Wealth Management Services for Health Care Professionals

WEALTH MANAGEMENT SYMPOSIUM SERIES

Tax Planning for Health Care Professionals

Susan Yao-Arkilander, CFP

Investment Advisor and Financial Planner

DELIVERING THE WEALTH MANAGEMENT EXPERIENCE



2

WEALTH MANAGEMENT WEALTH MANAGEMENT NEEDSNEEDS

Client Needs

InsuranceRetirementEstate PlanAssist

ParentsAssist

Children

Income Protection

InvestmentsWills LivingExpenses

Education

Asset ProtectionRRSP

Trusts

Special Needs

IPP / RCA

Heirs Inheritance

Charitable Giving

Taxes

Disability



3

Will & Estate

ConsultantFinancialPlanner

Susan Yao-Arkilander

Health Care Professionals

Susan Yao-Arkilander’s Wealth Management Team

Domestic and International

Trust Services

Tax PlanningSupport

RBC Private Banking /

Health Care Banking

RBC Private Banking /

Health Care Banking

Insurance Specialist



4

Agenda

1) Taxation:Incorporation

Tax deferral Income splitting

2) Risk Management:Identifying the risksInsurance – what type, how much and when do you need it

3) Retirement:Individual Pension Plans



5

Incorporation

What is a professional corporation?

– In many instances, health professionals earn their income either as a sole proprietor or an employee of an unrelated employer

– All provinces now allow a health care professional to earn professional income through their own corporation – which is called a “professional corporation”

– Various rules exist regarding share ownership. These rules differ based on

the profession and the province



6

Characteristics of a Professional Corporation

– Business restricted to the practice of the profession

– Possible restrictions on share ownership (depending on province of incorporation and professional body regulations)

– No limit on professional liability



7

Benefits of PC – Marginal Tax Rate Comparisons

Province Professional Corporation

Tax rates on taxable income

Sole Proprietor Tax Rates Highest Marginal Tax Rate

Eligible Dividends from PC (over $500,000)

Ineligible Dividends

from PC (under $500,000)

Up to $500,000 Over $500,000

BC 15.5 % 31.5% 43.7% 18.5% 31.6%

Alberta 14.0% 29.5% 39.0% 16.0% 26.5%

Saskatchewan 15.5% 32.0% 44.0% 20.4% 30.8%

Manitoba 13.0% 33.0% 46.4% 23.8% 38.2%

Ontario 16.5% 33.5% 46.4% 24.0% 31.3%

Quebec 19.0% 30.9% 48.2% 29.7% 36.4%

New Brunswick 16.0% 32.5% 47.0% 23.2% 35.4%

PEI 14.5% 35.5% 47.4% 24.4% 33.6%

Newfoundland 16.0% 33.5% 47.0% 30.6% 35.6%

Nova Scotia 16.0% 35.5% 48.3% 28.4% 33.1%



8

Who, should set up a PC?

• No tax benefit of setting up a PC if all after-tax income is needed for lifestyle expenses.

• Don’t set up a PC if currently receiving T4 income from an employer (hospital employee or associate doctor/dentist) – “Personal Service Business” - double taxation

• Consider a PC if at least $25,000 of annual income can remain in the corporation

• Consider a Service Corporation (eg. Hygiene Services Corporation) to income split



9

Corporate and Personal Tax Integration

There is generally no tax benefit of earning income through a corporation and

paying it to the professional in the same year.

Sole Proprietor Professional Corporation

Taxable Income $100,000 $100,000

Corporate Taxes N/A ($16,500)

Dividend from PC N/A $83,500

Personal Taxes ($46,400) ($26,135)

Net after-tax funds $53,600 $57,365

2009 Ont. rates



10

Tax Deferral Example

Net billings after office expenses of $400,000; lifestyle expenses and personal taxes $300,000 .

Sole Proprietor Professional Corporation

Net billings $400,000 $400,000

Lifestyle expenses and taxes

($300,000) ($300,000)

Remaining funds $100,000 $100,000

Taxes ($46,400) ($16,500)

Net funds remaining $53,600 $83,500

Additional funds in PC $29,900

2009 Ont. rates



11

• Taxes are deferred until taken out as dividends and may be used in

the interim to:

– Pay down business loans, purchase equipment, make lease payments

– Fund investments, insurance, IPP

Tax deferral benefits of a PC



12

Income Splitting

1) Family members employed by the PC can receive salaries

1) Family members who are “shareholders” can receive dividends

1) Each shareholder qualifies for the $750K capital gains exemption

2) IPP benefits funded by corporation qualify for income splitting

3) A “trust” can own non-voting shares of the PC with “minor children beneficiaries” – but no tax benefit of PC paying dividends to minor children



13

Income splitting with minors – $10,000 basic personal tax exemption

If taxable to parent

$20,000 x 50%= $10,000

Tax payable = $4,600

If taxable to child

$20,000 x 50%= $10,000

Less basic exemption = ($10,000)

Tax payable = $0

If taxable to parent

$20,000 x 50%= $10,000

Tax payable = $4,600

If taxable to child

$20,000 x 50%= $10,000

Less basic exemption = ($10,000)

Tax payable = $0

$20,000 Capital gains$20,000 Capital gains

InvestmentAccount

InvestmentAccount



14

RBC Family Trust Structure

Parent

SmithFamilyTrust

Beneficiaries

loan or gift

Tax-free Capital gains $

Trustee(s)



15

• Have children or grandchildren who have little or no income

• Possess surplus non-registered capital

• Want to have access to the capital you fund to the trust

• Children or grandchildren have expenses such as private school tuition, post-secondary education and extracurricular activities

Who should consider an RBC Family Trust?



16

Risk Management

Risk Exposure:

Family

Business

Estate Retirement income, capital gains tax and long term care

Premature death, disability or critical illness



17

Age 30 40 55 65 75 85

Long TermDisability Long Term

Care

Critical Illness

Income Protection Asset Protection Income Protection Asset Protection

Insurance Needs

Life

Insurance

Retirement

18 | WEALTH MANAGEMENT SOLUTIONS

Typical asset allocation

Fixed Income

Non-Registered

House

Business

Real Estate

Registered


Insurance as Another Asset Pool

Fixed Income

Non-Registered

House

Business

Real Estate

Registered

Life Insurance

Non-Registered

House

Business

Real Estate

Registered

Fixed Income


Tax-exempt insurance

• $ 300,000 of surplus assets are repositioned and deposited over five years into a $1MM tax-exempt Universal Life Solution.

• Non-Registered balanced portfolio, growing at 6.25%, taxed at the highest marginal tax rate.

• Insurance investment growth rate of 5% - tax-exempt on a joint last-to-die basis.

Non-Registered Investment Tax-exempt life Insurance

Year Age Account Estate Value Deposit

Estate

Value

Annual return on

Estate Value

1 51 $300,000 $ 311,569 $60,000 $ 1,454,833 2,325%

2 52 323,628 60,000 1,512,407 354%

3 53 336,199 60,000 1,572,860 157%

4 54 349,306 60,000 1,636,336 95%

5 55 362,973 60,000 1,725,497 65%

10 60 440,650 1,770,726 24%

15 65 536,749 1,857,515 15%

20 70 656,007 1,977,961 11%

25 75 804,480 2,162,817 9%

30 80 989,930 2,419,550 8%



21

Retirement

Individual Pension Plans



22

1. Diversify the retirement strategy

2. Significantly increase retirement savings

3. Attain a planned capital accumulation for retirement

4. Corporate tax deduction – retain small business tax rate

5. Creditor Proof

6. Succession Planning

7. Assist in the sale of the business

Reasons to establish an IPP



23

Suitable Candidates

Incorporated business owners

Incorporated professionals

Senior executives



24

• Individuals between the ages of 40 and 71 years

• Individuals earning T4 income of $124,722

• Individuals with past service dating back to 1991

Works best for ….



25

Case Study Incorporated since 1991

Earning maximum T4 income of $124,722

Contributed maximum to an RSP

Age: 55

Year Age RRSP Transfer

($)

Past Service Cost ($)

Employer

IPP Current Cost ($)

Employer

IPP + RRSP

Total

RSP Cont.

($)

RSP Total

2010 55 367,950 203,195 31,154 648,605 22,000 418,356

2015 60 44,723 1,166,621 28,753 755,423

2020 65 61,256 2,008,245 37,579 1,286,850571,145



26

Investment Strategy?

Return Objective 7 1/2%

Valuation Year

Start Date

Deficit$52,200

Surplus$30,000

9%

5%

• Additional contributions can be made to shore up any deficit

• Some surplus can be retained without limiting contributions (generally up to 25% of plan assets)

2013 - Age 58Current yr cost = $38,700Deficit = $52,200Total = $90,900



27

Thank you!The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness. This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change.

This presentation has been prepared for use by RBC Dominion Securities Inc.* and RBC DS Financial Services Inc. (collectively, the “Companies). The Companies and Royal Bank of Canada are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by RBC DS Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., and RBC DS Financial Services Inc. Insurance products are only offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. *Member CIPF

Unless otherwise indicated, securities purchased from or through RBC Dominion Securities Inc. are not insured by a government deposit insurer or guaranteed by Royal Bank of Canada and may fluctuate in value.

® Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under license.

©Copyright 2008 Royal Bank of Canada. All rights reserved.