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MNP Tax Strategies - From a Dental Career Stage Perspective

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MNP Strategies to Stay Ahead of the Tax Man. From a Dental Career Stage Perspective.

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MNP Tax Strategies - From a Dental Career Stage Perspective

  1. 1. Presented by: Date: From a Dental Career Stage Perspective Calvin 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
  2. 2. Session Agenda • MNP Services to Dentists • The Business of Dentistry, an Overview • The Career Stages of a Dentist • Other Important Matters • Some final words
  3. 3. MNP LLP • About MNP Services to Dentists • History • Leadership • Leaders in Dental Education (dental faculties) • Our Clients • 1500 (+) dental clients
  4. 4. Offices from Nanaimo to Montreal Offices from Nanaimo to Montreal MNP: Serving Canada’s Dentists
  5. 5. • 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
  6. 6. • 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)
  7. 7. • 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 Dentistry: An Overview (cont’d)
  8. 8. 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 Dentistry: An Overview (cont’d)
  9. 9. Pre- practice As a student Starting out The Basics Associateship Locums Buying into a Practice In Practice, now what? Creating an efficient practice Wealth accumulation Expanding Financial Objectives Planning for Retirement Estate planning The Career Stages of a Dentist
  10. 10. Retirement Selling the Practice Stop or slow down? After Practice “Evolving” your Structure Other income sources Estate Following your wishes The Career Stages of a Dentist
  11. 11. 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 The Career Stages of a Dentist
  12. 12. 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? The Career Stages of a Dentist
  13. 13. 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 The Career Stages of a Dentist
  14. 14. Starting out Locums Tax strategies; Practice structure for multi jurisdiction Planning to “smooth” annual income The Career Stages of a Dentist
  15. 15. 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 The Career Stages of a Dentist
  16. 16. 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
  17. 17. Buyers are looking for? • Profitable operations • Turnkey operation • Experienced staff • Good location • Processes in place • Mentorship • Technology and new equipment
  18. 18. Buying a Practice Practice Sale Asset Sale Share Sale
  19. 19. 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? The Career Stages of a Dentist
  20. 20. 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
  21. 21. What is the Most Tax Effective Structure for your Practice?
  22. 22. 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
  23. 23. In Practice, now what? Wealth accumulation Tax strategies; Advanced tax efficient practice structures Corporate investing Creditor protection Evolving Life Insurance planning RRSP vs. IPP The Career Stages of a Dentist
  24. 24. 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
  25. 25. 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
  26. 26. In Practice, now what? 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) The Career Stages of a Dentist
  27. 27. In Practice, now what? 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? The Career Stages of a Dentist
  28. 28. 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
  29. 29. In Practice, now what? Estate planning Tax strategies; What do you want your Estate to be? The Career Stages of a Dentist
  30. 30. Retirement Selling the Practice Tax strategies; Valuation assistance Are you selling shares or assets? Vendor financing – to be or not to be? GST considerations The Career Stages of a Dentist
  31. 31. 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
  32. 32. 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
  33. 33. What’s the process of selling? • 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.
  34. 34. What’s the process of selling? • 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
  35. 35. Structuring your sale • Shares vs. Assets • Lifetime capital gains exemption • Hybrid transactions • Critical sale matters • Financing
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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)
  42. 42. 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
  43. 43. Retirement Stop or slow down? Tax strategies; Do you need an Associate Agreement (full circle)? Practice transition plan Name change for practice corporation The Career Stages of a Dentist
  44. 44. After Practice “Evolving” your Structure Tax strategies; Use of other Trusts Simplify your structure – Holdco and Opco to One Co The Career Stages of a Dentist
  45. 45. After Practice Other sources of income Tax strategies; RRSP melt down / Pre 72 RRIF Canada Pension Plan (CPP) – early or delay Old Age Security (OAS) & Claw back The Career Stages of a Dentist
  46. 46. 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
  47. 47. Estate Following your wishes Tax strategies; Selecting your Executor Multiple wills Spousal Trust Testamentary Trusts The Career Stages of a Dentist
  48. 48. 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
  49. 49. 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.
  50. 50. 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
  51. 51. What’s New, What’s Changed? 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
  52. 52. What’s New, What’s Changed? Capital gains exemption (applicable to QSBC shares) - Increased to $800,000 (Lifetime Limit) for 2014 - Indexed for inflation beyond 2015
  53. 53. What’s New, What’s Changed? New BC Personal Tax rate for 2014 & 2015 - Temporary new BC rate over $150,000 = 46% - May see higher incomes in 2013 to avoid
  54. 54. What’s New, What’s Changed? 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
  55. 55. What’s New, What’s Changed? 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
  56. 56. Deduct the right expenses
  57. 57. 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
  58. 58. 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
  59. 59. 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
  60. 60. 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!
  61. 61. • 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
  62. 62. • 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
  63. 63. Contact Us Calvin Carpenter, CA calvin.carpenter@mnp.ca Don Murdoch, CPA, CA don.murdoch@mnp.ca Barb Carle-Thiesson, FCA, ICD.D barb.carle-thiesson@mnp.ca Or at www.mnp.ca

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