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Julie Seberras: Thank you everybody for joining us this evening for our webinar on Private Corporations and Tax Planning. My name is Julie Seberras and I’m the financial planning lead here at MD Management.

Just a couple of housekeeping items off the top—feel free to submit your questions throughout the presentation, you can do so by submitting them to all panelists. If you experience any technical issues throughout the presentations, you can either reach out to all panelists in the Q&A box or alternatively, you can e-mail our webinar support team at MDwebinars@CMA.ca, as well as a recording of presentation will be posted on MD.CMA.ca, as well as we’ll e-mail a link to you as soon as it becomes available. Just for those questions, they should be general in nature. Any questions regarding your specific situation should be directed to your tax advisor.

For today’s presentation, I am joined by John Feeley who is vice president of member relevance at the Canadian Medical Association. I also have Gavin Miranda, partner tax services at MNP here in Ottawa, as well as Nick Korhonen, senior manager of tax at MNP here in Ottawa as well, and I have Lowell Thiessen my colleague, wealth lead at MD Management. And that rounds out our panelists for today.

Who is MD? MD, we represent ourselves with the expert office. We offer full financial planning for Canadian physicians and their families. Under that wheel is financial planning, investments, insurance, estate and trust, banking and borrowing, and of course the topic near and dear to us today, medical practice incorporation.

To kick off our presentation, I’m going to turn it over John Feeley to discuss what the CMA is doing.

John Feeley: Thank you, Julie. CMA recognized that the July 18th announcement would have an impact on physicians and the small business community. And as such, CMA reached out to the small business community to raise concerns and explore potential for collective action, and we’ve connected with the Federation of Independent Business, the Canadian Chamber of Commerce, the Dentist Association, the Bar Association, CPA Canada and many other organizations, over 25 organizations that are representing members that will be impacted by the proposals.

In addition to that, we’ve secured the services of a top lobby firm here in Ottawa and they’ve been tremendously helpful in getting us set up for a meeting we have tomorrow with the Minister of Finance.

In addition, we’ve been working very closely with internal tax and planning experts, such as Julie and Lowell. In addition to that, with our partners at MNP for some external tax expertise and have been tremendously helpful there.

The CMA executive committee recognized early on that again, this was a high priority issue. We met on July 22nd to approve our strategy to move forward, which included reaching out to the provincial territorial medical associations, making sure that we were sharing our knowledge back and forth, in addition, with the national specialty societies, again, to help build our fact base and understanding of the impacts on the physician community.

Also, we reached out to members, so you. You in the audience that are listening today have been very supportive in getting the message out to your MPs and to the Minister of Finance, which so far we’ve had over 6,000 letters have been sent and I think in large part that has helped to initiate that meeting with the finance minister.

I guess the other thing that I should mention, we are working on an official written submission that we will be providing for the deadline up to October 2nd. I think it’s also important to note that there’s really two phases to the lobbying activity. So the first phase goes up to October 2nd, during the official consultation process. But that continues beyond October 2nd so that as we bring forward messages to beyond sort of the Liberal caucus to other MPs, senators, and of course tax bureaucrats.

So with that, I’ll turn it back, Julie. Thank you.

Julie Seberras: Thanks so much, John. So it sounds like lots of great work happening there at the CMA.

Next I would like to turn it over to Nick and Gavin to take us through the technical components of these changes.

Nick Korhonen: Thanks Julie. Welcome everybody to tonight’s presentation. As Julie mentioned, we’re going to focus a little more on the technical side of these changes and how they might impact you and your corporations now and in the future.

A little bit of background on MNP for those of you that don’t know us. We’re a national accounting and advisory firm operating coast to coast. We are national in scope but we pride ourselves on being local and focused, and we have specialists and experts in our various regions across the country. Nationally, we’re actually the largest accounting service provider for physicians with more than 76,000 medical clients coast to coast.

Before getting into the technical details, we wanted to spend a bit of time looking at the background and the steps that the Liberal government has taken so far with respect to their election platform. The Liberals ran on a platform to cancel income splitting and other tax breaks and benefits for the wealthy. They promised to increase marginal tax rates for income earners, and to conduct a review of tax expenditures that benefit Canada’s “one per cent”. Since winning the election, they’ve implemented many significant changes affecting physicians.

Shortly after coming into office, they increased the federal top rate of tax by 4 per cent, bringing it up to 33 per cent for individuals earning over $200,000. When combined with provincial and territorial rates, this had the effect of increase in the top rate of tax to above 50 per cent in many of Canada’s jurisdictions.

Next, they froze planned reductions to the small business tax break. While the rate supposed to drop to 9 per cent, the rate has been frozen at 10.5 per cent since 2015.

In budget 2016, we saw the most drastic changes to date. Significant changes were put in place to restrict access to the small business deduction, which affected many physicians. They also eliminated the family tax cut credit and there was significant speculation at the time surrounding the taxation capital gains.

In both the 2016 and 2017 budgets, the government’s also increased funding for CRA. To date, they’ve committed to invest $1 billion over six years, with the view to recover an additional $5 billion of revenue. We’ve definitely seen the effect of this in our offices across the country as audit activity has been increasing.

And lastly, in budget 2017, the government signalled its intention to address specific tax planning strategies for private corporations. They indicated that we could expect to see a policy paper sometime in the summer.

Now as we all know, on July 18th, the government released this policy paper. To everyone’s surprise, they also released draft legislation at this time. The paper identified three focus areas which we’ll be talking about today: Income sprinkling, holding positive investments inside a private corporation, and converting income into capital gains. These are the most significant changes to the Income Tax Act since 1972 and will have far-reaching implications to Canada’s business community.

With that, I’ll pass it over to Gavin to discuss the proposed changes to income splitting.

Gavin Miranda: Thanks very much, Nick.

The first item we’re going to discuss is the proposed change to the income sprinkling rules. So by way of background, what is income sprinkling? It would be useful to understand what the government income sprinkling means. More commonly, we know it as income splitting. It’s a tax planning strategy whereby income is redirected to a lower income family member. Since Canada’s tax system uses progressive tax rates, the higher an individual’s income, the higher their marginal rate of tax will be. By moving this income away from a high rate tax payer to a low rate tax payer, overall taxes paid can be effectively reduced resulting in permanent tax savings. Traditionally, this is done either by paying a salary to a lower income family member for work they do in the business or by allowing them to subscribe for shares on which dividends can be paid. This also has the added benefit of allowing the multiplication of other items, such as personal income tax credits or the lifetime capital gains exemption.

On this slide, we can see the current graduated tax rates at the federal level in Canada. Individuals who earn above $202,800 pay 33 per cent of federal tax on earnings above this threshold, compared to a low rate tax payer who would only pay 15 per cent. When this is combined with provincial or territorial rates, many jurisdictions now have a top marginal rate above 50 per cent. So in the base scenario where a physician earns all of their income directly, a significant portion is being paid to the government in the form of taxes.

Here, let’s use a typical structure employed by many physicians to effectively reduce their tax rates. The physician incorporates their practice. The physician and their family members subscribe for shares of the practice. Since the corporation has no value at this point in time, the shares are typically subscribed for with a nominal amount, such as $10. As the income is earned by the professional corporation, profits are paid out as dividends on the shares owned by the physician, their spouse and their adult children.

So what are the common uses of this structure? They’re put in place to finance various expenses in a tax efficient manner. For example, they’re used to fund maternity leave, disability, sabbaticals and post-secondary education, or to assist with the purchase of a principal residence.

Let’s use an example. In Ontario, here’s a situation where the physician takes a salary of $200,000 per year and pays an additional $200,000 per year to their spouse by way of a dividend. The total taxes payable under this scenario are $127,000. If on the other hand, the physician received all of the income personally, they would pay taxes of about $160,000. By income splitting, the family unit was able to save approximately $33,000 per year.

Let’s take a second example. In this situation, the physician takes a salary of $200,000 per year and pays $40,000 of dividends to their spouse and each of their adult children. This is quite common where the children are completing their post-secondary education or have recently graduated and are trying to get on their feet. By income splitting, the total taxes payable by the family are about $75,000. If on the other hand, the physician took all of the income directly, they would pay taxes of approximately $144,000. That’s a total savings of about $68,000 per year.

So, what’s the government’s concern? It is this type of planning, which is standard that they’re trying to prevent. Rules already exist under the Income Tax Act to minimize the benefit of income splitting in many situations. The government however, is concerned that they’re too limited in scope and do not have the desired effect of preventing this type of planning. The government also believes that in order to benefit from income from a business, an individual should have to contribute to the business either in the form of capital or labour.

Furthermore, the tax benefits of undertaking this type of planning increase with higher income and with more family members with whom to split that income. The government doesn’t see this as fair.

Throughout its commentary to date, the government continues to refer to this type of planning as a loophole. The dictionary definition of loophole can be defined as an ambiguity or a mission in the text to which the intent of a statute, contract, or obligation may be evaded. Notice, that for planning to be a loophole, by definition, it needs to defeat the intent of the legislation. This is particularly interesting in the context of the quote presented on this slide from Ontario’s Minister of Finance Greg Sorbara, when discussing the ability of physicians to introduce family members as shareholders of the corporation.

In 2001, the right to incorporate was extended to all regulated professionals. Under existing provisions, non-members of a profession cannot own shares in a professional corporation. Recent negotiations with the OMA have resulted in the government’s commitment to extend the share structure of physician professional corporations to include non-voting shares for family members.

As you can see, the ability to income split with family members was not in fact a loophole, but was rather a very much an intentional decision. In Ontario anyway, it arose as a specific policy response to address concerns raised by the Ontario Medical Association.

We have a couple of initial thoughts on the proposals. From speaking to our clients, these changes will affect a significant majority of incorporated small businesses across the country. This is not a measure that will impact only high income earners, but rather, will affect many middle-class business owners. It is also concerning that the government’s consultation paper draws parallels between employees and business owners. In their analysis, they failed to address many significant differences, such as: lack of retirement pensions, lack of employment insurance for job security, significant financial risk taken by entrepreneurs, no maternity or paternity, no health care benefits, and the sacrifices made by family members to support their entrepreneurs.

So what has the government proposed? They’ve proposed to extend the rules around the tax on split income, which is commonly referred to as “kiddie tax”. They proposed to limit the availability of the lifetime capital gains exemption for family members.

Kiddie tax was introduced in 1999, to address planning where shareholders were paying dividends to minor children to take advantage of their tax rates. Up until now, it only ever applied to minors. Under kiddie tax, dividends, business income and certain non-arm’s length sale of shares were subject to the highest rate of tax.

So the proposed changes that the government are intending for kiddie tax is that these rules will apply to all Canadian residents regardless of their age, who receive this income unless it’s reasonable. And we’ll discuss this test shortly.

They’ve also expanded the definition to capture additional sources of income that weren’t previously captured under the rules broadening the base, such as: interest income, gains on the disposition of property, confirmed benefits, and second generation income or reinvested income.

Accompanying these changes is the introduction of a reasonability test for items that are considered to be split income. If the amounts are considered unreasonable, kiddie tax will apply to tax the amounts at the top marginal rate. So the question becomes how do we determine what amount is reasonable? This will likely be the most contentious issue going forward, as there is no bright light test to determine a reasonable amount. Instead, a number of factors outlined in the legislation will need to be considered.

There are actually two separate reasonability tests to be considered. One applies to individuals aged 18 to 24, and the second applies to individuals 25 and over. The tests for individuals in the 18 to 24 age bracket are more stringent. The factors that will be considered will be labour and capital contributions made by the individual. With regards to labour, the individual must be engaged on a regular, continuous and substantial basis in the activities of the business. This essentially means that they must be employed on a full-time basis to meet this reasonability test. With this wording, we don’t expect that work in the evenings and weekends or during the summer would qualify. With regards to capital contributions, an amount may be considered unreasonable if it exceeds a government prescribed rate of return on the assets. Currently, that rate is 1 per cent. So, as an example, where $100,000 was contributed to the business, let’s say for shares, anything over $1,000 could be considered unreasonable in a dividend.

In the 25 and over age group, there are some less stringent tests. With regards to labour, the individual is involved in the activities of the business and could otherwise essentially have been remunerated by salary, so therefore part-time work would qualify.

With regards to capital contribution, the individuals contributed assets or assume some risk in support of the business. However, this is unclear how it will be determined. This makes reference in the notes to what’s a material contribution? So for example, if a family member is employed in the business and that contribution is considered to contribute let’s say $50,000 of value and that’s the compensation that that person is given. However, that’s in an arm’s length situation. In your situation, you want to pay the person $20,000 as salary. You can then pay that person $30,000 as a dividend, bringing the total compensation to $50,000. In order to justify now that $50,000 and the payment to that family member, we need to consider is that what you would have paid an arm’s length individual for that contribution? Is that what I would have paid my neighbour if they were employed in the business and not my spouse or family member? That’s the new reasonable test that we have to be working with.

Let’s revisit our initial example and see the implications of these changes. We saw previously that if all of the income was paid to the physician, the taxes would be about $160,000. Taking advantage of the current income splitting rules reduced the annual taxes to $127,000. With the application of the proposed kiddie tax under the new system, the tax would be increased back to approximately $161,000. Roughly the same result as when the physician took all the income themselves.

Here we see a similar result under example two. Previously, if all the income were paid to the physician, taxes would be about $144,000. Taking advantage of the income splitting currently, annual taxes would be reduced to $75,000, approximately. With the application of the prosed kiddie tax, the tax would be increased back up to $144,000. Approximately the same result again, as when the physician took the income all in their own hands.

So as Nick had mentioned, detailed legislative proposals were released with this rules on July 18th for income sprinkling. These proposed rules will apply for 2018 and later taxation years. So, if that application date is to be met, we would hope to see some type of final legislation by the end of the year. But that is an aggressive timeline. And again, these rules are proposed.

So what should you be doing? Well, first and foremost, evaluate your strategy in the context of where you are in your professional lifecycle. There are likely different considerations for someone starting out in practice versus someone nearing retirement.

One possibility could be paying a larger dividend this year to fund future year’s expenditures, for example, for post-secondary education, assuming that the proposals come in.

You should evaluate what impact these proposals would have for 2018 and later years under the reasonability test. And determining what’s reasonable is now critical, and documentation will be even more critical to support if the CRA comes and reviews this.

Finally, consider some alternative strategies. For example, kiddie tax will not apply to salary.

In addition to these changes to dividend payments, the kiddie tax rules have also been expanded to capture capital gains realized by spouses and adult children. This includes the ability of an adult spouse or adult children to access to lifetime capital gains exemption. While this won’t have an impact on a large majority of physicians, certain physicians own a practice that is sellable. In these cases, it was common planning to multiply the capital gains exemption by issuing shares with value to family members. Remember the lifetime capital gains exemption allows for $835,000 of proceeds to be received tax free.

Under the new rules, to claim the lifetime capital gains exemption, a shareholder will be subject to more stringent tests. The exemption will no longer be available to minors or family trusts, and spouses and adult children will be subject to the same reasonability test that applied to dividend payments discussed previously.

There is however, planning to be able to take advantage of a lifetime capital gains exemption. For example, gains can be crystalized or realized in 2017. Alternatively, there’s the ability to make an election in 2018 to use the capital gains exemption. Note however, that this requires careful planning during 2017, to ensure your corporation qualifies. And therefore, it’s paramount that you discuss this with your tax advisor if you are in a practice that could one day be sold.

So with that, I’ll turn it back over to Nick, to lead us through the discussion on passive investment income for private corporations.

Nick Korhonen: Thanks Gavin.

So the next proposal we’re going to talk about is holding and passive investments inside a private corporation. This is a significant area of concern for many of our clients.

I thought it would be useful to generally review our current tax system to outline a few basic concepts before we look at the proposed changes. Our tax system is based on the principle of integration. And integration basically says that one should be indifferent whether they earn income directly as an individual or indirectly through a corporation.

The example on the slide shows as follows: If a corporation earns $500,000, the corporation would pay $75,000 corporate tax. It then has about $425,000 left over that it can either distribute as a dividend or invest. When that dividend is received personally, personal income tax applies and in this case the individual is left with about $235,000 to spend. In contrast, if that same $500,000 was earned by an employee, the employee is left with $235,000 to invest. So ultimately, the same amount of tax is being paid when business income is earned through a corporation or personal. The only difference is the timing of when taxes are paid in full.

To establish what it refers to as fairness, the government has identified that the difference between a) and b) on this slide is an unfair advantage. In the government’s view, the difference provides a business owner with a benefit because they would have a higher amount of capital to invest passively and this is not otherwise available to others. They’re seeking to remove this benefit unless it’s directed towards investments in growing a private business.

Continuing with our integration example, let’s briefly look at the taxation of investment income under the current system. So for an employee, investment income, in this case simple interest, is subject to ordinary tax rates, and in this case we’ve assumed the highest personal rate, which we’ve said is 50 per cent for simplicity.

In contrast, if you earn that same $500,000 of investment income in a corporation, the corporation is subject to a 50 per cent tax. But out of this 50 per cent, 30 per cent of the tax is actually refundable when the corporation eventually pays a dividend.

So this slide points out that as it currently stands, there’s no material advantage to earning investment income in a corporation when compared to earning investment income personally.

So why is differing income important? Well there are a number of benefits. The deferral allows a business owner to acquire assets not directly related to his or her business in order to diversify their exposure to risk. It allows a business owner to access capital to be opportunistic and to ultimately create more employment opportunities by spending. Differing income allows a physician to save for retirement because he or she usually does not have a pension plan. It also allows a physician to accumulate funds in case they become disabled, sick, go on sabbatical or need to take maternity or paternity leave. So while there is a benefit to differ an income, it’s not just performed to provide what the government calls a personal benefit. In a number of instances, differing income allows a small business owner to manage a number of realities that they assume when they go into business for themselves. Employees don’t have to face these same realities.

So what’s all the fuss about? Well finance is concerned that business owners are obtaining too much personal benefit from the current system. At some point, the point where a business owner has accumulated a certain level of wealth, the government has determined that a business owner should be an employee for tax purposes and that it is fair to tax an apple and an orange in the same manner.

Due to this perceived unfairness, the government has proposed alternatives to eliminate any benefit of keeping money behind in a corporation. Now of note, these are only proposals and we don’t even have the draft legislation at this point. We do however; have the opportunity to comment on the proposals or to put forward alternative systems until October 2nd, 2017. So I would encourage you to reach out to your MP, reach out to the minister and let them know your opinions.

So the government’s outlined three proposals which we’ll review at a high level. These are known as the 1972 approach: the apportionment method and the elected method. A couple notes to keep in mind. The government has committed time before any such proposal becomes effective. What this exactly means remains to be seen, but we’re hopeful that there will be a reasonable transition period for the implementation of any changes. By all accounts, the government does realize the complexities involved with such an overhaul. The government has also endeavoured to grandfather existing assets. However, it has not specifically commented on how this might be achieved.

Now I’m not going to spend any time reviewing the 1972 approach today. In their policy paper, the government indicated they were not actively considering it at this time. Instead, I’m going to focus on the elective method and the apportionment method, which seem more likely to be introduced.

Now these two options are really two methods of administering the same proposed change to the system. Under these options, the refundable component of income tax, that 30 per cent that we talked about earlier, would be removed. Further, there would be no addition to the capital dividend account for the non-taxable portion of any capital gains realized by a corporation. This essentially results in double taxation of the income as it’s fully taxed in the corporation and again, when withdrawn as a dividend. The government considers this fair as the total after tax available to the business owner is approximately the same as that available to an employee.

Now you can imagine the complexity in administering such a system. For integration to work, the source of the income that’s invested needs to be tracked to ensure an appropriate level of personal tax is paid when the funds are eventually withdrawn. Income that’s been taxed at the lowest small business rates should be subject to a higher personal rate of tax. Income subject to high corporate rates should be subject to a lower rate of tax. And investments that are funded with after tax shareholder contributions should not be taxed at all when withdrawing from the corporation as these funds have already been fully taxed.

The two methods: the apportionment and the elective method are proposals that deal with this tracking. Under the apportionment method, the corporation would have to track the source of income for all its investments in order to determine how the distributions are taxed.

Now due to this complexity, the government also introduced the idea of the elective method. And under this method, there would be a default treatment that assumes all corporate income has been subject to lower rates of tax meaning that high personal rates of tax would be paid.

A taxpayer would have the option to elect, to give up their small business deduction, resulting in the ability to distribute all funds from the corporation at the low personal rates of tax. Unfortunately, this system doesn’t account for tax paid contributions made to the corporation by the shareholder.

So to put it into context, I thought it would make sense to look at the proposed system in action. I’ve assumed in this case that the shareholder is subject to the highest marginal rates of income tax in both cases.

So let’s start with the employee. If we continue with our earlier example, the employee had $235,000 to invest. Assuming a rate of return of 10 per cent, they would have $23,500 investment income or about $11,750 after tax. To establish fairness, according to the government, the business owner is effectively subject to a tax of 71 per cent on investment income earned.

So let’s take a closer look at how that’s calculated. Here, the corporation has $425,000 to invest. At a 10 per cent rate of return, that results in $42,500 of interest income. Rather than applying that 30 per cent refundable tax we talked about earlier, the government is proposing to apply 50 per cent permanent tax at the corporate level. This would leave the corporation with about $21,250. When this income is distributed as a dividend, it’s again taxed in the personal hands in the form of a dividend. As a result, the business owner is left with about $12,000, which is a similar amount when compared to what the employee was able to claim. The fundamental change here is that there will no longer be a benefit associated with investing a higher amount of capital in the corporate compared to what would otherwise be available to invest personally.

So going forward, it’s going to be absolutely necessary to closely monitor this proposal, and even more important to let the government know about how such a proposal would negatively impact your situation. If anything is enacted as written by the government, it would be necessary to rethink investment and retirement strategies.

We want to emphasize the need for caution at this time. We’re seeing many advisors recommending restructuring of corporate holdings and receiving questions from clients, such as should I wind up my corporation? Should I transfer all my investments to an exempt insurance policy or should I just move to another country?

At this point in time, we simply don’t have enough information to make informed decisions. Any actions taken today could have severe tax consequences depending on the form of the final legislation that’s released on this issue. So for the time being, we’d advise you to wait until you have more information on these proposals before implementing any changes.

The last bucket of proposed changes has to do with the conversion of income into capital gains. Over the last number of years, many high income tax payers were utilizing strategies to convert their salary or dividend income into capital gains. Since only 50 per cent of the capital gain is taxable, this resulted in significant tax savings.

This is an example from the government’s policy paper showing the effect of a PEI resident converting their income into capital gains. As you can see, the savings were significant. The government is concerned that integration is no longer effective when capital gains are extracted as opposed to salary or dividends.

Effective July 18, 2017, draft legislation was introduced that prevents any self-dealing transactions from producing tax savings. The legislation as drafted also has the effect of retroactively capturing some transactions that occurred before July 18th but have not yet been paid out to the shareholder.

For today, we’re not going to discuss the planning opportunities that are no longer available, but rather, you’re going to focus on the consequences of these changes in the context of estate planning. These changes will likely have a significant impact on the estate planning performed by physicians.

So to review our system as it works today, when an individual dies, there’s a deemed disposition of all of their assets, including shares of a private company. This results in a capital gain, which as we noted is only 50 per cent taxable. So a tax rate of about 25 per cent applies.

After death, the physician’s family might decide to wind up the company. When they do this, there’s also a deemed dividend equal to the value of the assets distributed. So you can see that this results in double taxation. Taxes applied once on the value at the date of death and once on the value distributed on winding up. Historically, we had two solutions to resolve this.

The first, called loss carry back planning, and without getting into the details, this planning allowed the capital loss to be carried back to the final tax return of the physician and eliminate the capital gain on death. So you were left with only one layer of tax, the dividend tax.

The second plan was called pipeline planning. This was implemented to essentially eliminate the deemed dividend on winding up. So once again, you’re left with one layer of tax except in this case, it’s the capital gains layer. Since capital gains rates are significantly less than dividend rates, pipeline planning was often utilized to minimize the estate tax liability. And under these new rules, pipeline planning is no longer available and the taxpayer is left having to rely on loss carry back planning and paying dividend rates of tax.

So here’s what the numbers look like if we assume the corporation’s worth $2 million at the date of death. With the pipeline planning, the final tax liability was about $480,000. With the traditional loss carry back planning now the only planning available, the estate taxes increased to about $840,000. That’s an increase of about $360,000 in this example.

So what does this mean? Well there are two main takeaways.

First, is it will be critical to wind up a corporation in a timely manner after the death of the physician. If this isn’t done within one year, then loss carry back planning will not be available and both these layers of tax will apply. It’ll also be important to revisit insurance planning. Many of you have purchased enough insurance to cover your estate tax liability on death, which may now be significantly higher than it was when you decided how much insurance to buy.

And with that, I’ll pass it back to Julie.

Julie Seberras: Great, thanks so much, Nick. And up next, I would like to turn it over to my colleague, Lowell Thiessen for some comments on MDs perspective.

Lowell Thiessen: Thanks Julie, and hello everyone. Transitions are challenging times from a planning perspective. Old rules become unreliable and with this proposal, the new rules are both complex and incomplete. In short, even sticking with general direction, there is very little that is definitive at this stage. So what I’m about to say, deals with shades of grey, not black and white.

My primary objective is to help you understand the direction and scope of impact on your financial plans. Hopefully, this will assist you with prioritizing your advocacy efforts and scheduling meetings with your advisors.

Assuming that the direction of the position paper is achieved, the greatest impact to medical professional corporations is expected to be the changes to dividend sprinkling or income splitting, and loss of investment deferral. There may be individuals hit hard by other aspects, but with limited time, I will focus on those too. Feel free to bring up other issues in the questions.

I will be breaking my comments into three stages. First, I have some thoughts for those who are considering incorporation. Second, will be considerations for practicing physicians who have a corporation. And then I will conclude with retired physicians who have a corporation.

For those of you who are considering the incorporation of your practice, or know someone who is, the direction of these changes is intended to constrain or eliminate the two primary reasons why physicians incorporate their medical practice. Physicians who can meet a reasonableness test don’t need a corporation in order to income split. Those who can’t meet the test appear to be worse off using dividend sprinkling than salary. And there is greater risk in the dividend sprinkling test, especially for young adults, not good for dividend sprinkling.

On the deferral front, the corporation will still benefit from more working capital, which means there will likely still be a few business reasons to incorporate. However, with all related investment income clawed back, the window of opportunity to use a corporation to enhance retirement income is smaller, as is the benefit assuming your situation still fits the window.

For those of you who are practicing using a medical professional corporation, you may be headed for some tough choices. On the dividend sprinkling front, there will be pressure to distribute this year. Conversely, under the investment deferral proposal, it appears to be best to distribute as little as possible this year.

Let’s go through an example. Let’s say you have an 18-year-old daughter, who is a shareholder in your corporation and just entering university. You might need to consider drawing the full four years of costs from the corporation this year in advance of the new dividend sprinkling rules. That payment would typically eat into the retained earnings of the corporation. Here’s the challenge. Finance has said it will grandfather existing corporate investments under the old investment rules, which means your retirement income optimization is best achieved by maximizing your retained earnings before the new deferral investment rules kick in.

Help your daughter and hurt your retirement or vice versa. There are many, many more complications, but my short form for practicing physicians is this: review your dividend sprinkling in November while keeping an eye towards maximizing your retained earnings until deferral investing changes clarify. Feel free to hit us with follow-up questions in a few minutes.

If you’re retired with a corporation, the grandfathering rules on existing corporate investments might allow you to escape consequence. That is unless the dividend sprinkling rules catch you.

Those of you who have concentrated your wealth in your corporation with plans to use dividend sprinkling in retirement, likely need to advocate against/watch changes more than those who have diversified wealth that includes other income splitting options.

I may have just raised more questions than I answered. But that is the reality of the stage we are at, the more of us that ask finance hard questions at this stage, the better. Once the discussion timeframe passes, meet with your advisors. Be very careful implementing new strategies now though. Not only are the rules not yet set, you may harm a pool of capital that you can’t replace.

Julie Seberras: Thanks so much, Lowell. And now we will move into the Q&A portion. So our first question is...

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These presentations are provided for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. Please consult your MD Advisor for additional information concerning your specific wealth management needs.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.cma.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.

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Insurance products are distributed by MD Insurance Agency Limited, a CMA company. All MD employees dealing with clients regarding insurance products hold life licences.

Estate and trust services are offered through MD Private Trust Company, a CMA company.

Banking products and services are offered by National Bank of Canada through a relationship with MD Management Limited. Credit and lending products are subject to credit approval by National Bank of Canada.

The commentary provided by the Canadian Medical Association and MNP are for informational purposes only and should not be considered investment advice or an offer for a particular security or securities. The views and opinions expressed by the speaker are his or her own, as of the date of the presentation. The views and opinions expressed do not necessarily represent those of MD Financial Management and are subject to change at any time, based upon market or other conditions. Please consult your MD Advisor for additional information concerning your specific wealth management needs.

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