/early termination clauses in their leases as landlords demolish and redevelop their properties instead of investing in new plaza development in the green and growing areas.
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Look Forward and Prepare For Occasional Sunny Breaks. • Expect base rental rates to remain at about the same levels as they have been for the past number of years. If your base rental rate remains the same for 10 years, then compared to an average annual inflation rate of two per cent the base rate actually drops by 20 per cent over the 10 year period. • With more space available to lease, consider relocating to your dream market or location. As vacancies open up, that perfect unit may become available. • Developers are shifting their focus to renovation or redevelopment of existing properties in urban areas. Perhaps your building will receive a facelift, or you could move to new and exciting space built in your area where no new space has been available for years. • Landlords will become more “flexible” negotiating renewals as tenant favourable leverage positions improve because tenants now have the ability to relocate which they didn’t in the past. Finally, consider buying your own property, even a plaza. I’m seeing “realistic” sale prices now as the shine wears off properties which were traded beyond their value a few short years ago. I expect to see distress sales to become more frequent as interest rates increase. My advice? Make the best of the weather. Actively manage both your location and your lease obligations based on practical, objective and realistic expectations. Mr. Toms has been creating and preserving realty leasehold value for tenants and landlords since 1986 and can be reached at (705) 7431220, by e-mail at iantoms@pipcom.com, or through his web site at: www.iantoms.com
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Developing An Ideal Practice DR. RON WEINTRAUB www.innovativepracticesolutions.ca
Who among us doesn’t think of having an ideal practice? An ideal practice varies significantly based on our individual aspirations and abilities of our team. To identify our version of an ideal practice requires thought and strategy. Focused Thinking And Planning Identifying in writing how the vision of our practice and its day-to-day operation look is a good first step. It’s unwise, at this time, to add any caveats that might limit this vision. It is also unnecessary to exclude procedures in our wish list that we think our patients might not accept. Envisioning how our perfect day would look on paper makes our potential ideal practice schedule personal and concrete. More importantly, it automatically sets up a goal. Once we establish our goal, we need to examine our existing daily operation. We can do this by assimilating our former day sheets into a replica of a typical day. Realistically, we note the significant differences between our wish list (Format A) and an actual day (Format B). Now facing a more difficult task, we must articulate the issues that cause the divergence from Format A to the existing Format B. To accomplish this, we need self-awareness and an objective assessment. Realizing that Format B is the day-to-day reality of our current practice, listing perceived impeding factors is our next challenge. For instance, “I do not have the type of patient base that allows me to do sufficient comprehensive dentistry.” Perhaps we might think, “Am I diagnosing what is in patients’ best interest or what I think the patient is prepared to accept? Is my team conditioned to help patients make choices that will build oral health?” Another concern: “Am I providing sufficient training to the team to achieve my
ideal practice?” Other questions are,“Should I upgrade my agenda, would I currently have the skill set and training to deliver successfully the high level of care that I would want for my patients? Am I prepared to have my skills honed via continued education?” In addition to human resource considerations, our current physical facilities need examination: “Is the office structure adequate to support our ideal agenda?”
“Should I upgrade my agenda, would I currently have the skill set and training to deliver successfully the high level of care that I would want for my patients? Am I prepared to have my skills honed via continued education?” Perceiving Change Primarily, our view of change influences our likelihood of success in achieving our goals. Dentists generally revel in repetitive, predictable behaviour in order to produce consistent results. Consequently, we often relegate the process to wishing for as opposed to wanting a difference. Signaling a barrier to implementing desired upgrades is the erroneous perception that current procedures are too entrenched to implement change. Not being able to move beyond a comfort zone by not believing adjustments are realistic poses a serious obstacle to the success of achieving the goal of an ideal practice. Limiting Factors Evaluating limiting factors to achieving an ideal practice is noteworthy. The first consideration is that the socioeconomic make-up of the patient base somewhat restricts the treatment accepted. Adaptive strategies, however, overcome this issue. Support staff may also present barriers. Entrenched, longstanding support staff content with their roles and status quo may be unwilling to make necessary changes to implement
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a new vision. Not only patients and team are a consideration, but also our willingness to pay for assistance to facilitate the process to make the necessary changes in implementing the vision exists. Finally, if contractual obligations to a negative location and facility are major concerns, we need to re-evaluate our strategy. Strategies To Achieving Goals In Group and Single Practitioner Settings Group Practice Advantageous to achieving an ideal schedule is to consolidate individual practices into a generic whole. If three practitioners treat three autonomous patient bases under the same roof, amalgamating the practices into a single patient base under one roof has promise. For example, practitioners outline procedures with which they are most successful and that they most enjoy such as endodontic surgery or implants. Their confreres may be more comfortable with restorations or pediatrics but perform other procedures their patients need out of obligation. After meeting and deciding how to trade off procedures so that their individual schedules will more closely represent their vision of an ideal practice, the group chooses a win-win situation. Positively presented, patients see advantages in internal cross referral as enhanced care as opposed
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to being downloaded to another dentist on the premises. The relative financial return is balanced by efficiency, productivity, and lower costs. Single Practitioners Single practitioners have a more challenging road to follow of self-enhancement, patient education, and expansion of skill sets in order to keep pace with advancements and realization of goals. Most often, outside sources are necessary to bring the team and patients on board for the value added approach offered. The motivation to schedule the process assists dentist, staff, and patients to accept an approach that leads to quality dentistry and an accepting patient base. Narrowing the gap between Format A and Format B is possible, but a willingness to change is paramount to success. PA
Ron Weintraub is a founding partner with the Bayview Village & Downtown Dental Associates and brings over thirty-ve 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 beneted from his insight. As owner of Innovative Practice Solutions, Ron advises dentists on practice enhancement, practice purchases, sales, location evaluations, associate buy-ins, and business mergers. Dr. Weintraub can be contacted at (905) 470-6222 Ext. 221 or drronips@rogers.com.
12 Possible Symptoms of Poor Tax Planning DAVID CHONG YEN CFP, CA www. dcy.ca
As the 2010 Federal Budget did not provide you with any additional personal or corporate tax breaks, it is more critical to review your tax situation to determine if you are paying too much taxes. The following are twelve possible symptoms of poor tax planning. Discussing and addressing these issues with
your accountant or financial advisor could yield tax savings, i.e., if you exhibit any of these symptoms, you could be paying more taxes than you need. 1. You, the dentist, receive an excessive salary (in excess of $130,000 per year) where you have a professional corporation (PC) and your PC’s taxable income is much less than the $500,000 threshold amount under which income is taxed at the lowest possible corporate tax rate, currently 16.5 per cent. Any additional salary over and above $130,000 may be taxed at the top marginal rate of 46 per cent while the top combined corporate and personal tax rate on dividends equates to less than
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44 per cent. Your advisor could provide you with the technical services corporation. right salary/dividend mix to minimize your personal 4. No dividends are paid to poor family members and corporate taxes. You could go to the extreme if (spouse, parents, children 18 and older) even though you do not believe in a Registered Retirement Savings they are shareholders of your PC, technical or Plans or care much about the Canada Pension Plan hygiene services corporations. Do you know that when you retire by receiving no salary and all dividends an individual who makes little or no income pays from your PC. A salary of $122,223 is required to virtually no tax on a dividend of $35,000 per year? maximize your 2010 RRSP and the top personal tax 5. No reasonable salary is paid to poor family members bracket starts at $127,021 (2010). even though they perform services for your office. 6. You or your loved ones do not have double wills even though you/your loved ones own shares of PC/technical/hygiene services corporation. Also, you do not have a will if you have a proprietorship or a partnership or other assets and you also do not have a power of attorney. 7. You do not have child care expenses, even though you have poor parents living close by, adult children and children under 17. 8. You only deduct 50 per cent of all business meals and entertainment expenses. 9. You do not have any deductible business automobile expenses. 10. You have not claimed your lifetime capital gains exemption (CGE) with respect to your PC shares. This also applies to your family members if theyown a hygiene or technical services corporation. You can claim your CGE and still own your practice. 11. You pay for your medical expenses personally with expensive after tax dollars instead of having your PC pay them and receive a tax deduction for the medical expenses using cheap corporate tax dollars. 12. You are not aware of your ability to deduct 100 per cent of software and hardware purchases before February 1, 2011 Reducing your tax bill should be done on an ongoing 2. Employment Insurance (EI) is deducted from basis, much like preventing cavities. If you are like salaries paid from your PC to you and/or other some dentists looking to save taxes only in the month employed family members. The maximum employer of April, close to the personal tax deadline, chances are it is too late and you are reacting to a problem and employee 2010 EI is about $1,800. rather than being proactive in ďŹ nding tax savings 3. You are the only shareholder of your PC but you opportunities. PA have poor parents, spouse and/or children 18 and older living in Canada and there is no other David Chong Yen, CFP, CA, of DCY Professional Corporation Chartered corporation. Since 2006, parents, spouse and Accountants, has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by children of dentists are now permitted to become phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca. non- voting shareholders of the PC. There is no www.dcy.ca. This article is intended to present tax saving and planning such restriction on the ownership of a hygiene or ideas and is not intended to replace professional advice.
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Only Trusted Staff Can Defraud You GRAHAM TUCK H.B.A., C.A. www. ppsales.com
I talk to many dentists and I am surprised at the number of dentists that have been defrauded by their staff. There are many ways that individuals can defraud you. Generally it is not more than one employee. Due to the limited number of staff in some practices it is difficult to divide up the duties to have good internal control. If multiple staff members act in collusion they could get away with gross fraud for years unless the doctor or their spouse insert themselves into the system to keep an overview of certain key reports such as the deleted treatment or cancelled charges reports. Some of the fraud is as simple as taking patient cheques to the bank to have them cashed “for the dentist” and then covering up the theft by cancelling the charge to the patient. This can be very costly as you will have: a) the loss of the cash or cheque b) to pay the government income tax for the income recorded before it was stolen if the cover-up did not reduce the gross revenue (a “double whammy”) c) the feeling of betrayal within the team - loss of focus for the team Other types of fraud have more long reaching implications - particularly when insurance companies are involved. If a staff member sends in false claims and diverts the cheques it is difficult to detect - and creates another “double whammy”. The insurance company will demand repayment of the funds fraudulently paid “to the dentist” if the procedures were not performed on the insured person and the cheques were intercepted by the “trusted” staff member. This type of fraud can be avoided by a separation of duties whereby the person who opens the mail is not involved in the billing or insurance claims.
Different computer programs have different procedures, but all programs will print off daily sheets. These sheets should be reviewed by the dentist and signed and retained as a permanent record. All adjustments (write-offs, deleted treatment reports, cancelled charges, etc.) should be reviewed by the dentist, signed and retained. Even when a fraud is detected it is often impossible or very time consuming to determine the extent of the theft, with limited hope of getting the money back. Yes, you can terminate the employee (use a lawyer) but a lawsuit to recover the money or obtain a conviction is generally not an option. An ounce of prevention is worth a pound of cure. Certainly, when hiring new staff check all references - but this is only the first step. Setting up good internal control procedures in your practice with the assistance of your accountant is the best long term protection. There are courses in fraud protection for dentists if you want to get directly involved. There is no department in the dental community to register individuals who have defrauded their dentist. This means that individuals can go from practice to practice without a track record. If an employee is not a trusted employee it is difficult for them to steal from you as you are monitoring their work. The trusted staff member is the only one that can defraud you if you do not have the internal control procedures to protect your practice. If you have been defrauded and would like to anonymously relate your situation to me to report in future Professional Advisory issues, I would be more than pleased to receive the information and to disseminate it to the dental community with full anonymity for you. PA
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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Shareholders Agreement for your Professional Corporation DAVID ROSENTHAL BA., LL.B. As I and my colleague, Barry Spiegel, Q.C. (now retired from the practice of law), discussed in previous articles of The Professional Advisory, the laws now permit family members of a dentist to be non-voting shareholders of the dentist’s professional corporation (PC). A “family member” means a dentist’s spouse, child or parent. A “spouse” is defined as someone to whom the dentist is married or with whom the dentist is living in a conjugal relationship. However, note that only the dentist’s parents but not in-laws or grandchildren qualify as family members. Creating the proper share structure for your PC is a critical step and your tax and legal advisors will assist you in that process. We know your spouse, children and parents can own non-voting shares. But that is only the first and easiest step. Consider the other attributes the PC non-voting shares might have: • redemption or retraction rights • do the shares participate in the profits only and/ or in the growth of the PC • do the shares have a fixed value • what priority do the shares have against other classes of PC shares for dividends or distribution when winding up or selling the PC shares • how many different classes of non-voting shares should be issued For maximum flexibility, generally speaking, each family member should have a different class of shares. Each dentist and his/her family will have different needs, so issuing shares to family members needs to be planned carefully. If family members receive shares that are not redeemable by the PC, it is absolutely essential to have a shareholders agreement. Your dental practice is your livelihood and it is critical that you the dentist,
and not your family members, have absolute control of the practice at all times. You might be surprised to learn that non-voting shares of a PC (or any corporation) have voting rights under the Business Corporations Act (Ontario) in certain cases. Furthermore, in some circumstances shareholders of a class are entitled to vote separately as a class, whether or not that class of shares carry the right to vote. Imagine the scenario where you do not have a shareholders agreement and you want or need to reorganize your PC share structure, but your rebellious family member will not agree. This can be dealt with in the shareholders agreement by family members giving a voting trust or power of attorney in favour of the dentist relating specifically to the PC shares.
Creating the proper share structure for your PC is a critical step and your tax and legal advisors will assist you in that process. At some point in your career you will sell your practice, whether by asset sale or a sale of all the PC shares. The dentist must be able to ensure that all the PC shares or assets will be sold, whether or not the other shareholders (your family members) wish to sell or agree on the sale price. The shareholders agreement should provide the dentist with the right to ‘drag along’ the other shareholders on the sale of the practice. Consider other events such as death of a family member or divorce or separation from your spouse. Those events are stressful enough. The shareholders agreement should specify what happens to the family member’s shares. For example, the shares might be redeemed by the PC or purchased by the dentist. The shareholders agreement should deal with how those shares are going to be valued and the terms of payment. In certain cases it may be appropriate for your spouse to obtain independent legal advice before
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signing a shareholders agreement. The dentist must remain in control of the PC regardless of changing circumstances. A properly drafted shareholders agreement will ensure this. The ideal time to complete the shareholders agreement is at the beginning of the process when the shares are being issued to family members. The rules permitting family members to own shares of your PC present significant tax planning opportunities
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and potentially substantial tax savings for you and your family. However, the laws are complex. Proceed carefully and with the benefit of proper and expert professional advice. PA 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@drlaw.ca.
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”.