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

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. 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. MNP LLP
• About MNP Services to Dentists
• History
• Leadership
• Leaders in Dental Education (dental
faculties)
• Our Clients
• 1500 (+) dental clients

4. Offices from Nanaimo to Montreal
Offices from Nanaimo to Montreal
MNP: Serving Canada’s Dentists

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. • 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. • 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. 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. 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. 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. 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. 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. 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. Starting out
Locums
Tax strategies;
Practice structure for multi jurisdiction
Planning to “smooth” annual income
The Career Stages of a Dentist

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. 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. Buyers are looking for?
• Profitable operations
• Turnkey operation
• Experienced staff
• Good location
• Processes in place
• Mentorship
• Technology and new equipment

18. Buying a Practice
Practice Sale
Asset Sale Share Sale

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. 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. What is the Most Tax Effective
Structure for your Practice?

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. 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. 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. 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. 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. 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. 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. In Practice, now what?
Estate planning
Tax strategies;
What do you want your Estate to be?
The Career Stages of a Dentist

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. 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. 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. 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. 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. Structuring your sale
• Shares vs. Assets
• Lifetime capital gains exemption
• Hybrid transactions
• Critical sale matters
• Financing

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Estate
Following your wishes
Tax strategies;
Selecting your Executor
Multiple wills
Spousal Trust
Testamentary Trusts
The Career Stages of a Dentist

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. 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. 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. 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. 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. 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. 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. 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. Deduct the right expenses

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. 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. 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. 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. • 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. • 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. 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