Presented by: Mathieu St-Denis, CPA, CA Senior Manager - Taxation Tel: Fax

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1 Building your practice The pros and cons of various ownership structures and the tax benefits associated with them Presented by: Mathieu St-Denis, CPA, CA Senior Tax Manager CAOT Management Mondays Webinar in collaboration with BDO CANADA LLP October 20, 2014 The presenter Mathieu St-Denis, CPA, CA Senior Manager - Taxation Tel: x 2928 Fax : mstdenis@bdo.ca Mathieu is responsible for managing and supervising tax engagements for small and medium enterprises (SME) and not-for-profit organizations. He specializes in corporate reorganizations and estate planning. He provides his wealth of knowledge in both official languages to many health professionals. Slide 2 Learning objectives After taking part in this webinar, participants will: 1. Recognize the various legal tax structures available to them and which one fits best, 2. Understand the advantages of incorporating and the work involved in maintaining a corporation active. Slide 3 1

2 Why is this topic relevant for occupational therapists? The presentation will provide a brief overview of the pros and cons of the available ownership structures followed by the benefits of some structures over others. Details will include tax benefits you may not be aware of, such as income splitting, leveraging acquisitions and access to capital, the Personal Liability Protection myth, among other topics. Also covered, the cost of operating a corporation and what happens when you retire will wrap up the session. Slide 4 Ownership structures Sole proprietorship & partnerships o Proprietorship business carried on personally o Partnerships arrangement between 2 or more practitioners o Partners jointly liable o Income of proprietor/partner taxed personally o Personal tax rates are normally high o High rate on income > $220, % (Ontario) Slide 5 Pay less tax in your practice Ownership structures The power of incorporation! o Corporation tax rate 15.5% (ON) - Deferral/Savings 34% o Leaves more $ available for use in practice o Leaves more $ for expansion or real estate purchase o Leaves more $ for investment/retirement savings o Leaves more $ for purchasing a practice Slide 6 2

3 Benefits of incorporation Tax deferral using the Small Business Deduction First $500,000 of active income taxed at lower corporate rates due to small business deduction (SBD) For incorporated partnerships, all of the individual corporate partners must share limits (but we can plan around this) value declines with # of partners - Rule does not apply to a medical/dental association where members are not partners Slide 7 Pay less tax in your practice Example A British Columbia Occupational Therapist earns practice income of $200,000, and able to leave $100,000 in corporation per year to pay debt on purchase of practice or to set aside for retirement: Slide 8 Pay less tax in your practice British Columbia Proprietor/Partner Corporation Income left $100,000 $100,000 Tax (45,800) (13,500) Net available $54,200 $86,500 Over 5 years - $161,500!! Over 10 years - $323,000!! Net saving/deferral $32,300 Slide 9 3

4 Pay less tax in your practice Who should incorporate? Occupational Therapist with income over $100,000 maybe less? You are expecting to sell your practice some day You are planning to acquire real estate You are making investment in equipment/capital assets You are someone with debt and practice value (existing assets or goodwill) You are someone who is planning to buy a practice You have adult children attending post-secondary education Slide 10 Pay less tax on personal income If not incorporated practice income is personal income o Subject to $4,700 of CPP costs annually o Tax at graduated personal tax rates (Alberta) First $43,953 25% Next $43, % Next $48, % Over $136,270 39% o If incorporated choice between salary or dividends o Tax savings by choosing dividend over salary will depend on the province of residence o Savings on CPP contributions $4,700 per year Slide 11 Salaries versus dividends Remuneration planning: Qualitative considerations: Dividends do not create RRSP room need other approach to savings Dividends do not create CPP pensionable earnings retirement planning Payment and reporting of dividends is simpler No tax is withheld from dividends on payment plan for tax liability Ask for an estimate from your advisor Dividends may not easily support personal borrowing power Slide 12 4

5 A corporation offers me more protection, right? WRONG The liability of a member to a person receiving professional services is not affected by the fact that the services are provided on behalf of a corporation. So, you need to pay your insurance! Slide 13 Pay less tax on personal income Income splitting o Split income with lower income family members o An individual resident in Manitoba with no other income can receive a dividend of approximately $41,000 without paying Federal tax (a minimal amount of Manitoba Tax is payable $3,500) Slide 14 Income splitting Remuneration planning: Husband Wife Adult Child Adult Child Total (salary) (salary) (dividend) (dividend) Corporate Income $ 125,000 $ 125,000 $ - $ - $ 250,000 Corporate tax Dividend distribution 125, , ,000 Personal tax (38,000) (38,000) (76,000) Net after-tax $ 87,000 $ 87,000 $ - $ - $ 174,000 Corporate Income $ 250,000 Corporate tax - - (24,800) Dividend distribution 80,000 80,000 32,600 32, ,200 Personal tax (18,500) (18,500) (450) (450) (37,900) Net after-tax $ 61,500 $ 61,500 $ 32,150 $ 32,150 $ 187,300 Savings $ 13,300 Slide 15 5

6 Pay less tax on personal income Other methods: o Pay spouse or children salary for services to practice Reasonability test must reflect work performed o Consider services corporation/corporate Landlord charges practice for services/rent o Loan money to family members and tax them under section 15(2) of the Income Tax Act good planning for adult children Slide 16 Pay less tax on personal income Pay for business related non-deductibles, WITH corporate Dollars Life Insurance premiums Golf Dues 50% of meals and entertainment Savings equal to approx. 30% of cost previously funded with after tax personal dollars $15,000 of costs $4,500 of tax savings! Slide 17 Use of a Family Trust (when possible) Good planning vehicle for holding other non-professional assets (i.e. real estate) Provides income splitting with family members as well as non-family members Completely discretionary in terms of allocating income and capital Most advantageous when children are attending University Limited lifetime deemed 21 year rule Good tool in Family Law Act situations Slide 18 6

7 I m going to incorporate tomorrow! WAIT! There is a cost to incorporate ($1,200-$3,000) & Annual returns depending on the province($60 - $225) Family law issues? Financial Statements and Separate tax returns and related planning for the corporation ($3,000 - $5,000) If the company pays for personal things Could create big problems with Canada Revenue Agency You will need a separate bank account and bookkeeping more work You will need to update your wills to reflect a corporate ownership Slide 19 Professional corporations Occupational Therapist Allowed to have a professional corporation Allowed to have a Holding Corporation as a shareholder Allowed to have other family members as shareholders (normally non-voting) Allowed to have a Family trust as a shareholder BC X X X X AB X - X Minor only SK X X X X MB X - X - ON X QC NB X 1 X X X NS X 1 X X X PEI X? NL Majority of all shares/voting shares held by Professional Slide 20 Professional corporation Typical structure Occupational Therapist - BC subscribes for 90% voting common shares with 100% of voting powers Occupational Therapist Spouse Adult son Adult daughter Other family members (spouse, adult children) subscribes for 10% nonvoting common shares of different classes Medical PC CO Slide 21 7

8 Be careful out there Each practice is different Get professional advice Some provincial restrictions may limit you Do you want your spouse to own shares? What if you divorce / separate? Does he/she remain a shareholder? - Buy him/her out? What if they say no? - They have rights as a shareholder - Better to keep them out and pay a reasonable salary? Slide 22 When you retire If you can t sell the corporation or your practice, what happens? The professional corporation holding your investments accumulated over the years will remain in the corporation until liquidated When you stop paying your dues, the professional corporation will cease to meet the regulations and will become a plain Holding / Investment corporation If your spouse is a shareholder, income splitting is still an option in retirement Your advisor can help you determine the best income and distribution ratio in relation to your other personal investments/income Slide 23 Planning for the future No one else will take care of your future except yourself Identify/develop personal goals (i.e. retirement, travel, cottage, children s education, etc.) Need concrete strategies and plans to achieve goals Work with all your advisors, they are there to help If your advisors aren t helping you meet your goals, CHANGE ADVISORS Slide 24 8

9 Q & A 15 min. Slide 25 A fine is a tax for doing wrong, a tax is a fine for doing good. unknown Slide 26 BDO CANADA LLP Slide 27 9

10 A message from CAOT In an effort to continue to improve our webinars, registrants will receive an with a link to a feedback form. We d greatly appreciate any feedback you can provide. To request a certificate of completion, please education@caot.ca *Only those that have registered for this webinar and who attended the webinar live can request a certificate of completion. Slide 28 10

Presenter: Matt Holmes, CPA, CA Partner Tax Specialist Tel: Fax

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