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James: Good evening, everyone. Welcome to MD Financial Management’s webinar on the incorporation decision. My name’s James Pitruniak, and I’m a Physician Engagement Manager here at MD, based in Ottawa. As a Physician Engagement Manager, I oversee the financial education initiatives for physicians and clinics and hospitals across Eastern Ontario, and assist in connecting physicians with MD’s wide array of services. I'm very pleased to be joined tonight by one of MD's knowledgeable and well-respected financial advisors, Greg Alexander. For the past five years, Greg has been working almost exclusively with senior residents and practice physicians in Eastern Ontario, helping them navigate through the myriad of significant financial decisions they face as they transition into practice. Hey Greg, how are you?

Greg: I’m great James, good to be here tonight. I'm really happy that we are working with you to talk about the incorporation decision.

James: Awesome, thanks Greg. We have some 200-plus participants joining us from across Canada tonight, which is absolutely amazing, and I know that they are eager to learn more and ask questions. So let's dive into the agenda. Tonight, we're going to take an in-depth look at the incorporation decision. We’ll explain the major benefits of physician incorporation and walk you through some case studies. We’ll separate the facts about incorporation from some common myths and misconceptions. We'll talk about the many advantages of incorporating a practice over the long term, and will discuss some of the disadvantages and dilemmas physicians may face. And finally, we’ll close with a summary of some of the questions that physician clients should ask their financial advisors, their team of professionals and themselves before making a final decision. At that point we’ll open the floor for a Q-and-A period, where we'll do our best to answer as many of your questions as possible.

For those of you wishing to ask questions, on the right side of your WebEx console there's a Q-and-A box, where you can submit questions. Please feel free to write your questions here, and we'll answer them in the second half of our session, and we will follow by email as well if we’re unable to answer your questions during the session. When submitting your question, please do your best to submit questions to all panellists. Note that you may not see the Q-and-A if you’re viewing the web and are in full screen. So just exit full screen mode to use the Q-and-A functionality. I would also be remiss if I did not mention the new incorporation checkup tool on the MD Financial Management website. On our newly redesigned website, www.md.cma.ca, in the tools and calculator section, you'll find the incorporation checkup tool. This is a great resource that takes only a few minutes to complete and will help eliminate many of the issues we will touch on tonight. If you haven't done so already, please do take a moment to complete our poll question which you see there on your screen. With that, I will turn it over to Greg.

Greg: Thanks, James. All right, to get things going I think it's important that we start by having a look at taxation briefly. Here we go. So for the purposes of this evening, we're going to look at tax rates as an average tax rate, so these do not represent any particular jurisdiction. We're just going to use some averages here. It will obviously vary depending on which province or territory you live in. So let's look at the top part of that screen talking about the average active business income rate. So the first thing you're going to notice is that below $500,000 of net income, we have a corporate tax rate of 14%. Following that, over $500,000, you see that it increases to 28.03%. And if you look, sort of, at the second half, going below the 28%, we see average investment income rate for interest income, two types of dividend income which we can talk about another time, and capital gains rates. So, interest income at 51.65, 38% for dividends, trending down to capital gains at 25.83. If you look on the right-hand column you'll see some individual rates, we’re using 49.92% at both the under $500,000 and over $500,000. And then of course you'll see higher rates for the interest income, the dividend income, some variation there between non-eligible and eligible dividend rates and capital gains.

So we will come back to this but just want to set the stage for this evening in terms of tax rates. So this is a tax deferral advantage talking about tax rates, so again these are notional rates. So one of the other concepts that you need to be aware of is a principle called integration. This principle states that at the end of the day you will pay the same amount of tax whether you are incorporated or not. So as we illustrated on the last slide, and you're going to see it again later in the presentation, there is generally little opportunity to save taxes after costs by immediately flowing all income through a corporation. Using a corporation to change the timing of the cash flow or deferral and/or the recipient, in terms of income splitting, those both can still be effective strategies. So that's what we're going to look at, but you need to keep in mind this concept of integration.

James: Thanks for clarifying, Greg. I know that these concepts can get pretty complicated pretty quickly. So next we're going to look at some examples to help illustrate what we're talking about, starting with Mary's situation.

Greg: This is a really interesting situation and it's the first of three scenarios. So let's think about Mary. So what we've got here, Mary's a single family physician, no mortgage, positive cash flow. She's in really great shape financially at this point. Not only is she able to maximize her RRSP, but she's also able to save money outside of the RRSP. So in this scenario we're going to assume that Mary, if she sets up a corporation, the corporation will pay Mary a sufficient salary so that she's able to continue to meet her lifestyle needs. But she is also going to, even though she's incorporating, is going to be able to continue with RRSP contributions. And the remaining income for Mary will be kept within the corporation, instead of being distributed as dividends.

So before we get to the actual details, further details of Mary, let's look at taxation a little bit more as relates to Mary. So again, average rates as we think about taxation. In Canada, if we use an average personal tax rate, the first $10,000 of income for any taxpayer is tax-free. Then we move to the first $40,000 of income after that, and we'd have an average tax rate of 25%. Moving from $40,000 to $90,000, we see the tax rate would move up to 35%, $90,000 to $140,000 to 40% and so on. So in tax lingo they call this progressive tax rates. With my clients, we can't seem to think about this as it gets progressively worse as we progress. So you can finally see at the $200,000-plus level, the average tax rate topping out at 50%. This is important to remember. Sometimes we mistakenly think that, oh, I'm in the highest tax rate, I'm going to lose half of all my money to tax. That's not so, it is progressive. On the right-hand side of the slide we see average corporate tax rates. So again, remember that this is a notional tax rate number, this is not particular to any specific jurisdiction in Canada. It will vary by each jurisdiction provincially and territorially. The first $500,000 of income will be taxed at the rate of 14%. Beyond $500,000, it would be taxed at 28%.

So let's have a look at how this works out for Mary. So in the first instance, before Mary incorporates, she's unincorporated. So she's got $300,000 of income after her business expenses or after her overhead. That's what's going to be taxed, personal income at $300,000. Personal taxes comes in at $122,000; Mary is left with $178,000 after tax. Now let's look at the next first year of incorporation. Again $300,000, remember that we talked about Mary drawing $150,000 of salary in order to maintain her lifestyle. Then we have the incorporation costs. Incorporation costs are always a big question with my clients; they’re always wanting to know, “How much is this going to cost?” And the answer is it may range, somewhere between $4,000 and as high as $7,000. It is very dependent on the complexities of the corporation. It's also dependent on how much you or other professionals like accountants and lawyers are going to do of the work. So if you're comparing costs, you want to be sure that you're comparing apples and apples when looking at incorporation costs. But the incorporation cost here is $4,000, for example, today, that's leaving us with net income of $146,000. On that $146,000, Mary's corporation is going to pay a tax of 14%. That's where the $20,440 comes from. That leaves $125,560 inside the corporation. Now we need to step outside the corporation for a moment and look at Mary's personal income tax situation. So she has a gross income of a salary of $150,000, personal taxes of $49,500, her net salary of $100,500 or her take home. So combined personal and corporate after-tax income of $226,060. In other words, $48,060 ahead, she's got a deferral advantage. She has more money in her hand at the end of the day.

Let's just go to the next slide or the next row there, and we see the only difference in this column is that the ongoing incorporation costs, third row there, drops from $4,000 to $2,000. The reality is, is that there is a cost, an ongoing cost, to maintaining a corporation. It is a separate legal entity. It does require that tax returns be filed for that corporation each year and there are other legal filings that are required each year. So there are some additional costs that are going to be ongoing. When we factor in those ongoing costs, it changes some of the numbers slightly, in that you reduce the expenses to the corporation and if you'll look down to the bottom right-hand corner of the slide, you'll see that the deferral advantage increases slightly to $49,780.

James: Thanks for walking us through those numbers, Greg. So in Mary's case, we would fairly unequivocally say that incorporation is a valid option. Mary will benefit from tax deferral on the savings she retains in her professional corporation and she can also use RRSP contributions from her salary of $150,000 for additional tax deferral. Moving on to our next case involving Joe, a physician, and his spouse, Julie.

Greg: This is another interesting case, we see this quite often as well in our offices. So in this particular instance, Joe, again, is a family physician married to Julie. Now for the sake of this example, Julie is earning a significant income. So we're not going to take into account her income in this example. They do have three children; they do have a large mortgage on their principal residence. You know to meet their cash flow needs, Joe is going to need to receive a salary from the corporation of $200,000. And in addition, he's going to need to receive some dividends, basically equal to the funds remaining in the corporation.

So let's have a look at how this will work for them. So again, the first column is just simply detailing the $300,000 dollars of income. So we'll go to the next column there to see how things look for Joe and Julie. So we've got that $300,000 after overhead, after expenses, that's a $200,000 salary paid to Joe from the corporation is an expense for the corporation. Then we have the initial incorporation cost of $4,000, now that causes the net income of the corporation to go down to $96,000. That's what gets taxed, corporately. So we calculate 14% tax on the $96,000, for $13,440, leaving after-tax income of $82,560. So remember at this point we've got $82,560, this amount could be kept inside the corporation, or it could be paid out. But we mentioned in the previous slide, Joe needs this money. So he's going to pay this money out as a dividend to himself. So nothing will be retained in the corporation. So now let's review what happens at a personal level. So Joe has $200,000 as a salary personally. He's got to pay personal, sorry he's going to receive personal dividends here of $82,560. His total personal taxes on that income is over $106,000. That means his net salary is $175,885. So that's less than what he would have had had he not incorporated. Now we just want to make sure you know, in our analysis let's take this a step forward to the subsequent year. If we look in the second year, the costs drop only in the incorporation ongoing costs in terms of compliance cost of accounting and legal fees dropping from four to two, but we get down to the bottom, we're still seeing a negative in the savings. So the costs don't seem to justify the expense at this point.

James: OK, so in this case, based on the financials that Greg just outlined, Joe would say no to incorporating at this time. He's got no savings retained in the corporation, meaning no tax deferral. Any additional expense of incorporating means no tax savings. Incorporation for Joe would be more administrative work and very little, if any, tax savings. You know, the important thing to remember is that there is basically little long-term benefit to incorporation if you need to withdraw all the funds from the corporation to live on. The opportunity for tax deferral is greater when funds are retained in the corporation, and they're taxed at a small business rate, which is that 14% that we're talking about. However, that being said it can also be advantageous, even if you exceeded the 14% tax rate and moved up to the general corporate rate of 28%. Another important point to keep in mind is that an effective incorporation strategy does not replace an RRSP strategy; typically it can work in conjunction with it. Same thing with tax-free saving accounts. One of the things that your MD Advisor will do is work with you to determine what the appropriate strategy is for your household and your corporation. Greg, maybe I'll just pause right there because I think we got a timely question. Someone asked why Joe or our previous example, Mary, would worry about an incorporation given the tax deferral, worry about an RRSP, excuse me, given the tax deferral benefit that the incorporation offers. It's important to draw a distinction, I think, between the tax protections that your RRSP offers to investments, versus how investments are taxed within a corporation.

Greg: Sure. So there's a couple of points there. One of the things when we talk about incorporation and RRSP investing is just in terms of, I always think of it as a two-step process. We have money to invest, we've got money in a corporation, that's a specific location. And in that location there are certain tax characteristics attached to the various investments. So you may recall that in one of our earlier slides we talked about dividend income, interest income, and capital gains income. And that there were different rates of tax attached to each of those types of investment income. So for instance, capital gains income had a lower rate of tax, let's say around 25% versus interest income at a rate of 50%, let's say, versus if money was being invested inside an RRSP, if it was interest income, there's tax deferral going on there. So we're not worried the same way about what's going to happen with that. So whether it's interest income or capital gains income inside the RRSP, as long as that money is in there, there's no tax occurring at that time.

James: That's great, thanks Greg.

Greg: One of the other things that you may think about in terms of, you know, when funds are retained inside the corporation is just when you're going to draw money out. So for instance you know retirement is certainly a long way away, so maybe we'll leave that for another time. But sometimes in the early days we think about perhaps parental leave, education, perhaps doing a master's program, that sort of thing, voluntary service or other purposes, where your income may drop to a lower bracket. That may create an opportunity where you're going to draw money out of your corporation that's been retained in the corporation early on. You know there are other examples too, like helping your kids with university education, that sort of thing, but that really means that you understand the concept of income splitting.

James: So tax deferral, Greg, as you just covered is one major advantage of incorporation. Another is the ability to income split. Income splitting arises largely from a physician's ability to split the corporate income with other shareholders via dividends. But not just anyone can be a shareholder, isn't that correct, Greg?

Greg: That's right, James. Share ownership is restricted, and determined by province or by jurisdiction. You know we have another layer of legislation that impacts medicine professional corporations, but by provincial or territorial jurisdiction. Typically what we would think of, using Ontario as an example, you know you can think of your parents, you can think of adult children, you can think of a spouse, as people that may end up owning shares in your corporation. But it does vary by jurisdiction so you certainly want to check to see which applies to you.

Let's have a look at some income splitting numbers with Joe and Julie. In this particular instance, Julie obviously is a spouse and so she's going to be an eligible shareholder in Joe's corporation. And in this particular instance, we're going to take away Julie's income. For whatever reason she's going to have zero income in this particular example. I won't go through the unincorporated piece; I think you're familiar with that already. So if we look at incorporated year one, again there's that $300,000 after expenses, that's the income. We're going to pay Joe $150,000 of salary here. We determine that that's an appropriate amount. Again, the incorporation costs, we're using $4,000. The corporate net income is $146,000. Corporate tax is at 14%, so its $20,440, leaving $125,560 for deferral, so we can leave it in the corporation or to pay it out. So in this particular case let's go on at the personal tax level now, we've got Joe receiving $150,000 of salary, his personal taxes on that $150,000 are $49,500 and because Julie in this example has no other income they've decided to pay Julie a non-eligible dividend of $125,550. Don't get too hung up on the terminology here, but we've certainly walked you through that, but it is important that it is a non-eligible dividend in this instance. This leaves taxes for Julie of $23,824. So the after-tax income to the household is now $202,236. In other words, we've increased the household income by $24,236, so a great opportunity in terms of helping this family with their cash flow needs in terms of paying mortgages and perhaps other debts managing the family. So this appears to represent a good opportunity. If we just take a quick look at the second year of incorporation again, the major change here again, really minor change, is the fact that the incorporation cost declined from $4,000 to $2,000. And if we jump down to the increase in after-tax income it increases slightly to $25,423. So this is certainly showing us that there is an advantage in the income splitting. The one thing that I wanted to just touch on at this point, sometimes clients will ask me, well, how about paying the kids, you know, I've got these young kids, maybe they're a year old, or two years, how about me giving them some money as well. And there are specific rules around this and so you can see up on the screen the term “kiddie tax.” And basically what this says is that if you paid a dividend to a child who's under the age of 18, that income is going to be taxed at the top personal marginal rate. So there's really no tax advantage to doing that.

James: And Greg, I'll just interrupt you there, because I did see a question earlier about our second case about Joe when Julie, asking why Joe just didn't pay dividends out to his children. And that kiddie tax factor that you just brought up is a perfect illustration of why not. There really would be no tax advantage.

Greg: That's right. And assuming that his children are minors, there is no advantage in terms of paying out that tax at that point. One other thing I might just add around that, because you mentioned the kids is that if the child is 18 or older, yes than there is an absolute advantage where you might be paying a dividend to your adult children who are over 18, and there is great flexibility in that. It doesn't have to be used for university or whatever, so you’ve got lots of flexibility.

James: OK, moving on. Next, we're going to try to separate fact from fiction and dispel some of the popular myths around medical professional corporations, starting with business expense deductions. Greg, you come across these questions all the time. The notion that a corporation will provide the physician with more opportunities to deduct business expenses, than if he or she were not incorporated, true or false.

Greg: This just isn't true, James. What the reality is, is that if they're unincorporated they're considered a business, it they're incorporated they're a business. There are a few exceptions that the corporation gains additionally, but very minor in nature. One of the questions that I often get revolves around personal expenses, such as automobile costs. For instance, if a personal expense like an automobile cost is paid out of the corporation, the costs are not deductible to the corporation for tax purposes, and the shareholder would be in receipt of a taxable benefit, which really results in double taxation. The issue is that if you have a car owned by the corporation, there's a whole question about are you using it for personal use, and so you can end up with some tax issues with that. A way to think about it is whether or not an expense is deductible to the corporation whether you can test it against these criteria. First of all, the expenses have to be incurred for the purpose of earning income. The expense has to be reasonable in the circumstances, and you have to be able to provide proof of payment, at least be able to at some point in the future. So you've got sort of those three criteria always to be watching for. One of the things that often comes up too, well great, can I deduct my golf membership and that sort of thing. And CRA has deliberately singled out certain things like golf club memberships, where they are simply not eligible. So there are exceptions, so you need to be aware of those things.

James: OK. Something else we often hear is, if I incorporate I am somehow limiting my professional legal liability. Is this the case?

Greg: You know protection from liability by way of the corporation is not allowed for physicians. The rules of incorporation for physicians make it explicit that a physician remains personally liable for all medical acts that he or she has performed. However, the corporation does provide limited liability for corporate creditors. For example, if someone trips and then falls within your office and wants to sue, you're in default to a supplier, in this case where provincial restrictions allow for it, you may want to consider a holding company, as well as a corporation, to put investment assets of the corporation, those sorts of things. But those are very specific strategies and issues they need to look at. What you do you need to do is put together a liability plan, an insurance plan and a risk management plan to make sure that you are properly protected.

James: OK, Greg, let's talk about some of the major advantages of incorporating, both short term and long term.

James: Sure. You know, in terms of the real advantages, what it all comes down to is you're only paying 14% tax. So what does that mean? It means you've got more money to invest. You've got more money to pay for health expenses. You've got more money to pay life insurance. You have more money to save over the long term, that's really the key. When it comes time to, you know, retirement and income planning, you really need to look at incorporating all your plans. So you know we would look at RRSPs, we would look at perhaps individual pension plans, that might be an option at a later date. Really, an individual pension plan is like a supercharged RRSP. We'd look at how do we incorporate a Canada Pension Plan, Old Age Security, all of these sorts of things. You know there are lots of things that will happen between now and then. One of the key takeaways though today is, when it comes to retirement planning, when you hit that point in time when you're ready to retire, it's not that you must now empty out your corporation. You are provided with all sorts of options about how to move money out of the corporation. You have the ability to be very flexible in terms of what forms you take money out. So I think I would leave it at that today.

In terms of exit strategies, you know, again this is sort of following along the same lines of what I was speaking of a moment ago, the money's not trapped in there. Sort of the big change is that when you make the decision to stop practising medicine, your corporation is no longer a medicine professional corporation. So basically what happens is the restriction is peeled away from your corporation, and you're now going to have more opportunities. So things like enhanced capital gains exemptions, those sorts of things, you may have heard those things. Well, those are things that we would review at a much later time in terms of how that was put into your retirement plan. And I wouldn't really add too much to this. I think the point in seeing this slide is that you're aware, and you probably have heard perhaps about capital gains exemptions and the value of a business that increases in value over time. And so we can make use of that increased value depending on your individual circumstance. And it is very specific to each individual situation.

James: OK, moving on now to some of the downsides of physician incorporation. Greg, this is a pretty wide-ranging list with some major issues to be aware of. I know for you, U.S. citizenship is one of those red flags that you're going to look for in talking to clients.

Greg: Yeah, that's right James. I mean one of the questions we always make sure we ask is, to the physician, are you a U.S. citizen? If their answer is yes, we kind of put the brakes on at that point, because there's going to have to be some decisions considered about whether a person is going to proceed with incorporation at all, or are they going to consider renouncing their U.S. citizenship, there's a lot of factors that go into that decision to do that or not. And the other thing that we review in terms of U.S. citizenship, are those potential shareholders, whether that be a spouse or a parent, or that sort of thing, are any of those people U.S. citizens. And this is where we see that the reach of the IRS is very strong. And so we need to make sure that we've considered the implications of U.S. citizenship when incorporating. In terms of incorporation, in terms of the cost, time and money—I just spoke about this a little bit—one of the things to consider are the initial setup costs. It can be expensive. You might see anywhere between $4,000 and $7,000. You may have spoken to colleagues who are doing it for less, and one of the things that you need to be sure of is that all the fees are being included. So you know there are accounting fees, there are legal fees in terms of actually putting together the Articles of Incorporation, there are various filing fees included. So if you're getting quotes, for instance, if that's the route you're going and you're talking to a couple of sources about incorporation, make sure that you're comparing apples with apples. There is lots to consider in terms of the complexity of this, in terms of the time that it takes. Filing of tax information like T4s and T5s, those are things that you are now going to have to be doing as you have a corporation. It is a separate legal entity. It does need to have a tax return filed annually. It does have legal filings required, shareholder resolutions required, and the consequences of not keeping up with some of those tasks can be quite severe. So it is a big commitment and you want to make sure that it makes sense for you.

James: OK, as I think we've illustrated this point Greg, the decision to incorporate really does involve a wide range of considerations that depend on an individual's goals, their circumstances, family situations, income expectations and other factors. We developed some questions for physicians who might be considering incorporating soon. Why don't we walk through them? Starting with questions for the client themselves.

Greg: So, you really want to sit down and ask yourself these questions. So, for instance, how much debt do you have right now, that can have an impact. Are you a good saver? Sometimes I see in my office where people are totally out of control and aren't able to save any money, or don't have a good sense of where their money is coming and going. One of the things you want to really focus in on, is the question, “Am I well organized financially?” If that's not your strength, you need to think about, is there a way for you to delegate that. Maybe it's a spouse that can help, you know, keep you organized, that could be important. How do you handle that financial complexity that's going to be layered on by having a corporation? Another one that's important is this risk of legislative change. That is important, that can happen. You can incorporate and the rules of the game can change as we go along, and we certainly saw an attack by government, initially, on the federal budget in March of this year. Where they were going to make some legislative changes that would negatively impact you. The other one that is really important is having a good relationship with your accountant and lawyer. So is your accountant someone that you feel comfortable with, can you work with them, are they good at explaining things to you. Those things are very important.

James: Greg, I know you really emphasize the role of one's financial advisor in preparing to make the incorporation decision. What about the questions that you would hope clients would ask you in preparing to make this decision?

Greg: Thanks, James. It's really key. I always say that your first stop, when you're considering incorporation, should be to see your MD Advisor. That's the first place you want to go. Then you can talk to us in the sense that we're looking at your comprehensive financial plan. We're not just looking at one silo of your finances, we're looking at the entire plan. We're looking at how incorporation might impact your saving strategy, whether it's RRSPs, or TFSAs, and all of those opportunities. We're looking at whether income splitting makes sense for you, we're going to help you sort through what should you do compensation-wise. Should it be a mix of salary and dividends? What should the combination look like, and what's the impact in terms of your investments and your other plans in terms of estate plans and retirement plans. So what we're going to do is we're going to work through that, help you come to a decision that yes, it makes sense to move forward with incorporation or, maybe, not now. If we determine it makes sense to move forward, then we're going to make a recommendation to make the next stop, which would be to see an accountant.

James: OK, Greg, and obviously the accountant plays a significant role in establishing the corporation, and in the ongoing reporting of the corporation’s income and tax filings. What questions should clients be preparing to ask their accountant?

Greg: Sure. So you can certainly see quite a list there on the screen. I think that the key here is that you want to make sure that this accountant has good rapport with you, but what you're really looking to find out is to understand how your income is going to flow into the corporation and how your income is going to flow out. And that may sound obvious, but one of the important things for you to attend the meeting with, to your accountant, is to be able to say I need x dollars a month to support my lifestyle. Too many times clients go to the accountant and they don't know the answer to that question. That's one of the first questions the accountant is going to ask of you: How much money do you need out of your corporation every year? So you want to have a good answer to that. And I know that it's often difficult, particularly when people have transitioned, say, from residency to practice, where they were finishing on a resident’s income and now it's finally buying a house and trying to catch up with life, really. What is that lifestyle amount? Certainly you want to have that and you can certainly see quite a number of other questions that you want to ask of your accountant.

James: Greg, one item there, just back on the accountant slide, was finding the optimal mix between dividend and salary. I saw that question pop up in the question pane a few minutes ago. That's something that certainly the accountant would assist with; finding that optimal mix, depending on the client's needs, et cetera.

Greg: Yeah, the accountant definitely helps with that. And certainly your MD Advisor will discuss it as well, because it's not just the income piece, but it also influences your ability to save within an RRSP as well. So for instance, there was a time, with legislation in the past and tax rates, where there were some accountants very much promoting 100% dividend payment for income. The challenge with that is that that meant that the physician would no longer be able to contribute to an RRSP, and as we talked about earlier, that limited the ability for the client to save within the RRSP structure.

James: OK, and finally, the other key professional is one's lawyer. Greg, what questions would you recommend the clients bring up with their lawyers?

Greg: So again, it's similar to the accountant, one of the things that you want to make sure that you ask the accountant and the lawyer is what’s their experience working with physicians. Do they have a specialty area within their accounting or law practice that deals just with physicians. There's lots of unique issues around medicine, and the practice of medicine as a business. So it's important to have experience with that. Typically we find that if you've gone to the accountant first, many accountants will provide a letter of instruction for the lawyer about how to set up the share structure. The accountant obviously being the one who’s saying look, this is how the money's going to flow into the corporation and in this specific client situation, this is how we want money to be able to flow out, and that's what impacts your structure.

James: And where do clients go from here, Greg, what would you recommend next?

Greg: Well, I would really recommend that they reach out to their MD Advisor. It's time to have a conversation. It's a benefit of your CMA to come in and chat with us. So take advantage, come and chat with us, we'll go through that process. If it makes sense for you to proceed to the next step, then we'll send you on your way to an accountant and then from there for legal advice.

James: And really important to mention I think, Greg, that regardless of where our participants are across the country tonight, their local MD Advisor is going to have a list of professionals that they can refer to, be they accountants, lawyers, insurance specialists, what have you.

Greg: Yeah, that's right and so the MD Advisor in your particular area does have a team from MD, but also external professionals, accountants and lawyers that have been recommended by your peers as professionals that are experienced in medicine professional corporations.

James: Terrific. And just to reiterate who we are. Greg and I do both work for MD Financial Management, obviously. Greg has stressed throughout this presentation a number of times the importance of meeting with your MD Advisor. Important to reiterate that we are owned by the Canadian Medical Association, and Advisors across the country like Greg who specialize in the needs of residents and practising physicians, are a benefit of membership. So if you are thinking about incorporating, if you have outstanding financial questions, do take the time to schedule a meeting with your MD Advisor and have your financial needs analyzed. I think we say it all the time Greg, when we do these sorts of presentations, they are really great for introducing participants to the broad topics, and for answering high-level questions, but they're not a substitute for taking the time to meet one on one with an Advisor, have your questions asked and answered, and have the financial plan developed.

Greg: I agree James. It's very important to take time to look at your individual situation. We're here to help you do that and we look forward to meeting with you.

James: OK. So we've got about, I think about 20 minutes for questions, which is terrific and I did see quite a few of them lining up in the queue. Greg, I saw one earlier, and I know we touched on the importance or the value of leaving money within the corporation, retaining money within the corporation. And someone asked, “Why would I do so?” And I think it's important to note that the money doesn't just sit there in the corporation, it gets invested in a corporate investment account. What does that actually look like, what does that process look like at MD?

Greg: Sure. So the way to think about it is you have a dollar coming in the doors of your corporation, if we use a 14% tax rate, basically that means you're going to have 86 cents left over that you can then invest. So what that means is that MD, we can open an MD corporate investment account, and we can use that to make various investments. So, for instance, perhaps MD mutual funds or a variety of different investments. We see over time, those portfolios in those corporate accounts grow into the millions of dollars, often managed by the MD Private Investment Council program, so that your wealth is growing inside your corporation

James: OK, so I see a question here around universal life insurance policies and whether or not there's a value in transferring it to one's corporation. Greg, can you just talk about the interplay between universal life and corporations, and how those two can work together.

Greg: Sure. So it can be very complicated, first of all. Let's suppose that you had an existing universal life insurance policy, and you wanted to transfer that into the corporation. The answer is yes, it's possible but you need to consider many options, OK. So you would want to get some advice from the insurance consultant, you would want to get some advice from the tax specialists to consider what are the consequences of making that move, so that's something to consider. Did I answer the question there James?

James: I think so, yeah.

Greg: OK.

James: OK, we've got a question around case number two, and why Joe would pay himself a dividend versus a salary, and whether he's allowed to do either? Are there minimum salaries or maximum dividends that one is allowed to pay?

Greg: So, first of all, Joe's decided to pay himself a salary to achieve a number of goals. One is that by paying a salary, he's going to participate in the Canada Pension Plan. He's also going to create RRSP contribution room, so that he can contribute to an RRSP on an ongoing basis. And he's also entered into an employee/employer relationship with his corporation. So he's making sure that he's paying himself some salary, to avoid the potential for him to be, for his corporation to be classed as a personal service business. So he's also mitigating some risk by paying himself a salary. So that's one of the reasons that he does that. So in some instances what we have seen is where people may pay them a minimum salary, they typically have an employment contract with their corporations, so that's another cost, you know, involved in setting up the corporation to begin with. But they may be paying themselves the minimum salary to at least maximize Canada Pension Plan, and then using dividends as well. But these things typically change from year to year, depending on what's happening with tax integration. You recall that I was trying to say that taxation was, you were in the same position whether you were incorporated or not, and so from a dividend perspective you will come across, some accountants will say no, no, take it all as dividends.

So one of the questions that I get faced with from time to time, is we'll have clients who say this accountant has recommended x strategy. And when we review with our experts internally at MD, then we say well, that's not the strategy we would recommend, so does that mean the other accountant is wrong. So that's a question we get asked. And so I throw it back to you as physicians to think about specialists, how you might go and find varying opinions among specialists. And what we have to be careful of, of course, is that there are areas of black and white and gray. And so what you'll find is that we're always going to be bringing out to you the advice that we have confirmed with experts across the country.

James: OK, Greg. We have a question here around suggestions on structuring classes of shares. And I think it's an important distinction we need to draw between voting and non-voting shares. And I know these regulations vary from province to province. Can you just maybe explain what the difference is, and how that might break down between different shareholders?

Greg: Sure. So I think one of the things to keep in mind with voting and non-voting, typically the physician is the only voting shareholder, typically, and non-voting shareholders are the others. And what that really means is, and that's often dictated by the professional, medical professional legislation that goes with the particular jurisdiction in which you reside. The non-voting shares simply means that, now you've got an opportunity, let's say a spouse owns a non-voting share, that gives you the ability to turn on and off dividends paid to that non-voting share.

James: OK. And we had a question here which I alluded to earlier. The questioner says that she's not convinced that Mary is saving money over the long term; wouldn't she still have to pay taxes on income she retains in the corporation, whenever she eventually pays it out to herself? And Greg, I think the real value here is that the money would be invested in the interim, so would be growing, right. So an important consideration there.

Greg: I love that question. So the way to think about it is this: if you double a dollar 20 times, one becomes two, becomes four, becomes eight. After doubling that dollar 20 times you'll have about a $1,048,000, If you double that dollar after tax and so, I think when I did this last time I used 46%, but if you say a dollar becomes two, but now you have to give away fifty cents on that second dollar, so now you only have a dollar and a half, and you double that and so on, you'll have just over $5,000. So when you think about the incorporation, if a dollar came in and you only had to pay 14 cents on it, you have more to keep, which means you have more that you can invest and grow. So even if 30 years out, even if I took it out all in one day and I pay tax on all of it, I would still have more money than the person who drew it all out, paid tax on it and invested that amount. I'm going to beat them every time.

James: OK, Greg, we have a question here asking what if you were a salaried physician but also earned fee-for-service money outside of the salary. Is this something that you encounter with your clients who might be salaried, but are registered and incorporated?

Greg: Yes, so that we have to be careful here and we're always key to identify what you mean by salary in deeper service. Because sometimes those numbers are used interchangeably. So one of the things I always talk about is, let's make sure we're talking about the right things. So, for instance, if somebody is truly salaried, that means that you're likely going to receive a T4, OK, so we can set that aside. If you're getting a T4 income from somewhere, that T4 income cannot go into the corporation. If you're receiving a fee for service, say from the Ministry of Health and Long-Term Care in Ontario, most times that money can go into the corporation. In other models, you may be receiving a T4A from another source. That income can often go into the corporation. So you may end up with a mix, so it's going to depend upon, what's the source and nature of that income.

James: OK. We have a question here around who can be shareholders in a corporation and does this differ between provinces? The answer to the second question is yes. However, rather than go through the exhaustive list around who can be shareholders in which provinces, I'll just mention that that information is all contained within MD's incorporation guide, which is available to you at your local MD office. So talk to your local MD Advisor, get a copy of the most recent incorporation guide, for all the latest rules around share ownership. I should also mention for those of you asking questions around changes to permanent life insurance, life insurance regulations, rather than get into the weeds on those issues today, I would recommend that you reach out individually to your MD Advisors and we can connect you with an insurance specialist in your local office for answers to those questions. For questions around citizenship specifically, citizens of other countries and people asking whether or not their partners of other nationalities would be affected if they're incorporated, I think Greg, you'd agree, those might be better questions for an accountant. So perhaps again contact your local MD Advisor, and talk to a local accountant, rather than try to give a one-size-fits-all advice on this forum, it might be a better avenue to seek there. A question here is around what if you are working in two different provinces as a locum physician? Greg, many young physicians are locuming, they’re very mobile, what do you recommend?

Greg: Yeah, so I see this fairly often. There's a couple of factors to take into consideration. One is, how long does the physician feel they're going to be doing this in multiple locations or multiple provinces. You know, as we saw earlier, there is a cost associated with setting up a corporation. We also have to look at how much money is going to be generated in each corporation. One of the things that is important is that it's where the money is generated is what drives the location of the corporation. So if the person was, the physician was living in Ontario, if they were living in Ontario, but the opportunity was in another province, it's going to be in the other province that's driving the location of the corporation. So we would look at it on a case-by-case basis. How long are you going to be doing that locum work, what's the volume of revenue and then, of course, we'd also consult the accountant as well.

James: So Greg, we have a question here around, the questioner asked, so I can't use dividend income to contribute to an RRSP. I think an important distinction we need to draw is between RRSP contributions and how RRSP contribution room is generated.

Greg: Yeah, good point James. So the key is, first of all, in order to contribute to an RRSP, you have to have RRSP contribution room. And what creates RRSP contribution room is earned income. So earned income typically is salary, in your circumstances here. Dividend income is not earned income. So for instance, if a physician would have had say earned income, salaried income through their residency years, they would have accumulated some RRSP contribution room. Then, let's say, if that physician was drawing dividend income, they could use that dividend income and contribute it to their RRSP up to the limit of RRSP room that had been carried forward from previous years. But you would also want to look at how much dividend income do you have in that year, are you gaining a tax-saving advantage that makes sense to make that contribution as well.

James: We have a question here, is there a mechanism for your corporation to buy or absorb personal educational day. Greg?

Greg: We wish.

James: Yeah, I think that question is more appropriate for a general discussion around debt management, which I know probably many of our attendees tonight are interested. But can you provide me general guidance around how to balance one’s debt repayment priorities with their desire to incorporate?

James: Sure. So you know in a general way we might encourage developing a strategy to focus on eliminating your, let's say, a resident line of credit sometimes before incorporating. Again, it's very hard to generalize, because it's going to be dependent on the specific circumstance. If it was just an individual person with no spouse or anything else, and they had a lot of debt we might say look, you're going to use all of your income to eliminate the line of credit first. There could be a circumstance where we might not follow that approach. So it really is individual, you really need to meet with your MD Advisor and go through the scenario. Look at what your goals are, too. There may be good reasons to incorporate right away, there’s information that is not being presented here that might make it worthwhile.

James: And I should take this opportunity to mention that in the coming months, we will be hosting another webinar on debt management for residents and new physicians. So stay tuned. We will certainly be hosting that, probably within the next few months towards August or September. OK, I think we've got time for one or two more questions. If you are income splitting with a spouse, who does not have another income, and you are paying the spouse a dividend, can he or she take advantage of RRSPs? And I think Greg that comes back to the concept of pre-existing RRSP contribution room?

Greg: That's right, James. So if that spouse did not have RRSP room from previous earnings of a salary, that sort of thing, then they're not going to have any room in the future. Dividend income does not create new RRSP room and then, of course, would be the question whether it would make sense to contribute the dividend income to an RRSP or not as well. Sometimes it might, but there might be certain circumstances where that would not be appropriate. But again, it's very individual that we need to look at this.

James: OK, Greg. Great question here around the incorporation process. How long does the setup take? For example, if I am starting practice on August 1, when should I start the process?

Greg: It is a great question. I would say after you come to see your MD Advisor and you go and see your accountant, if the accountants are experienced in the way that we’ve described, from the meeting with the accountant to the day you're open is about four weeks.

James: OK. So we've got a question here. If your spouse is earning a higher income, i.e. greater than $80,000, is there still a benefit of income splitting, we're assuming within a corporation? So again, income splitting is designed with the idea that as a family unit, we hope to pay less than we otherwise would. So in this case Greg, would there be any benefit?

Greg: We've seen instances where yes, there can be a benefit. Of course, I don't know the jurisdictions that they're in, and what the appropriate tax rates are with them, and maybe what their other goals are either. So it's difficult to say specifically in that situation, but there can be.

James: OK. Is there a value to income splitting if both spouses are already in a high tax bracket, i.e., two physicians?

Greg: Well, I think the reality is that if you're both in a high tax bracket, if you both topped out, it's going to depend on what your goals are for that money. You maybe have some reason for trying to accumulate dollars in each person, I mean, in each person's hands. So we'd have to know some more information about what your objective is there.

James: OK. We've got a question here around mobility within Canada. So what happens to your provincial corporation if you end up moving provinces?

Greg: That's a great question and part of it is dependent on which provinces you’re moving about. The short answer is, is that it is possible. I've seen it with some of my clients, moving from Ontario to other provinces where they kind of go through a re-registration process. So there's some money involved, in terms of cost, but it can be done.

James: OK, I've got a question here, is there a minimum income level or a minimum amount of corporate retention that you would recommend not incorporating, if values fall below this. I guess that's an individual determination.

Greg: It is a pretty individual question, because there could be spots where there might be opportunity to income split, and they're not retaining any money. In other cases it could be shorter term.

James: OK, and we've got a question here, how much difference in income between a physician and spouse needs to be, how much does the difference in the income between a physician and a spouse need to be for it to be worthwhile to split income. What about if incomes are $300,000 and $100,000 respectively, for example. Greg, I think if clients do go and meet with their MD Financial Advisor, you have the tools to be able to kind of fool around with the numbers and project what the tax savings will be.

Greg: That's a great point, James. Because one of the tools that we have, we can do it right in our office. So we can take whatever numbers you have, it's a great way to go into the office of the MD Advisor, you know, bring in your information in terms of income, $300,000, we can play with it right in front of you. Well, what happens if we add $10,000 in dividends, and your spouse is making $80,000 or $100,000, whatever numbers you wish, and we can show you what the outcome will be to some pretty exacting numbers. So that's a great reason to go in and make the visit.

James: OK, we had a question around, are you able to change your salary, the salary you pay yourself through your corporation from one year to the next?

Greg: Absolutely, yeah, that's not a problem.

James: OK, I'm seeing a lot of questions coming up here. Unfortunately, we are just about out of time so I'm afraid we're going to have to conclude tonight's session. Thank you to all of our participants who asked those questions. I think together we've discussed and really explored a broad range of considerations when it comes to incorporation. Reminder, we will be posting a recording of this webinar on the MD Financial Management website shortly, and will follow up by email to all of you to make sure you get answers to all of your questions. So for those of you whose questions we didn't have a chance to answer, we will be following up. If you have any further questions around incorporation or any other financial matters, as I mentioned before, please do not hesitate to contact MD for more information. You can click the Contact Us section of the MD website to contact our various service departments, or click the Find Offices link to contact the local office nearest you. Greg, thank you for your time and expertise. As always, it's been a big pleasure.

Greg: It's been good to be here.

James: All right, thank you everyone for your time. On behalf of everyone at MD, have a great night.


© 2016 MD Financial Management Inc.

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 presentation 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.