CONFIDENTIAL Accounting, Tax and Other Planning for MD Residents entering practice July 23, 2015

CONFIDENTIAL

Accounting, Tax and Other Planning

for MD Residents entering practice

July 23, 2015

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www.cbhealthcaregroup.com

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WHO AM I and WHAT IS COLLINS BARROW KMD LLP?

Brandon D. Gilbert, CPA, CA, BMath, MAcc Partner since 2012, practicing since 2003 90% + of practice is healthcare related Born and raised in Southwestern Ontario Married to Donna, also a CPA, CA Son Brody, who is an active toddler, 2nd baby on the way.

Collins Barrow KMD LLP Member of Collins Barrow

–8th largest CA firm in Canada–Offices in over 55 cities across the country–A local firm with National reach

Well known knowledgeable partners and staff Diverse experience in business, agriculture, healthcare, etc. Large client base of Physicians, Dentists and PC’s throughout

Ontario, with 300+ PC’s, 175+ MD residents.

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WHY ARE WE HERE?

Basics of Tax Income and Expenses as Professional/MPC What is a Medicine Professional Corporation

(MPC) and should you have one? Random knowledge

– Banking arrangements– Buying that house and mortgage vs. invest in MPC– TFSA’s– Disability and life insurance thoughts– Legal Easy– Top 11 financial tips.

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IF YOUR FRIEND JUMPED OFF A CLIFF…

You are not the same as friends/colleagues Facts and circumstances are important The “Crystal Ball” effect

(no one can predict future, build in flexibility and update plans as situation changes)

If it sounds too good to be true Do not hide information from advisors Advisor interpretations and opinions

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WHEN TO THINK ABOUT TAXES

You should think about taxes all the time. Major life changes

–Birth; –Marriage;–New Job/Practice/Corporation;–Moving; –Investing;–Wills; –Inheritance; –Gifts;–Separation/Divorce;–Death;

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THE ROAD TO BECOMING A PHYSICIAN

Medical Student

MD Resident

Fellowship Practicing Physician

Medicine Professional Corporation

(MPC)

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MARGINAL TAX RATES - EXAMPLE FOR TAX DEFERRAL

Marginal personal rates$0K to $44K = 20 - 24%$45K to $89K = 31 - 39 %$90K to $137K = 43.4%$138K to $149K = 46.4%$150K to $220K = 48% over $220K = 49.5%

Corporate rates15.5% up to $500K (scheduled to decrease to 13.5%)26% over $500KInvestment income = ~ 47%

Maximum Tax Deferral (49.5% - 15.5%) = 34.0%

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GENERAL TAXATION RULE FOR PROFESSIONAL INCOME

Professional income is taxable when earned (accrual method) not when received (cash method). – e.g. service provided December, paid in February

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GENERAL RULE/RESTRICTION FOR PROFESSIONAL EXPENSES

Expenses deducted on the Accrual basis– e.g. February conference and flight; paid in December.

Expense for purpose of earning income Must be reasonable Allowed under Income Tax Act of Canada (ITA)

– Some “professional” expenses denied under ITA (workspace-in-home, certain insurances, auto cost/lease, etc.)

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ACCOUNTING FOR INCOME AND EXPENSES

Your responsibility to keep receipts and records. By default:

– Deposits are taxable – Payments (expenses) are non-deductible

Keep all business receipts (credit card and bank statements not sufficient)

KISS principle and make it a habit

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TYPICAL EXPENSES FOR A HEALTHCARE PROFESSIONAL

Accounting, legal and other professional fees

Automobile (commuting to work is personal) Fuel Repairs and maintenance (including car washes) Insurance Licensing fees (for business vehicle only) Automobile Association (e.g. CAA) Parking Interest on vehicle loan (if your vehicle is financed) Capital cost allowance (depreciation) [restricted for “luxury” vehicles] Lease payments (if vehicle leased) [restricted for “luxury” vehicles] Expense is limited to total business use kilometers vs. total kilometers

driven in the year (% business use)

Bank charges for practice bank account;

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Credit card fee for practice credit card, if any

Subscriptions, periodicals, journals for practice (no personal newspaper or magazine subscriptions);

Meals & entertainment for practice business/promotion

Gifts for staff, residents and/or colleagues

Interest on line of credit to finance practice assets/ operations (NO interest for student LOC is allowed)

Medical and drug supplies for office/patient use


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Private Health Service Plan (PHSP) premiums and Health Care Spending Account (HCSA) contributions (restrictions if you have employees);

Professional association fees and dues including CMPA malpractice insurance (net of any rebates)

Office supplies and expenses

Office insurance and Prof. overhead expense insurance

Salaries to spouse, secretary, employees, or temporary office staff, subcontracts for billing agent, nurse.


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Shared overhead or cost-sharing expenses/payments

Telephone/telecommunication– Cell phone (note: home phone not deductible unless 2nd

line for business or long distance for business)– Pager (if unreimbursed)– Internet (including home internet)– iPhone, Blackberry, cell phone

Professional development, continuing medical education, seminar and other course expenses;

Travel, conference, meetings (separate meals out and add to meals & entertainment category)


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OTHER EXPENSES FOR A HEALTHCARE PROFESSIONAL

Office-in-home (workspace in home) Not deductible if unincorporated and have an outside “principal

place of business” Expense based on proportion of office vs. entire house on

“square footage” or “equivalent room” basis. Actually has to look like an office.

Expenses can include:– Mortgage interest (NO principal)– Rent– Gas and Electricity– Insurance– Property taxes– Security System monitoring– Repairs and maintenance specific to the office or of a general nature only

(e.g. repair to a roof, furnace, hot water heater)

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Amortization/Depreciation (Capital Cost Allowance) Deduct a percentage of cost of a “Capital” asset each year

Can add assets at start of practice at fair market value.

Capital assets last more than one year, such as:– Computer equipment (cl. 52 = 55%)

Laptops and home computers (if used in business), iPads (tablets) and iPods (if used in business)

– Office equipment including desks, chairs, printers, lamps, degree/diploma framing (cl. 8 = 20%)

– Medical library and textbooks (cl. 8 = 20%)– Computer software (incl. EMR software) (cl. 12 = 100%)– Medical Instruments and equipment (cl. 8 = 20% or cl. 12 =100%)– Buildings for practice (cl. 1(a.2) = 6%)– Leasehold improvement (cl. 13 straight-line for 1st term + 1st renew)

OTHER EXPENSES FOR A HEALTHCARE PROFESSIONAL

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Objective: Minimize tax, maximize income/savings

Create and stick to personal spending budget–Live within your income –Plan for long term savings and pay off debts–Build in flexibility

Be realistic and do not live beyond your meansWork with accountant to estimate taxes in advance.

HOW LOW CAN YOU GO? HOW HIGH SHOULD YOU STOP?

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WHAT IS A CORPORATION

Separate legal entity

Limited liability – BUT professionals not shielded from professional negligence claims

Corporate roles Shareholders Directors Officers Employees

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Income “split”

Income “smooth”

Tax deferral

Other perks

BENEFITS OF INCORPORATING

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INCOME SPLITTING OVERVIEW

Objective: shift high-tax income to low-tax family Maximum tax savings = 29% of the income Methods:

–Salary (employee “role”) Deductible expense, but CPP “cost”Do not need to be incorporatedSalary must be “reasonable”, paid regularly

–Dividend (shareholder “role”) Paid from after-tax corporate incomeSimpler, can be sporadic

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INCOME SPLITTING – EXAMPLE OF SAVINGS WITH SPOUSE

After-Tax Income Annual Net Professional No TaxIncome Corporation Corporation Savings $300,000 $208,500 $192,000 $16,500

$400,000 $261,400 $242,500 $18,900

$500,000 $312,800 $293,000 $19,800

Assumes doctor salary of $140,000, spouse salary of $12,000, maximum RRSP contributions, extra $3,500/year admin costs for PC and full income splitting of remaining after-tax corporate funds as dividends using 2014 tax rates.

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INCOME SPLITTING – EXAMPLE WITH SPOUSE + ADULT CHILDREN

Tax One Two Net Savings Child ChildrenIncome Spouse $40,000 $80,000

$300,000 $16,500 $28,700 $38,000

$400,000 $18,900 $33,300 $47,200

$500,000 $19,800 $34,600 $50,600

Assumes doctor salary of $140,000, spouse salary of $12,000, maximum RRSP contributions, extra $3,500/year admin costs for PC and full income splitting of remaining after-tax corporate funds as dividends using 2014 tax rates.

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INCOME SMOOTHING OVERVIEW

Drawing a consistent personal cash flow from the corporation instead of “random” draws: Controls spending Assists budgeting Easier to manage Taxes consistent Taxes minimized Saving for retirement, a leave of absence, or

your children’s education

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AFTER-TAX CASHFLOW AMOUNTS – Dividend Income

Dividend Personal After-tax Per paid tax paid Cash Month$ 66,000 $ 6,000 $ 60,000 $ 5,000$ 82,700 $10,700 $ 72,000 $ 6,000$109,500 $19,500 $ 90,000 $ 7,500$137,700 $29,700 $108,000 $ 9,000$157,200 $37,200 $120,000 $10,000

$206,600 $56,600 $150,000 $12,500$256,800 $76,800 $180,000 $15,000

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WHAT IS TAX DEFERRAL

Tax is not paid at the personal level until salary or dividends withdrawn from corporation

–Concept is similar to RRSP

Owner/manager can control timing of salary and dividend withdrawals

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THE THEORY OF INTEGRATION – as of January 1, 2014

Income to Corporation $100,000Corporation Tax (15,500)Available for Dividend 84,500Personal Tax (maximum rate) (33,900)Net After Tax Cash $50,600

Income to Person $100,000Personal Tax (maximum rate) (49,500)Net After Tax Cash $ 50,500

Overall Tax Savings (0.1%) $100

Potential Tax Deferral (34%) $34,000

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OPTIONS FOR INVESTING THE TAX DEFERRAL

Corporate investment options Stocks, mutual funds & ETF’s, Corporate Class,

fixed income (GIC’s / bonds) Real Estate and equipment for practice Life insurance with cash value

Tax sheltering of investment income Reducing tax to estate for next generation

Shares and loans to related corporations Related corp. can invest in other real estate.

DO NOT use corp to invest in any personal assets (e.g. House, recreational properties, vehicles)

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OTHER POTENTIAL PERKS OF A CORPORATION

Non-taxable benefits Club dues (golf club, social club, not gym)Life insurance premiumsOffice-in-homeHealth plans

Enhanced Scientific Research tax credits for Physicians contributing to research activities

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MORE DETAILS ABOUT INCORPORATION

Restrictive share ownership –children, spouse, parents, only

Separate bank and investment accounts–Recommend separate credit card

Must file corporate tax returnMust still file personal returns, but returns should be simpler

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Taxes paid in 3 ways:

Paid from Corporation bank account: 1. Corporate income tax instalments (monthly)2. Salary source deduction remittances (monthly)

Paid from personal bank accounts:3. Personal instalments on dividends (quarterly)

MORE DETAILS ABOUT INCORPORATION

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INITIAL AND ONGOING COSTS OF INCORPORATION

Incorporation costs (1st year only)–Accountant fees (guidance and tax planning)–Incorporation service or Lawyer incorporation fees

CPSO corporation registration (initial application and annual renewal)

Additional tax and administrative complexity = higher annual accounting and legal costs compared to remaining unincorporated

But, most costs are tax deductible

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Cost and additional complexity may outweigh benefits if:Nobody to income split with (e.g. single, dual high income); AND

Need all income personally (debt repayment, RRSP, TFSA, RESP); AND

No “other perks” as advantage

WHY WOULD I NOT INCORPORATE

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After-Tax Income Annual Total Professional No SavingsIncome Corporation Corporation (Cost)$200,000 $133,800 $135,600$(1,700)$300,000 $185,100 $186,600$(1,500)$400,000 $235,700 $237,100$(1,400)$500,000 $286,300 $287,600$(1,300)

Assumes doctor salary of $140,000, maximum RRSP contributions, extra $3,500/year admin costs for PC and dividends to doctor for remaining after-tax corporate funds using 2014 tax rates (Note: no substantial tax changes in 2015).

WHY WOULD I NOT INCORPORATE – POST JANUARY 2014

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PROBLEMS AND BAD ADVICE

Incorporate when it does not make senseLiability protection is limitedTax planning, what is that?The bank of Corporation

–Mortgage/Loans–Personal spending

“Employee” actually looks after kidsIn the business of medicine/dentistryPoor investment/insurance planning/guidance

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BANKING ARRANGEMENTS

Request images of cleared cheques and use duplicate deposit book or keep ATM deposit slip.

Pay for everything using credit cards or trackable bank transactions.

Paying online sometimes not the easy to track so print online transaction confirmations.

Set up automatic payments from credit cards and bank statements where practical.

Separate personal and business credit card transactions (open new accounts for practice)

Consider business LOC if cashflow is tight.

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BUY THAT HOUSE CONSIDERATIONS

Do not be house poorAvoid CMHC as much as possible.

–Try to “rob Peter to pay Paul” by using cash from practice and personal LOC to fund downpayment.

–Consider delaying purchase to build cashFixed rate mortgage rates very cheap, interest rates will go up (but when…)

Plan to payoff in under 25 years (i.e. budget)Never terminate a line of credit as never know when may need it.

Talk to us first if possible

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BUY THAT HOUSE – RRSP HOME BUYERS PLAN

Home Buyers Plan (HBP)–Exception to recommendation to not contribute.–May withdraw up to $25,000 from RRSP to purchase your first house.

–Funds must be in RRSP for 90 days before withdrawal

$5,000 federal only non-refundable tax credit for a “first time home buyer”

Example: Self-employed income of $185K in 2015, $25K RRSP contribution Feb 28, 2016, buy house June 1, 2016.

RRSP HBP withdrawal (after June 1, 2015): $25,000

Tax saved (refund) from RRSP contribution 12,000

Cash available for down payment on house$37,000

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$500,000 mortgage @ age 35Corp has $44,800/yr. extra cash3% after-tax return and 3% mortgage rate33% tax to make base mtge, 37.5% tax on extra

Corp advantage is $51,000@ age 59 –$95,000 @ age 80 with growth

@2% return, $(40)K @59, $(60)K @80@5% return, $315K @59, $878K @80

MORTGAGE VS. INVESTING IN CORPORATION

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$10,000 TFSA ContributionTFSA rate of return 1.85%LOC interest cost 2.85%“Cost” to TFSA investing = $100 per year

Love funding TFSA from low tax dollars–Inheritance, lottery, income splitting, sale of house, cash sitting around.

LOVE/HATE RELATIONSHIP WITH TFSA’s

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Last Will and TestamentPowers of Attorney

–Finance and Property–Health and Personal Care–Living will

ContractsPurchase/sale agreementsLeasesEmployeesCorporation/Incorporation (maybe)

LEGAL EASY?

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NEVER deduct disability insurance against income (and do not pay through PC).

Increase disability insurance in “ramp-up” years

If disabled, benefits cover current living costs plus saving for retirement

Beware “too much” insurance late in career

DISABILITY INSURANCE PLANNING

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Get a reputable insurance agent that works with other physicians and ask questions.

Know the terminology or ask– Level, Own Occ, COLA, Additional Ins. Rider

Annual vs. Monthly ($1,655.69 vs. $1,788.12)

DISABILITY INSURANCE PLANNING

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Term vs. Permanent– T-10, T-20, T-100, UL, Whole Life– YRT, Level COI

Amount: Depends on why you need it.

Mix and match: Reduce if financially secure

Insure non-working spouse = one year income.– Gives some flexibility to take time off, pay

down debt, etc. Consider annual premiums

LIFE INSURANCE PLANNING

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1. Engage services of accountant and lawyer who knows your profession. Call them before making any major financial decisions or commitments.

2. Check out all your practice options and incentive opportunities. Be comfortable before committing.

3. Learn about OHIP and other billing procedures. Maximize the legal amount of billings, including non-OHIP services.

4. Obtain appropriate insurance coverage – disability, life, liability, overhead from a reputable agent.

5. Systematically set aside for your tax payments. Always pay taxes when due. NEVER FALL BEHIND!!

6. Keep all of your receipts and records. Know when you can destroy them or what you have to keep longer.

TOP ELEVEN FINANCIAL TIPS

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7. Consider incorporating and/or paying a lower income spouse a salary to save taxes.

8. Do not invest in tax shelters or other risky investments. Your best investments are your RRSP, TFSA, (MPC) and paying down personal debt.

9. Pay down personal debt to reasonable levels, then maximize your RRSP, then invest inside the corporation and consider TFSA contributions.

10. Avoid the temptation to spend immediately on big-ticket items, such as an expensive vehicle or house. Save up significant down payments first.

11. Set your lifestyle at a level which reflects your income last year, not at what you anticipate you might make this year. This way, your spending won't "get ahead" of your income.

TOP ELEVEN FINANCIAL TIPS

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THANK YOU!

Interested in hearing more?Schedule a meeting with us

Brandon Gilbert, CPA, CA, BMath, Macc ([email protected])

Dave Wells, CPA, CA, CFP, BBA ([email protected])

Mike Bondy, CPA, CA, CFP, TEP, BA ([email protected])

Doug Greenhow, CPS, CA, CFP, BMath ([email protected])

Collins Barrow Chartered Accountants495 Richmond St. at Dufferin Ave, London(519) 679-8550

www.cbhealthcaregroup.com

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Clarity Defined.

TM

This presentation is for information purposes only and includes tax information current to July 23, 2015. This presentation is not intended to substitute for obtaining accounting, tax, financial or legal advice from a qualified professional. We assume no liability or responsibility for any errors or omissions and users are cautioned this presentation may not be appropriate for their purposes.

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CONFIDENTIAL Accounting, Tax and Other Planning for MD Residents entering practice July 23, 2015