MNP Tax Strategies - From a Dental Career Stage Perspective

Presented by:

Date:

From a Dental Career Stage PerspectiveCalvin Carpenter, CA

Vice President, Professionals Services

Don Murdoch, CPA, CA

BC Leader, Professionals Services

Barb Carle-Thiesson, FCA, ICD.D

Partner, Professionals Services

March 6, 2014

MNP Strategies to Stay Ahead of the Tax Man

Session Agenda

• MNP Services to Dentists

• The Business of Dentistry, an Overview

• The Career Stages of a Dentist

• Other Important Matters

• Some final words

MNP LLP

• About MNP Services to Dentists• History• Leadership• Leaders in Dental Education (dental

faculties)• Our Clients

• 1500 (+) dental clients

Offices from Nanaimo to Montreal

Offices from Nanaimo to Montreal

MNP: Serving Canada’s Dentists

• Canada has 20,000 dentists who provide $12B in services annually – but only 8% of total health expenditures – average per capita spend is $400

• 90% of dentists work in private practice with over 50% in solo practices – only 10% in five or more dentists

• There is a dentist for every 1725 people in Canada – ranges from 1540 in BC to 3125 in Newfoundland

• Average self employed Canadian dentist earns $140K

• Average revenue per practice is $575K in Canada – much higher in Alberta

Dentistry: An Overview

• Demand for traditional dental services has tended to be lower with healthier teeth

• Demand is driven by demographics – 75% of population visits annually with 90% of 6 to 11 years old – drops off to 68% over age 20

• Most dental work is required at ages 5 to 19 and 55 plus

• Demand for dental services is limited by the growth in the population – new ways are being looked at to grow revenue including implants and cosmetic services including whitening - focus on 25 to 55 year olds

Dentistry: An Overview (cont’d)

• Average age of dentists is 49 with 30% of active dentists being over 60 years of age

• The make up of Canada’s dentists has changed dramatically – 50% of graduates are women who on average retire ten years earlier than men

• In USA it is estimated that the number of dentists per capita will decline by 57% in the next ten years

• Shortage of dentists already exists in rural areas although these practices are generally most profitable


Other issues include:

• Sterilization rules and related costs – how to recover?• Hygienists in own practices – competition?• Anti-combines legislation outlawing fee guides – impact?• Increasing use of technology and related additional costs• Continuing containment of costs by insurers• Consolidators coming into dentistry


Pre- practice

As a student

Starting outThe BasicsAssociateshipLocumsBuying into a Practice

In Practice, now what?Creating an efficient practiceWealth accumulationExpanding Financial ObjectivesPlanning for RetirementEstate planning

The Career Stages of a Dentist

RetirementSelling the PracticeStop or slow down?

After Practice“Evolving” your StructureOther income sources

EstateFollowing your wishes


Pre- practice

As a student

Tax Strategies;

File your returns to claim tuition, create RRSP room

Find a knowledgeable accountant

Develop your financial knowledge

Implement basic record keeping to track eligible/deductible expenses


Starting out

The Basics

Tax strategies;

Where will you practice (province, country)?

Are you a US “person”?

Do you have student debt?

When should you incorporate?


Starting out

Associateship

Tax strategies;

Ensure you have an Associate Agreement- Contractor vs. Employee- who pays what?- address Practice purchase option

Cost Sharing Agreements (must have a current one)

Consider GST registration


Starting out

Locums

Tax strategies;

Practice structure for multi jurisdiction

Planning to “smooth” annual income


Starting out

Buying into a Practice

Tax strategies;

Buying shares or assets?

Incorporate for purchase debt repayment

Build a Practice Cash Flow / Financial Plan- your bank will need it

Practice transition plan

Consider GST registration


Buying a Practice

Key statistics to be aware of:

• Practice value peaks when the dentist is 50 to 54 years old• Values in USA have begun to fall – more sales to Consolidators

• In 2010, 30% of the dental population is over age 60• Lots of practices for sale in the future BUT

• Number of dentists per capita is expected to decline 57% by 2020• Population growth, retirements, licensing changes, limits on number of

graduates, more females with changing expectations in profession

Buyers are looking for?

Profitable operationsTurnkey operationExperienced staffGood locationProcesses in placeMentorshipTechnology and new equipment

Buying a Practice

In Practice, now what?

Creating an efficient practice

Tax strategies;

Income splitting – What is possible? With whom?

Salary vs. Dividends – review annually

Risk management planning – disability, death

Private Health Services Plan (PHSP)

Canada Pension Plan (CPP) – opting out?


Salary vs. Dividends

Salary:• Required to make income tax and CPP contributions• Creates RRSP contribution room

Dividends:• Not required to remit payroll tax and do not make CPP

contributions• Does not create RRSP contribution room• Ability to “sprinkle” income

What is the Most Tax Effective

Structure for your Practice?

The Most Tax Effective Structures

• Most common corporate vehicle for a dental practice is a professional corporation although, depending on profitability province, we may also make use of hygiene corporations or lab companies

• Ensure we are effectively income splitting with family members (don’t forget parents!)

• When setting up a new practice there may also be another entity to recover the GST / HST paid on set up


Wealth accumulation

Tax strategies;

Advanced tax efficient practice structures

Corporate investing

Creditor protection

Evolving Life Insurance planning

RRSP vs. IPP


Tax Minimization for your Corporation

Individual Pension Plans (IPP)

What’s good...

• Defined benefit plan (IPP) vs. defined contribution plan (RRSP)

• Past service contributions• Creditor protection• Interest on funds borrowed to make

IPP contributions is deductible• Can be used to defer tax on sale of

practice

Tax Minimization for your Corporation

Individual Pension Plans (IPP)

What’s possibly not...

• More costly to establish and administer than RRSP’s

• Funds locked in until retirement• Unlike RRSP planning, cannot split

income unless the spouse works for the same employer and is a member of the plan


Expanding Financial Objectives

Tax strategies;

Elderly parents and other dependants

Children’s education and other

Property investing – driven by intention

Philanthropy

Wills (should always have them but must be current)



Planning for Retirement

Tax strategies;

Maximize practice efficiency = maximum practice value

What does your exit look like?

What do you need?

Shut down or continue Family Trust?


Maximize the value of your practice

• Define a timeline and target value for your Practice

• Identify and evaluate factors (KPI’s) that affect management, operations, and financials in your practice

• Design an practice operating plan to achieve your value goal


Estate planning

Tax strategies;

What do you want your Estate to be?


RetirementSelling the Practice

Tax strategies;

Valuation assistance

Are you selling shares or assets?

Vendor financing – to be or not to be?

GST considerations


Selling the Practice

• Who will your buyer be?• Part time dentists, over 50% of grads are female, fewer dentists• The new “Investor dentist

• Are you ready to Sell?• Define a timeline

• Practice Values and Costs of Selling• Very expensive to set up new practice – purchase preferred

• Increasing practice value• Especially true in southern Ontario, Calgary and Vancouver (100 to 120%

versus 40 to 75% in smaller) – first job s to find buyer though

• Structure of deal to minimize taxes

What’s the process of selling?

Valuation of practice

• Gathering Information as to:• Patient demographics• Billings of past 5 years• Staff experience and wage levels• Equipment held• Premises lease• Number of active patients and new patients in practice• Assignment of non-assignment• Breakdown of billings as to services rendered

Review of information to determine value of assets including goodwill


• Key Items• Transfer of premises lease• Restrictive covenant on a part of seller, as to area and time frame• Indemnification by seller• Due diligence search by buyer including review of financial information, lien

check on assets, chart audit and review as to law suits, etc• Dismissal of employees• Allocation of selling price• Associate agreement, if applicable• HST on sale• Financing: vendor take back, etc.


• Offer to purchase/sale agreement• Will include all terms as noted• List of acquired assets• Deposit (and refundable)• Closing date• Other obligations to be transferred

Structuring your sale

• Shares vs. Assets• Lifetime capital gains exemption• Hybrid transactions• Critical sale matters• Financing

Purchase & Sale of Practice

Asset Sale

Purchaser normally wants to buy assets:•No hidden liabilities•Increase in cost base of assets for tax purposes•Consumables generally have no tax impact•Equipment and leaseholds recapture depreciation @ corporate/individual rates•Goodwill depreciated

Minimizing Taxes after Asset Sale

• Shareholder loan deferral• Capital dividend account elections• Dividends – eligible versus ineligible• Reorganization of company (vs. dissolving Company)• Retiring allowances / death benefits• Children’s education – PC loans• Corporate owned insurance and investments• Moving expenses

Purchase & Sale of Practice

Share Sale

Seller normally wants to sell shares:• Tax on gain at 19.5%• Alternative minimum tax to consider• Potential elimination of taxes through use of $800,000 Capital

Gains Exemption [Value of $234,400 in AB]• Potential of share sale only if company is “pure” but your success

prevents it (“inactive” assets)• 2 year purification strategy• More time consuming and complicated

The Hybrid Sale

Prerequisites:

• Shares in company meet 3 tests necessary to be “qualified small business corporation” shares; and

• Company has sufficient retained earnings or source of active business income on an ongoing basis

The Hybrid Sale

Potential good fits:

• People who sell 50% of a practice

• Selling practice but continuing as an associate

• Selling practice that has significant retained earnings

The Hybrid Sale

Benefits:

• Potential savings of up to $800,000 multiplied by the marginal dividend rate in province (i.e. in Manitoba could save up to 40.77% or $326,160)

GST / HST and Sale of Practice

• When selling a dental practice certain assets will be subject to GST / HST (even if non-registrant) e.g. Real Property

• If you are registered for GST / HST tax will be applicable on all assets used in the taxable activities

RetirementStop or slow down?

Tax strategies;

Do you need an Associate Agreement (full circle)?

Practice transition plan

Name change for practice corporation


After Practice“Evolving” your Structure

Tax strategies;

Use of other Trusts

Simplify your structure – Holdco and Opco to One Co


After PracticeOther sources of income

Tax strategies;

RRSP melt down / Pre 72 RRIF

Canada Pension Plan (CPP) – early or delay

Old Age Security (OAS) & Claw back


New CPP Rules

• If you start receiving CPP before age 65 benefit is reduced by .6% for every month prior i.e. lose 36% monthly if collect at 60 versus 65

• If you start collecting after age 65 benefit is increased by .7% for every month after i.e. gain 42% monthly if collect at 70 versus 65.

• New rules will allow you to still pay into CPP if you are over 65 and are still working and are collecting CPP

• CPP will remove worst 8 years of earnings for calculation

EstateFollowing your wishes

Tax strategies;

Selecting your Executor

Multiple wills

Spousal Trust

Testamentary Trusts


Other Tax Planning Considerations

• Use of shareholder loans – general rules, auto loans and housing loans – beware!

• Vehicle rules – standby charges – tax free allowances• Vehicles – lease versus buy• Home relocation loans• Rules pertaining to golf• Disability Tax Credits and Disability Tax Savings Plan• Adoption Tax Credits

Other matters...

What’s New, What’s changed?

A review of expense deductibility

Safe Guarding Your Assets from Theft

Your Practice Tax Strategies should be regularly reviewed in response to changes to your circumstances and changes created from Federal and Provincial Budget announcements.

What’s New, What’s Changed?

Canada Pension Plan (CPP)

- Contribution maximum increasing again for 2014

- Combined employee / employer cost now over $4,850

- 2012 changes aimed at reducing benefit of early access to CPP and increasing benefit of deferring


Wages vs. dividends – 2014

- Gross up and tax credit for dividends changed for 2014

- Less tax advantage from dividends depending on province

- May see owner comp move away from dividends starting in 2014 – still need CPP cost considered


Capital gains exemption(applicable to QSBC shares)

- Increased to $800,000 (Lifetime Limit) for 2014

- Indexed for inflation beyond 2015


New BC Personal Tax rate for 2014 & 2015

- Temporary new BC rate over $150,000 = 46%

- May see higher incomes in 2013 to avoid


New tax filing requirements for foreign property ownership – personal and corporate taxpayers

- Specified foreign property with FMV > $100,000

- More detailed reporting / disclosure required

- Increased penalties for late or inaccurate filing


US “Persons” – citizens and green card holders

- Voluntary disclosure to “come clean” still available

- Requirement to file past three years US returns and six years of “banking” disclosure

- Increased client reporting requirements by Cdn banks is coming

Deduct the right expenses

Deductibility of Expenses

In general, expenses are deductible if:

• Incurred to earn business income• Reasonable in nature• Not personal in nature

• Pigs get fat, hogs get slaughtered

Deductibility of Expenses

Are these deductible?

Aggressive:• Trip to Hawaii• Wedding expenses

Legitimate & Less Common:• Private health service plans (PHSP)• Club dues & memberships• Tax free gifts (not for shareholders)• Christmas parties and other special events• Contributions to an Individual Pension Plan• Annual General Meetings

Getting Your Corporation to Pay

Commonly missed corporate deductions:• Donations• Annual general meeting• Death benefit• Meals and entertainment

- 50% deductible for tax purposes

• Dental equipment and tools, including dental kit• Staff uniforms

Safeguarding Assets: Employee Theft

• 50% of dentists report that they have been the target of employee theft ranging from hundreds of dollars to hundreds of thousands of dollars

• Lack of segregation of duties in dental offices along with lack of management supervision are the reasons this occurs – controls can be put in place!

• 60/20/20 rule – beware!

• Studies show dentists can have high levels of stress and anxiety – business management is one key reason

• Our goal is to help dentists succeed financially and to reduce stress related to practice

• Financial Success as a dentist should be assured but is not guaranteed

• We need to focus on key critical success factors (CSFs) to maximize financial returns.

Final Words – Financial Success

• Standardized Financial Statements• Benchmarking your Results• Tax focused eg. Proper Corporate Structures, IPP• Employee Theft Services• “Healthcheck”• Expanding GST recoveries for dentists• Practice Succession• “Hybrid” sale transaction• SR&ED

MNP Special Services for Dentists

Contact Us

Calvin Carpenter, [email protected]

Don Murdoch, CPA, [email protected]

Barb Carle-Thiesson, FCA, [email protected]

Or at www.mnp.ca

mailto:[email protected]

