CONFIDENTIAL Accounting, Tax and Other Planning for MD Residents entering practice July 23, 2015.
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Transcript of 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
CONFIDENTIAL
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www.cbhealthcaregroup.com
CONFIDENTIAL
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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CONFIDENTIAL
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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CONFIDENTIAL
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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CONFIDENTIAL
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)
CONFIDENTIAL
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%
CONFIDENTIAL
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
CONFIDENTIAL
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.)
CONFIDENTIAL
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
CONFIDENTIAL
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;
CONFIDENTIAL
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
TYPICAL EXPENSES FOR A HEALTHCARE PROFESSIONAL
CONFIDENTIAL
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.
TYPICAL EXPENSES FOR A HEALTHCARE PROFESSIONAL
CONFIDENTIAL
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)
TYPICAL EXPENSES FOR A HEALTHCARE PROFESSIONAL
CONFIDENTIAL
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)
CONFIDENTIAL
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
CONFIDENTIAL
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?
CONFIDENTIAL
WHAT IS A CORPORATION
Separate legal entity
Limited liability – BUT professionals not shielded from professional negligence claims
Corporate roles Shareholders Directors Officers Employees
CONFIDENTIAL
Income “split”
Income “smooth”
Tax deferral
Other perks
BENEFITS OF INCORPORATING
CONFIDENTIAL
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
CONFIDENTIAL
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.
CONFIDENTIAL
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 $3,500/year admin costs for PC and full income splitting of remaining after-tax corporate funds as dividends using 2014 tax rates.
CONFIDENTIAL
INCOME SMOOTHING OVERVIEW
Drawing a consistent personal cash flow from the corporation instead of “random” draws: Controls spending Assists budgeting Easier to manage Taxes consistent Taxes minimized Saving for retirement, a leave of absence, or
your children’s education
CONFIDENTIAL
AFTER-TAX CASHFLOW AMOUNTS – Dividend Income
Dividend Personal After-tax Per paid tax paid Cash Month$ 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
CONFIDENTIAL
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
CONFIDENTIAL
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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CONFIDENTIAL
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)
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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.
CONFIDENTIAL
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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CONFIDENTIAL
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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CONFIDENTIAL
$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
CONFIDENTIAL
$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
CONFIDENTIAL
Last Will and TestamentPowers of Attorney
–Finance and Property–Health and Personal Care–Living will
ContractsPurchase/sale agreementsLeasesEmployeesCorporation/Incorporation (maybe)
LEGAL EASY?
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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
CONFIDENTIAL
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.