WEALTH MANAGEMENT SYMPOSIUM SERIES Tax Planning for Health Care Professionals Susan Yao-Arkilander, CFP Investment Advisor...
WEALTH  MANAGEMENT  NEEDS Client Needs Insurance Retirement Estate Plan Assist Parents Assist Children Income  Protection ...
Susan Yao-Arkilander’s Wealth Management Team  Will & Estate Consultant Financial Planner Susan Yao-Arkilander Health Care...
Agenda <ul><li>1) Taxation: </li></ul><ul><li>Incorporation </li></ul><ul><li>Tax deferral </li></ul><ul><li>  Income spli...
Incorporation <ul><li>What is a professional corporation? </li></ul><ul><ul><li>In many instances, health professionals ea...
Characteristics of a Professional Corporation <ul><ul><li>Business restricted to the practice of the profession </li></ul>...
Benefits of PC – Marginal Tax Rate Comparisons 28.4% 30.6% 24.4% 23.2% 29.7% 24.0% 23.8% 20.4% 16.0% 18.5% Eligible Divide...
Who, should set up a PC? <ul><li>No tax benefit of setting up a PC if all after-tax income is needed for lifestyle expense...
Corporate and Personal Tax Integration <ul><li>There is generally no tax benefit of earning income through a corporation a...
Tax Deferral Example <ul><li>Net billings after office expenses of $400,000; lifestyle expenses and personal taxes $300,00...
<ul><li>Taxes are  deferred  until taken out as dividends and may be used in the interim to: </li></ul><ul><ul><li>Pay dow...
Income Splitting <ul><ul><ul><li>Family members employed by the PC can receive salaries </li></ul></ul></ul><ul><ul><ul><l...
Income splitting with minors – $10,000 basic personal tax exemption If taxable to parent $20,000 x 50%= $10,000 Tax payabl...
RBC Family Trust Structure Parent Smith Family Trust Beneficiaries loan or gift Tax-free  Capital gains $ Trustee(s)
<ul><li>Have children or grandchildren who have little or no income </li></ul><ul><li>Possess surplus non-registered capit...
Risk Management <ul><li>Risk Exposure: </li></ul><ul><li>Family  </li></ul><ul><li>Business </li></ul><ul><li>Estate  Reti...
Insurance Needs   Long Term Disability Long Term Care Income Protection  Asset Protection Age 30 40 55 65 75 85 Critical I...
Typical asset allocation
Insurance as Another Asset Pool Fixed Income
Tax-exempt insurance <ul><li>$ 300,000 of surplus assets are repositioned and deposited over five years into a $1MM tax-ex...
Retirement Individual Pension Plans
<ul><li>Diversify the retirement strategy </li></ul><ul><li>Significantly increase retirement savings   </li></ul><ul><li>...
Suitable Candidates Incorporated business owners  Incorporated professionals Senior executives
<ul><li>Individuals between the ages of 40 and 71 years  </li></ul><ul><li>Individuals earning T4 income of $124,722 </li>...
Case Study   571,145 Incorporated since 1991 Earning maximum T4 income of $124,722 Contributed maximum to an RSP Age: 55 Y...
Investment Strategy? <ul><li>Additional contributions can be made to shore up any deficit  </li></ul><ul><li>Some surplus ...
<ul><li>Thank you! </li></ul>The strategies, advice and technical content in this presentation are provided for the genera...
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Wealth Management Services for Health Care Professionals

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Practical wealth management strategies for Health Care professionals looking to reduce taxes and maximize family estate using tax deferrals, income splitting, incorporation, insurance and Individual Pension Plans, among other strategies.

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  • Slide to emphasize_that we do much more for our clients than just manage their assets. Wealth management deals with a variety of life events, all of which have financial implications, good and bad, and our role is to help clients identify these events and develop strategies to take advantage of opportunities and avoid the pitfalls._____________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________
  • IPP may approx double retirement savings one could otherwise accumulate in an RRSP All contributions and associated costs are tax deductible corporately , making the solution very tax effective and help small business owners stay in the small business tax bracket 100% creditor proof, a function of pension legislation; more secure than assets in an RRSP For family businesses only: in the event of death of the parent where a child is also is also employed by company, receiving T4 income and member of the IPP, there is potential for any plan surplus at time of death, to remain in the IPP tax free and begin to fund the current costs for the remaining participant (the child). Money contributed by one generation is thus passed on to another tax free. IPP costs can be used to strip cash out of the business in anticipation of the sale of the business or could be used by “buyer” to pay balance of sale over a negotiated period of time. Advantage for seller is, the ability to transition into retirement gradually and reduce capital gains taxes based on the reduced price (offset by tax sheltered contributions going into his/her IPP). Advantage for buyer ; Seller stays on to facilitate transition and deducts balance payment as a corporate expense.
  • Business must be incorporated to establish an IPP; verify eligible dates of incorporation for professionals as these dates will vary from province to province and one profession to another. To date 95% of IPPs are set up for Business Owners. Incorporated professionals include: doctors, dentists, pharmacists, vetenarians, accountants. Little action with Senior Executives, as business owners and incorporated professionals prefer to focus on immediate family.
  • Further to previous broad categories the IPP works best when the above criteria are also present. Income does not need to be max amount of $116,667; if less, benefit, cost &amp; tax deduction are all adjusted accordingly. Any income over the max does not factor into the formula.
  • Table shows the different accumulation potential in an IPP vs an RRSP (in blue) for the same individual age 55 in 2008. Age 55 shows total past service cost ( $474,442) part of which is offset by a transfer of RRSP assets ($305,400) into the IPP as required by CRA. In 2008 the plan sponsor can therefore contribute and write off $169,042 for past service plus $28,932 for current service (total $197,974). We fast forward 5 yrs to age 60 to show increase in current service cost, based on age and the fact that benefits are indexed and therefore increase each year. Accumulation in IPP at age 60 is $994,865 vs $640,395 in rrsp. At age 65 there is another opportunity (it’s optional) to contribute another large sum, $ 650,237, should the plan participant decide to defer retirement until age 71. This possibility stems from one of several “prescribed assumptions” set by CRA (see bottom of pg 6 in client illustration) that is that “retirement age is 65). Pension benefit payable at age 65 has been fully funded by contributions made to age 65, however, represents only 35% of actuarially adjusted benefit due at age 71. Issue is that the difference of payment due at age 71 could not be pre-funded because of the “retirement age 65 assumption” and therefore a certain amount of catch up is needed between 65 and 71.
  • One of my most important tasks is to help define your investment goals. To improve the chance of success these goals need to be very well defined and measurable. Usually, investment goals can be quantified by dollars and time (ie. I need X dollars to fund my retirement, starting in the year 2010). This will lead us to understand what level of annual rate of return we will need to achieve to meet the $ goal. Of course, part of the equation is also accounting for the effect of taxes, fees and inflation. As you know…..the road to success in investing is never this smooth.
  • Wealth Management Services for Health Care Professionals

    1. 1. 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. 2. WEALTH MANAGEMENT NEEDS Client Needs Insurance Retirement Estate Plan Assist Parents Assist Children Income Protection Investments Wills Living Expenses Education Asset Protection RRSP Trusts Special Needs IPP / RCA Heirs Inheritance Charitable Giving Taxes Disability
    3. 3. Susan Yao-Arkilander’s Wealth Management Team Will & Estate Consultant Financial Planner Susan Yao-Arkilander Health Care Professionals Domestic and International Trust Services Tax Planning Support RBC Private Banking / Health Care Banking Insurance Specialist
    4. 4. Agenda <ul><li>1) Taxation: </li></ul><ul><li>Incorporation </li></ul><ul><li>Tax deferral </li></ul><ul><li> Income splitting </li></ul><ul><li>2) Risk Management: </li></ul><ul><li>Identifying the risks </li></ul><ul><li>Insurance – what type, how much and when do you need it </li></ul><ul><li>3) Retirement: </li></ul><ul><li>Individual Pension Plans </li></ul>
    5. 5. Incorporation <ul><li>What is a professional corporation? </li></ul><ul><ul><li>In many instances, health professionals earn their income either as a sole proprietor or an employee of an unrelated employer </li></ul></ul><ul><ul><li>All provinces now allow a health care professional to earn professional income through their own corporation – which is called a “professional corporation” </li></ul></ul><ul><ul><li>Various rules exist regarding share ownership. These rules differ based on the profession and the province </li></ul></ul>
    6. 6. Characteristics of a Professional Corporation <ul><ul><li>Business restricted to the practice of the profession </li></ul></ul><ul><ul><li>Possible restrictions on share ownership (depending on province of incorporation and professional body regulations) </li></ul></ul><ul><ul><li>No limit on professional liability </li></ul></ul>
    7. 7. Benefits of PC – Marginal Tax Rate Comparisons 28.4% 30.6% 24.4% 23.2% 29.7% 24.0% 23.8% 20.4% 16.0% 18.5% Eligible Dividends from PC (over $500,000) 36.4% 48.2% 30.9% 19.0% Quebec 35.6% 47.0% 33.5% 16.0% Newfoundland 33.1% 48.3% 35.5% 16.0% Nova Scotia 33.6% 47.4% 35.5% 14.5% PEI 35.4% 47.0% 32.5% 16.0% New Brunswick 31.3% 46.4% 33.5% 16.5% Ontario 38.2% 46.4% 33.0% 13.0% Manitoba 30.8% 44.0% 32.0% 15.5% Saskatchewan 26.5% 39.0% 29.5% 14.0% Alberta 31.6% 43.7% 31.5% 15.5 % BC Over $500,000 Up to $500,000 Ineligible Dividends from PC (under $500,000) Sole Proprietor Tax Rates Highest Marginal Tax Rate Professional Corporation Tax rates on taxable income Province
    8. 8. Who, should set up a PC? <ul><li>No tax benefit of setting up a PC if all after-tax income is needed for lifestyle expenses. </li></ul><ul><li>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 </li></ul><ul><li>Consider a PC if at least $25,000 of annual income can remain in the corporation </li></ul><ul><li>Consider a Service Corporation (eg. Hygiene Services Corporation) to income split </li></ul>
    9. 9. Corporate and Personal Tax Integration <ul><li>There is generally no tax benefit of earning income through a corporation and paying it to the professional in the same year . </li></ul>2009 Ont. rates $57,365 $53,600 Net after-tax funds ($26,135) ($46,400) Personal Taxes $83,500 N/A Dividend from PC ($16,500) N/A Corporate Taxes $100,000 $100,000 Taxable Income Professional Corporation Sole Proprietor
    10. 10. Tax Deferral Example <ul><li>Net billings after office expenses of $400,000; lifestyle expenses and personal taxes $300,000 . </li></ul>2009 Ont. rates $83,500 $53,600 Net funds remaining $29,900 Additional funds in PC ($16,500) ($46,400) Taxes $100,000 $100,000 Remaining funds ($300,000) ($300,000) Lifestyle expenses and taxes $400,000 $400,000 Net billings Professional Corporation Sole Proprietor
    11. 11. <ul><li>Taxes are deferred until taken out as dividends and may be used in the interim to: </li></ul><ul><ul><li>Pay down business loans, purchase equipment, make lease payments </li></ul></ul><ul><ul><li>Fund investments, insurance, IPP </li></ul></ul>Tax deferral benefits of a PC
    12. 12. Income Splitting <ul><ul><ul><li>Family members employed by the PC can receive salaries </li></ul></ul></ul><ul><ul><ul><li>Family members who are “shareholders” can receive dividends </li></ul></ul></ul><ul><ul><ul><li>Each shareholder qualifies for the $750K capital gains exemption </li></ul></ul></ul><ul><ul><ul><li>IPP benefits funded by corporation qualify for income splitting </li></ul></ul></ul><ul><ul><ul><li>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 </li></ul></ul></ul>
    13. 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 $20,000 Capital gains Investment Account
    14. 14. RBC Family Trust Structure Parent Smith Family Trust Beneficiaries loan or gift Tax-free Capital gains $ Trustee(s)
    15. 15. <ul><li>Have children or grandchildren who have little or no income </li></ul><ul><li>Possess surplus non-registered capital </li></ul><ul><li>Want to have access to the capital you fund to the trust </li></ul><ul><li>Children or grandchildren have expenses such as private school tuition, post-secondary education and extracurricular activities </li></ul>Who should consider an RBC Family Trust?
    16. 16. Risk Management <ul><li>Risk Exposure: </li></ul><ul><li>Family </li></ul><ul><li>Business </li></ul><ul><li>Estate Retirement income, capital gains tax and long term care </li></ul>Premature death, disability or critical illness
    17. 17. Insurance Needs Long Term Disability Long Term Care Income Protection Asset Protection Age 30 40 55 65 75 85 Critical Illness Life Insurance Retirement
    18. 18. Typical asset allocation
    19. 19. Insurance as Another Asset Pool Fixed Income
    20. 20. Tax-exempt insurance <ul><li>$ 300,000 of surplus assets are repositioned and deposited over five years into a $1MM tax-exempt Universal Life Solution. </li></ul><ul><li>Non-Registered balanced portfolio, growing at 6.25%, taxed at the highest marginal tax rate. </li></ul><ul><li>Insurance investment growth rate of 5% - tax-exempt on a joint last-to-die basis. </li></ul>Tax-exempt life Insurance Non-Registered Investment 2,419,550 2,162,817 1,977,961 1,857,515 1,770,726 1,725,497 1,636,336 1,572,860 1,512,407 $ 1,454,833 Estate Value 8% 989,930 80 30 9% 804,480 75 25 11% 656,007 70 20 15% 536,749 65 15 24% 440,650 60 10 65% 60,000 362,973 55 5 95% 60,000 349,306 54 4 157% 60,000 336,199 53 3 354% 60,000 323,628 52 2 2,325% $60,000 $ 311,569 $300,000 51 1 Annual return on Estate Value Deposit Estate Value Account Age Year
    21. 21. Retirement Individual Pension Plans
    22. 22. <ul><li>Diversify the retirement strategy </li></ul><ul><li>Significantly increase retirement savings </li></ul><ul><li>Attain a planned capital accumulation for retirement </li></ul><ul><li>Corporate tax deduction – retain small business tax rate </li></ul><ul><li>Creditor Proof </li></ul><ul><li>Succession Planning </li></ul><ul><li>7. Assist in the sale of the business </li></ul>Reasons to establish an IPP
    23. 23. Suitable Candidates Incorporated business owners Incorporated professionals Senior executives
    24. 24. <ul><li>Individuals between the ages of 40 and 71 years </li></ul><ul><li>Individuals earning T4 income of $124,722 </li></ul><ul><li>Individuals with past service dating back to 1991 </li></ul>Works best for ….
    25. 25. Case Study 571,145 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 1,286,850
    26. 26. Investment Strategy? <ul><li>Additional contributions can be made to shore up any deficit </li></ul><ul><li>Some surplus can be retained without limiting contributions (generally up to 25% of plan assets) </li></ul>Return Objective 7 1/2% Valuation Year Start Date De ficit $52,200 Surplus $30,000 9% 5% 2013 - Age 58 Current yr cost = $38,700 Deficit = $52,200 Total = $90,900
    27. 27. <ul><li>Thank you! </li></ul>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.

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