JULIE: Hi everyone, and welcome to this webinar about the provincial and federal budget implications for incorporated physicians, presented by MD Financial Management. My name is Julie Gauthier and I will be your host for tonight. The provincial changes were introduced in March 2015 and amended in March 2016. In March 2016, there was a change to the new requirements for accessing the small business deduction. These amendments have not been passed into legislation yet. The federal budget legislation is still in draft only. Royal assent has not been received. So, over the course of our seminar today we are going to review a couple of points. So, first of all your corporation, review a couple of items around why and how you incorporated, the impact of the provincial and the federal budget changes and also the many impacts it may have on your financial plan and how you organize your compensation strategy.
As your guest speaker today, as I said, I will be your host. I am a financial planner and along with me from MD Financial here is Nicolas Karaoglanian. The context of the presentation tonight is that we want to expose to you how we may have, how we do have on a regular basis, a collaboration between MD and your tax specialists in order to use the competencies of both, and to reflect a real collaboration between your planner and the tax specialist to optimize your planning. So, Nicolas has more than 18 years of experience as a financial planner and private investment advisor. He has his master’s degree in business administration as well as his financial planning title in Quebec. Also joining us tonight, here is Samy Amar, a senior tax manager at MNP. So, Samy is based in the Montreal office. He is a member of the taxation services team and is one of the firm’s dedicated medical niche professionals. Besides public and private companies in a range of industries, Samy has worked with numerous clients from the health sector and research-intensive industries, including many medical and dental professionals and researchers. His experience in corporate income tax planning ranges from research and development, tax credits to developing and implementing tax deferral minimization strategies designed to maximize credits and deductions and reduce capital and provincial taxes. So, Samy, if you would like to talk to us a little bit more about MNP so that our guests know more about your firm.
SAMY: Thank you, Julie. Good evening, everybody—thank you for hosting us and thank you for MD Management for having us. MNP is a Canadian accounting and advisory firm with offices coast to coast. We have professional services niche that provides succession, tax planning evaluation and research and development amongst other sectors. We follow the industry and share our findings and provide opportunities for tax savings as well as all the regulatory changes that may have an impact on the practice for professionals. We connect throughout the year in a range of conferences and events, and we share our key news and strategies to help the practice. We have more than 4,400 medical clients across the country involved in different aspects of the healthcare sector, from fertility clinics to cosmetic surgery to independent medical practices. We understand that the professionals are busy people and we want to be their trusted advisors and help them throughout their career making sure that you do not miss any financial opportunities. So this is throughout the career from finishing their residency to starting a new practice or planning for their retirement. We are here to answer their key questions and understand all their options and making sure to talk to the professional to achieve their goals.
JULIE: Great, thanks very much. It’s actually a really good segue to talk to you about who is MD Financial Management and what we do because our goals are very, very close. We are deeply physician-focused, so owned by the CMA and MD has a single mandate—help you, the physician, achieve your financial well-being. So, our financial advisors like Nicolas are working on salary, not commission, and they provide objective advice that is in the best client interest. So, our collaboration with your tax professional like MNP, say, or any other firm out there, is really the way we do work at MD to make sure that the collaboration is at its best for your financial well-being. MD Financial Management is more than an investment firm. It’s a financial planning firm, so with the help of our MD ExO Expert Office, we are going to deal with all aspects of your financial plan. It could be insurance, estate planning, banking, your incorporation, so all the taxation aspects, we are going to be there for you in all those areas. So, I will ask Nicolas to talk a little bit more about the integration principle into the taxation world and we’re going to start the more in-depth conversation around taxes here.
NICOLAS: Thank you Julie, and it’s a pleasure to talk to you all tonight. All of you listening tonight, if you are listening to this webinar you’re either incorporated or thinking of becoming incorporated for your practice. So, one principle that’s very important for you to understand is integration. Basically, integration is the tax policy that’s designed to ensure that income that is earned by a Canadian-controlled private corporation is subject to the same amount of tax as an individual taxpayer that earns the same investment income. Basically, what that means is that if we’re planning to basically spend all the money that we’re making, you shouldn’t basically be incorporated because there’s just going to be added costs to the incorporation and you’re not going to be saving any money. Basically, the main reasons of incorporation are the tax deferral and income splitting. Of course, when we talk about tax deferral, it is to be taxed at a lesser rate at first to afterwards when we take this money out in the form of dividend or salary, basically pay lesser tax. So, that’s basically the tax deferral. Most people that are incorporated will basically defer, and should have a significant amount of savings every year for an incorporation to be worth it. And, a lot of you are also taking advantage of income splitting—some of you do both, basically. So, by income splitting we, of course, likely have a spouse that earns less money than you physicians, of course, so by splitting income we are basically handing a bit of your income to your spouse that has a lesser tax rate and so will basically be taxed at their marginal tax rate. This can be done also with adult children over 18. Under 18, unfortunately, does not work. You will be taxed on anything you will give to your children under 18 and will be deemed taxed at your marginal tax rate. Also, basically, there’s many—depending on your situation—whether you should pay yourselves dividends instead of salary. It’s definitely not a black and white factor. There’s many factors that must be considered in determining how you will be compensated from your corporation. Basically that discussion should be done with your MD Advisor and your accountant according to your situation. So, this is for the integration.
JULIE: Thanks, Nicolas. There are a lot of good strategies there that we could play with, with our clients, around income splitting and also tax deferral.
NICOLAS: Absolutely, and if you combine them both then incorporation becomes obviously very, very advantageous for physicians down the line.
NICOLAS: So, I mean, talking about the tax deferral—if you look at the next slide—obviously, if your active business income is less than $500,000, which it is for a great part of physicians, well we can see directly the advantage. Your tax right now—this is in 2016—18.5% in Quebec, whereas your marginal tax rate as an individual when you make $200,000 or more is at 53.31%. So, there’s an obvious advantage to keep some money in the corporation to make that money grow over time versus taking it out as an individual where you’re going to have to pay taxes immediately on it. So, the idea obviously is making money with the money you should have been taxed on—that should have gone to the tax man years ago.
SAMY: So, if I would add Nicolas, is that we see on this slide that for the income earned through a corporation that is less than $500,000, there is very much incentive to earn that income through a corporation as compared to an individual. So, it’s like almost 35% difference—18% compared to 53%. This is what we call the “deferral,” so leaving money in the corporation would defer the tax otherwise payable if the money had been earned directly by the individual. This difference is significant—actually, currently we are talking about 35% of deferral on active business income which is less than $500,000. The other flip side to the story is that if you take out the money immediately you’ll see on that slide that there is income tax as a second level of the shareholder. So, if the money is kept in the corporation, taxed at 18%, and thereafter what is left after the corporate tax is distributed to the shareholder—the physician, for instance—there will be another layer of tax which we call “dividends.” So, depending on—
JULIE: The compensation strategy could imply salary or dividend. In the case of dividend, we have the rates here.
SAMY: In the case of dividend there would be another layer of tax of 38%. So, if you combine the first rate of 18% payable by the corporation, and if you add on the taxes on dividends that the shareholder pays when the company pays him the dividend, so if you add on those rates you come up to a total combined rate of 54%. This is very much compared to what would have been paid if the individual had earned the money directly of 53%.
SAMY: So, this is the concept of what we call “integration.” If you earned your money, as Nicolas was mentioning, either by corporation paying you a dividend, or if you earned it directly, more or less you’ll be paying the same thing at the same rate at the end of the day. So, this is why Nicolas was mentioning one of the main benefits of the company, the corporation, is to leave money in the company to benefit from the low tax rates, corporate tax rate, and to leave that money to grow within the corporation.
NICOLAS: If I could add, the 54.23% if you see is, of course if you are taxed at the highest marginal tax rate as an individual.
SAMY: Of course.
NICOLAS: If you’re taking a year off, you won’t be paying that kind of income tax.
NICOLAS: In terms of investment income, well there is no real great advantage whether the money is invested personally or in the corporation. You will be taxed on your investment income pretty much alike, so there’s no real advantage there but that’s not the reason why we’re keeping money in the corporation; of course, it’s to defer the taxes.
SAMY: I would only add one last point on that slide. We see there, non-eligible dividends and eligible dividends. This is really relevant for the individuals, so the rates for a dividend depends on from which pool is it paid from the corporation. If the dividends have been taxed within the corporation at the smaller rate, below the $500,000, it would be taxed on the individual as a non-eligible dividend at the rate of 43%. If it is eligible, meaning it’s paid out from the higher pool of the incorporation, then it’s taxed at 39%—almost 40%.
SAMY: So, that again will affect the combined rate of corporate tax and individual tax, but more or less, there is also integration if the dividend is paid out through the non-eligible pool or eligible pool, there is always integration. This is the beauty of our tax system in Canada, whether you earn it through through an individual or through a corporation—
JULIE: You can’t avoid it [chuckling].
SAMY: You can’t avoid it, that’s it. But, the idea here is the timing. If you leave the money in the corporation and you’re not pulling it out, so this is where you’d get the benefit. Or, as Nicolas was mentioning, if you’re able to do some income splitting.
JULIE: So, that’s exactly what we have here. So, looking over the long term and trying to realize your gains a little bit later down the road when your personal tax rate is lower.
NICOLAS: Well, exactly. Of course, if we look at the long-term road of life, ideally we’re saving up this money; saving up every year for what? Obviously, so we can retire comfortably and leave, obviously, some inheritance to our children. So, basically, that’s when we look at the tax deferral could also become a significant tax savings come retirement because, of course, when you are retired or semi-retired you’re not going to make the same income as you were as an active physician. So, the dividends that you take out of your corporation retired you’re going to be taxed much less on it, a bit like an RSP of course. When you contribute money to an RSP, you are doing so when you’re earning a lot of money and when you are retired at 71 you’re obliged to convert your RSPs into an RIF and obviously at that point are most likely retired, so will be paying less taxes on what you take out. There is some tax planning to be done, too, not necessarily at retirement, but if you take a year off—a leave of absence or whatever reason—some really important tax planning could be done during that time to take advantage and take out some money from your corporation.
JULIE: You are right. The corporation can be a little bit more flexible with regard to sabbatical year or maternity leave and all these.
JULIE: I forgot to mention to our audience that if you have any questions that you would like to ask our panel, don’t hesitate to type them in the chat area to all panelists and we’ll just take note of them and answer them at the end of the webinar. So, we’re more than happy to take your questions if you have any. Sorry Nicolas, so let’s go back to the point around income splitting, I think.
NICOLAS: Yeah, so in terms of income splitting, I mean, I’ve already mentioned the Canadian tax rules of course cancels out any tax advantage you could have. So, obviously, children under 18, we cannot do any fiscal strategies with them, but of course, spouse and children over 18 we can do so. Actually on our website, on MD’s website, there’s an MD-developed tool, income splitting and deferral, that you could use to see with your personal situation what type of advantages incorporation can bring you. So, I very much encourage you to check out that tool. It could give you some great indications on the road to take. MD also has a quick clinic called “Should I Incorporate My Medical Practice?” It’s a 1-minute 38-second video that has an incorporation calculator that can help you decide whether incorporation is the right decision for you.
JULIE: Good. So, to the audience, we have a lot of tools available on our website to allow you to know a little bit more about your situation and how to enjoy the various benefits. We’re going to go into the provincial budget changes there. So, Samy and Nicolas are going to guide us into those changes because they can be pretty significant to you. As we said earlier, the changes have not been passed as a law yet. As soon as they will be, we will need to review the impact it has on your situation, your personal situation, so there will be a time, an opportunity to meet with your MD Advisor and your tax specialist in order to see what exactly the impact is for your situation.
SAMY: Yes, Julie, you are right. So, new Quebec changes of the last budget. These changes will affect a lot of small shops, corporations.
JULIE: Not only physicians.
SAMY: Not only physicians—depanneurs, etc. The new criteria that was put in place is based on the number of hours, so basically, employee’s hours must total at least 5,500 hours in a year. This is more or less the equivalent of three full-time employees. The rule is that you cannot count the hours of an employee over 40 hours per week.
SAMY: So, that’s a—
JULIE: So, even if you as a physician work 50-55 hours a week, under this rule it will not count for more than 40?
SAMY: Exactly. And, also, I mean, the hours have to be paid at the moment the small business deduction is claimed, so there’s a rule for the shareholder where the hours may not necessarily need to be remunerated. Also, when talking about the number of hours you can factor in, the hours worked by employees of a related company—or an associated company as we say in tax—of the preceding year, so that again is another criteria. The takeaway here on this slide is that it will affect a lot of corporations in Quebec—small.
JULIE: Small corp, yeah, small business.
SAMY: And, you as a physician who is incorporated need to absolutely talk to your MD Advisor and your accountant specialist and determine if you are subject to those rules.
JULIE: It will be hard for many physicians to qualify for three full-time employees including themselves—
JULIE: Because, you know, we know a lot of physicians are not into practices where they have a lot of employees, especially our specialists in the hospitals. So, that’s why the impact is really important. So, let’s have a look at the numbers and see what exactly it’s going to look like.
SAMY: So, the numbers, I mean, we see if you are impacted by these new Quebec rules, you would lose the small business deduction on the first $500,000 of income, meaning that your Quebec tax rate will increase from 8% to 11.8%. That’s almost a 4% immediate increase as of next year. We see that deferral here, comparing 18% which was the corporate rate, which was taxed on the company, and now it’s compared almost to 22.2%, so that’s a 4% increase. When we were talking about the deferral of the famous 35% potential deferral, that’s gone to 30% now.
JULIE: Thirty, yeah exactly. So, if you were deferring $100,000 last year, with the new rules you’re going to be able to defer, let’s say, $96,000 or something around those lines when the changes are in effect. So, yes, it will affect your capacity to save into your corp.
SAMY: To a smaller extent, I would say. I mean, this is 4% but—
NICOLAS: Obviously the spread between the personal marginal tax rate and the corporate rate is still quite large.
JULIE: Of course.
NICOLAS: So, I mean—
SAMY: Yeah, it was 35 and now it’s more 30—
SAMY: So, you still have some good room to defer—
SAMY: Some taxes by leaving the money in the company. You are only affected by the provincial.
JULIE: Yeah. Should we have a look at the federal ones now?
SAMY: Yes, sure.
JULIE: So, yeah, the federal impact is also affecting the small business deduction. It looks like the government have decided to aim into the small business.
SAMY: Yes. Now the federal budget which was announced last March 2016 introduced new proposals to take out the small business deduction where there are physicians structured in partnership arrangements or corporate arrangements and where there are fees for services that are paid either through the partnership or through the corporations. So, when there are these types of structures where the physicians are part of a partnership group or corporate group, I would suggest to consult with your advisor and your tax specialist and accountant how you would be impacted by these new rules because they are fairly complex. Each structure needs to be reviewed on its own and there is no magic solution, per se. Definitely, I invite all the physicians who are maybe caught by these new measures to consult.
JULIE: We can have a look at the exact tax changes going from 18.5 then with the two tax changes—
NICOLAS: Quebec and federal, yeah.
JULIE: Exactly, combined it’s now close to 27. Of course, again, less deferral possible there, but still a good differential between the personal rates and—
SAMY: Now, we’re comparing combined corporate rate—federal and Quebec rate—of 27%, more or less.
SAMY: Like, post-budget, so that’s 27% compared to the maximum personal marginal rate of 53%. Still, there’s room for deferral of 26% still, but I mean, decisions will have to be reviewed like: do I still continue to take a salary or still continue to take dividends; what is the right mix of salary and dividends? So, these new rates, if you’re affected by these new measures, I mean, again I invite you to consult and do your own math and—
JULIE: Exactly, because the personal situation of each is unique. If you had made the decision of incorporation because of tax deferral or because of income splitting or because of both, these need to be revisited just to make sure that it still fits.
NICOLAS: Well, of course the Quebec one, I assume, pretty much 95% or more of physicians will be affected by it. But the federal one is not as clear, so only the physicians that are really in a corporate structure, basically a group of specialists working together in a hospital—
JULIE: And sharing income.
NICOLAS: And sharing income, as an example.
NICOLAS: So, I’m not sure that most physicians will be affected by the federal one.
JULIE: Exactly, that’s true Nicolas. You could be caught by either provincial measure, but not necessarily by the federal.
JULIE: So, we’ll see a little bit of examples down the road in the presentation in order for you to have an idea how large the impact is on some situations. Of course, we were not able to deliver examples for all situations. We took some mid-range ones, but hopefully it will help you see some kind of a differential.
NICOLAS: And, as for the federal changes, just so you know, the CMA is lobbying very strongly on your behalf basically to amend what was initially proposed by the federal government. So, it doesn’t have the royal assent yet and CMA is really working hard on your behalf to basically make changes there. So, we’ll see what happens.
SAMY: That’s for the federal changes.
NICOLAS: That’s for the federal changes, correct.
JULIE: Exactly, yeah. So, as some kind of conclusion, Samy, the overall impact of proposed change, like significant reduction in the tax deferral advantage.
JULIE: Of course, that’s what we said.
SAMY: And, obviously there may be cost of paying more up front, up to more than 8%. Like, there’s the 4% for the Quebec changes and 4% for the federal change, so combined there’s an immediate tax cost of 8% at the corporate level.
SAMY: But, you’ll have to bear in mind that if the income is taxed at the higher level, at the corporation, it means that dividends that the shareholder will be getting will be taxed at the lower level. So, overall, there should be an overall cost in the range of 2%.
JULIE: Yeah, we’ll see that in the example.
SAMY: If the money is taken immediately, but this is not really the purpose; the whole exercise is like, let’s work on the deferral and—
JULIE: And, one good news there is that there’s no change in the income-splitting strategy. So, if you were doing income splitting with your spouse or adult child it’s still possible and there’s no tax implication or tax changes.
JULIE: So, at this point, Nicolas is going to talk to us about some impacts on the small business deduction in your financial plan. So, making sure that, you know, your incorporation decision is still right and compensation strategy and long-term retirement plan.
NICOLAS: Well, of course, with these changes in view of course it would be a good idea to sit down with your financial planner and with your tax specialist to discuss, obviously—well, remind yourselves the reason why you incorporated in the first place, and review your budget and your saving capacities. Compensation decisions will obviously impact your savings plan and it’s not black or white. Are we saving with the help of RSPs? Are you a 100% dividend strategy or are you mixing salary and dividends? Once again, this is not a black and white situation and no accountant has the same strategy, depending on your personal situation. Should you be saving in a TFSA also? Once again, not black and white. If you have a strong tolerance to risk and you’re a young doctor, the question being asked is, is it worth it to take out money from the corporation and pay more taxes right now to be able to put that $5,500 in the TFSA? We believe that, yes, that could be a good decision, but if, of course, you’re a bit older and you’re more risk-averse, then it might not be a good decision in the long run. So, basically if you are income splitting, how much does your spouse save, basically, with the income splitting? How do you plan to finance your children’s education? Do you plan on helping out other members of your family? So, those are all questions that need answers and need proper planning basically.
JULIE: Good. So, on the incorporation decision, should we switch back and go back to non-incorporated?
NICOLAS: I don’t think so. I mean, obviously, if you’re already incorporated and have some savings there’s no point. Of course, the cost of incorporation will remain year after year, so of course you continue with the incorporation. But, what might change is the savings patterns. Basically the salary versus dividend might change and that’s why it’s important to consult your tax specialist about that.
JULIE: Good. Talking about incorporation, compensation strategy. How do I do that if I’m a physician and I’d like to discuss the compensation? Is it a good time to revisit my decision?
NICOLAS: Yes, definitely. Once we know these new tax proposals are a law, I think definitely it would be a good time to sit down and revisit those decisions on what to do, and have the best fiscal plan that meets your needs. Obviously, the objective here is to pay the least amount of tax as possible now, but also plan for the future. We don’t want to be fiscally locked come retirement and obviously have an RSP that’s too big, as an example. That’s something that we look at as a financial planner. When we have very big RSPs at some level we’ll say let’s stop, you don’t want to be fiscally jammed at retirement and being forced to take out that money, so that’s why incorporation is a very good tool for that to have, obviously, a different pool from which to take from at retirement. Dividends from incorporation, RSPs, TFSAs—those are the usual pools that are trying to have a good balance at retirement to pay the least tax as possible.
JULIE: Good. I’d like us to have a look at some examples. So, we have made some number examples. The first one is, if you are impacted by the Quebec changes into a salary compensation decision. So, the next page, of course, is going to be on a dividend scenario. So, Samy and Nicolas if you would like to lead us into that example because there’s a lot of numbers for our physicians online.
SAMY: Yes, sure. So, this slide shows the impact of the Quebec changes if in a salary scenario. Only the Quebec changes, and this is assuming that the physician is not working the group structure—
SAMY: Where he would be affected by the federal changes as well. So, in this fact pattern, we have decided that the physician would have a salary of $150,000 and would—
JULIE: I think that was in order to cover the cost of living around $76,000. That’s what the client is mentioning during the financial planning meeting and the meeting the tax specialist.
SAMY: Exactly. So, he wants this in his pocket and also to contribute to RSPs and to optimize the RSP contribution in this scenario, we have RSP contribution of $25,000.
JULIE: Yes, exactly. In the example, we have to mention that the numbers were rounded, so $25,000 is not necessarily the maximum amount for this year. I think it’s a little bit lower than that, but just in order to have the example more simple and clear we rounded the numbers to RSP contribution.
SAMY: So, in this situation we have a net income profit from the practice of $300,000 and the physician, while incorporated, is pulling out the salary of $150,000 in order for him to contribute to an RSP and to fund his cost of living. If we do the math, we see that the taxes, corporation taxes, are increased from $27,000 to $33,000.
JULIE: Yeah, we can see an impact there.
SAMY: So, there’s an immediate impact there because of the increase of 4% of the Quebec rate. So, there’s an immediate outlay of $5,000—$5,700 to be more precise—and this is where it gets a bit…there’s a cost to the changes where the company is paying over $5,000 more taxes in the corporation. All the rest is equal and at the end of the day this is a cost that will have to be factored in.
NICOLAS: We’re talking about a $5,700 difference, basically, between being incorporated in 2016 and 2017, so of course the $5,700 at a 4% return could amount to about $170,000 over a 20-year period, so of course it does affect your savings in the long run.
JULIE: So, let’s have a look at the same kind of numbers into a dividend compensation situation, because a lot of our physicians are using the dividend strategy to get the remuneration.
NICOLAS: So, yeah, we just wanted to expose 100% of one or 100% of the other.
NICOLAS: So, the first one was if you’ve paid yourself only salary with your $150,000 and now the second one, same hypothesis, you are making $300,000 as a gross income and you need $76,600 roughly as a net income in your pocket, but this time you’re paying yourself strictly as a dividend. So, we’ll look at the differences here where your corporate taxes will go from $55,500 to $66,900, so the deferral advantage basically decreases from $49,000 to $38,063, so diminished by $11,400. You’ll notice that it diminished moreso if you paid yourself strictly by dividend than by salary in this scenario. Basically, $11,400 at 4% over 20 years, we’re talking about $339,000, obviously, of potential savings that we’re leaving on the table because of this change.
JULIE: That’s pretty significant.
JULIE: It starts to be something that is bothering our clients.
SAMY: Absolutely. So, when you’re really much weighing the dividends with incorporation—
JULIE: The impact is more significant.
SAMY: So the impact is worse.
NICOLAS: It’s worse, so that’s something you might want to reconsider according to your situation, but I know most physicians that I’ve met have a mix of salary and dividend.
JULIE: Of salary and dividend.
NICOLAS: So, that mix can also be re-visited.
JULIE: So, compensation strategy, talking about it, I think it’s composed of many components of course, because it’s not only how much you have left on the table on a yearly basis. So, Nicolas, maybe you want to talk to us a little bit more around all the other things that we have to consider in the compensation strategy.
NICOLAS: Well, obviously there’s a lot of things to consider. Obviously, by paying yourself a salary there’s all those social taxes that you have to take into consideration.
JULIE: Oh yeah.
NICOLAS: The Quebec Pension Plan, obviously you are paying the employer’s portion and the employee’s portion.
JULIE: And no one likes to do that [chuckle].
NICOLAS: No one likes to do that, but as I say in time it is a defined benefit pension plan that you’re funding for your retirement, so at the same time it’s something you’re getting back afterwards. The QPIP (Quebec Parental Insurance Plan) obviously when we’ve had our children and paid our dues it’s not always pleasant to pay that. I’m missing one. The—
JULIE: The health contribution. The Health Tax.
NICOLAS: The Health Tax contribution, obviously, so those are all different taxes or social benefits that you are paying for when we get a salary which makes it so that in the net, when you’re paying yourself a dividend, there’s always more in your pocket, but it’s not really the real picture because, of course, of the contributions you are making mainly to the QPP.
JULIE: You have the benefits that come with it in the end, so that has to be taken into consideration—yeah.
NICOLAS: Absolutely. So, basically the salary, of course, you are taxed progressively on the dividend. Of course the dividend tax credit, you will have to consider what are the different changes in the tax rules for that to make sure it’s advantageous for you. And risk management consideration, like I’ve mentioned before, do you want to take from many different pools at retirement or concentrate on one, basically the dividend pool from your corporation. That’s something that’s proper to you and you have to discuss that with your tax professional and financial planner.
JULIE: And your planner, yeah, of course.
SAMY: Yeah, because in the dividend—if I’m permitted to—
JULIE: Yes, go ahead.
SAMY: In the dividend scenario you would leave all the money invested in the corporation essentially, so that’s—
JULIE: That’s your strategy in only one account or one area.
SAMY: Yes, so you’re leaving everything in the corporation and just pulling out dividends. That also—
JULIE: Implies some risk, exactly.
SAMY: As compared to having other vehicles like RSPs or [TFSA].
NICOLAS: And, there are some investment strategies, obviously, that could be put forward when we have different pools that are obviously tax deferrals versus having all the money in the corporation. If you have a balanced portfolio, as an example, we’ll concentrate the fixed income into your RSPs and TFSAs because it doesn’t matter what type of return you are getting, dividend or interest—it’s not taxed.
JULIE: It’s not taxed into those.
SAMY: So, we want to concentrate the equities that are more friendly, tax-wise, into the corporation basically. So, those are all things to be considered.
JULIE: Yeah, and talking about benefits, so of course when we are working no one likes to pay the employer and employee part of the QPP or CPP benefits, but of course, when you are retired you like to receive your pension and your benefit. So, it’s just to illustrate—we want to have the best of both worlds in this situation. So, if we advance into the compensation strategy, I think this one is a good conclusion to what is going to happen if we lose both provincial and federal small business tax rates.
SAMY: Yeah. I mean, obviously if the physician is impacted by both budgets the impact is going to be tremendous immediately at the corporation level. And, definitely, there will have to be some consultation with their own—
JULIE: With their advisors at this point, yeah.
SAMY: Well, probably make some adjustments as far as the Quebec changes are concerned.
SAMY: But, wait maybe a little bit more for the federal budget before taking any more action.
JULIE: Yeah, because it has the implication of working into a group and maybe breaking this group arrangement if you don’t want to be caught by the federal measures.
JULIE: So, this is much bigger of an impact than just on yourself. So, the consultation, then maybe needs to be as a group meeting with your tax specialist, just to make sure you make the right decision for everyone in the group, yeah.
SAMY: So, the general feeling right now is the Quebec law is pretty much going to pass—
SAMY: The way it is. But, the federal one is still pretty much in the air and obviously the implication that it will have on physician groups is still really not determined. It’s up in the air. As I mentioned, CMA is working hard, obviously, on your behalf to try to favour that.
JULIE: So, let’s have a look at some examples very quickly because I’m conscious of time and I want to have some time to take your questions as well. So, this is an example of our same physician, $300,000 as an earned benefit, into a salary arrangement. But, this time our physician is caught by both measures, so the federal one and the provincial one. So, we see the deferral advantage in the end goes from $49,000 to $36,800, so the diminishment is pretty interesting at this point. Nicolas, how does it go after 20 years when you lose this advantage?
NICOLAS: Well, yearly we’re looking at $12,450 and over 20 years at 4% estimated rate of return we’re talking about almost $371,000, so it’s quite significant.
JULIE: Wow. It is significant. It could mean some changes in your financial plan as a physician at this point.
JULIE: Yeah. And, if we go to the dividend scenario then, the impact is even greater—ugh, looks awful there.
SAMY: Yeah. It’s almost $20,000 more of corporate taxes paid annually.
SAMY: So, definitely this is something that should be looked at.
JULIE: Of course, yeah.
NICOLAS: That’s really a worst-case scenario. Hopefully none of you will have to go through that scenario.
JULIE: Yes, and of course MD is going to be there to advise you and make sure that you have the better advice in your situation. So, if we go to the summary of all these examples, you can see that you have the first two columns are no group structures. So, meaning that you are impacted only by the provincial measure. And, the last two are you are impacted by both. So, the range of savings goes from—or the income that is into the pocket of the physician afterwards, $224,000 to $205,000 in the worst-case scenario. There’s a wide variety of impact that can be there. Of course, we don’t recommend here to switch your remuneration or compensation decision right now. As we said, both budgets are still not voted so they are not in effect now, but we wanted to expose to you the impact of all of this, so you are ready and prepared to have the conversation with your specialist.
NICOLAS: Very good.
JULIE: And, Nicolas, just to complete our session, around the long-term financial plan, any advice that you’d like to give to our physicians?
NICOLAS: Well, I mean, I compare financial planning to basically a GPS to the road to retirement. So, it’s a long road ahead and sometimes there is a snowstorm, sometimes there’s a flat tire—what type of car do you want to get there, what type of road? So, basically we have to readjust at all times, so this is my job obviously to do with you. Basically, we have to readjust and look at your budget and see where we want to be at retirement, what’s your cost of living right now, estimated at retirement. I mean, these fiscal changes happen all the time. We just have to adjust and cope with it and just readjust your financial planning to it. So, that’s something we’re happy to do here at MD, so of course, when and if those changes come in effect we strongly suggest that you consult your MD Advisor.
JULIE: Thanks. So, I think we’ve got some questions throughout the webinar. One comment is around it’s a terrible law for physicians incorporated. I so agree with you, doctor, it’s really so bad. So, tax implication that it will create when implemented? I think we have given some examples depending on your remuneration strategy, is it salary or dividend. So, hope the webinar answered this question throughout. As Nicolas and Samy said, of course it’s going to need to be reviewed as per your unique needs.
SAMY: As we said in our examples, depending if you’re weighted in salary or dividend, the immediate tax cost would range between $5,000 to almost $20,000.
JULIE: Almost $20,000 yeah. And, it was for one example of $300,000 earning. Like, it could be so different depending on your earning.
JULIE: Yeah. We have a question around income splitting: Can income splitting only be done through a family trust? So, Nicolas, I think this one is for you around financial planning.
NICOLAS: Yeah. I mean, ideally, of course, a family trust is the safest structure, I mean, in the sense that it can hardly be attacked if it’s well written, basically, if you have a good family trust. Right now I would say most physicians that are incorporated have a spouse as a non-voting shareholder—
NICOLAS: Discretionary dividends that are being given to their spouse and also for adult children. That method is still valid right now.
NICOLAS: But the federal government is looking into it.
NICOLAS: So, I’m not sure in two or three years if we’ll have this discussion that it’s going to still be a valid method to do income splitting.
JULIE: Or if family trust will be the only one way.
NICOLAS: It probably is looking forwards that road, but for now, 2016 and so far 2017, it is still good obviously with a family member as a non-voting shareholder to do income splitting that way
JULIE: Good, thanks.
SAMY: Yeah, there are benefits of family trust, but this is outside the scope of—
JULIE: Exactly, that are over and above income splitting, of course. Like control over the money—
JULIE: Make sure that the distribution is made according to your needs. Like, all of those advantages to family trusts need to be considered as well when you put one together—thanks for reminding us. The last question I think we will take is, can we explain the group structure? What does it refer to? Part of a corp that is owned by other physicians in a partnership. So, maybe Samy can give some precision around the group structure that we were referring to that is being caught by the federal measures.
SAMY: Yeah, well the basic group structure is where you have the professional corporation charging fees to, let’s say, the partnership or a group corporation. So, that fee, that income in the professional corporation, gets taxed at the smaller rate. So, now, that professional corporation would be viewed—although it’s not, let’s say, a shareholder of the main corporation or a partner of the main partnership—because of the new rule, because of that fee that’s paid to it, that professional corporation would be viewed as a shareholder or partner of the partnership.
SAMY: So, the fee arrangement—this is what is being challenged.
SAMY: The new rule, this is what it’s targeting because otherwise, I mean, if you think about it, if you are a corporation normally you would be a partner of the partnership, so to circumvent the rules of what people used to do is, OK I’m not going to be a partner of the partnership, I will just charge fees for the partnership.
JULIE: Oh, yeah.
SAMY: So, this is what the government is targeting.
JULIE: It is challenging, yeah.
SAMY: In essence, yes.
JULIE: OK. So, at this point I want to thank everyone who attended. If you were not able to attend for the overall seminar, or if you think one of your colleagues would benefit from hearing from the seminar, we will post the recording of tonight’s webinar on the mdm.ca website. We invite you to talk with your MD Advisor if you have any questions or are challenging any of the items that we talked about tonight. So, thank you very much Nicolas for being with us tonight. And, thank you again, Samy, for providing us with your advice. I wish you all a very pleasant night. Bye.