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

Transcription

1 Maximize your Wealth - Donate less to Canada Revenue Agency Presenter: Matt Holmes, CPA, CA Partner Tax Specialist CAOT Management Mondays Webinar in collaboration with BDO CANADA LLP November 2, 2015 The Presenter Matt is a Chartered Professional Accountant and Tax Partner with over 20 years of experience providing assurance, tax and advisory services to professionals and private corporations. Matt provides specialized tax services to individuals, corporations and trusts. He has also provided tax services to private sector enterprises, including personal and corporate income tax planning, SR&ED tax credit claims and succession and estate planning. Matt Holmes, CPA, CA Partner Tax Specialist Tel: Fax: mholmes@bdo.ca Slide 2 Learning Objectives After taking part in this webinar, participants will: 1. Understand how to pay less tax in your practice, on your personal income, when you sell your practice, when you sell real estate and when you buy a practice. 2. Understand how to maximize value with your practice valuation. 3. Know why it is important to start planning transition now. Slide 3 1

2 Pay Less Tax in your Practice Review ownership structure 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 high o High rate on income > $138,000 50% on Average! Slide 4 Pay Less Tax in your Practice Review ownership structure The power of incorporation! o Corporation tax rate ranges from 11% % depending on province- Deferral/Savings 34-39% o Leaves more $ available for: o Use in practice, paying down debt o Expansion or real estate purchase o Investment/retirement savings o Purchasing a practice Slide 5 Pay Less Tax in your Practice Review ownership structure Example Occupational therapist earns practice income of $200,000, able to leave $100,000 in corporation per year to pay debt on purchase of practice or to set aside for retirement Slide 6 2

3 Pay Less Tax in your Practice Proprietor/Partner Corporation Income $100,000 $100,000 Tax (50,000) (15,500) Net Available $50,000 $84,500 Net Deferral/savings $34,500 Over 5 Years - $172,500!! Over 10 Years - $335,000!! Over 20 Years - $770,000!! Slide 7 Pay Less Tax in your Practice Who should incorporate? Occupational therapist with income over $100,000 maybe less? Occupational therapist expecting to sell their practice some day Occupational therapist planning to acquire real estate Occupational therapist making investment in equipment/capital assets Occupational therapist with debt and practice value (existing assets or goodwill) Occupational therapist who purchased shares of corporation or planning to buy a practice Slide 8 Pay Less Tax in your Practice Save on incorporation Cash in on cost & value of practice Example: - Occupational therapist earning $100,000 net of practice income per year Tax of $30,000 annually - Practice value $500,000 consisting of: o Bank & Receivables net of payables $50,000 o Furniture & Equipment (tax cost) $50,000 o Leaseholds $50,000 o Goodwill $100,000 - Sells to corporation for $250,000 note receivable at beginning of calendar year - Income for year equal to $50,000 (50% of goodwill) tax approx $12,500 - Corporation pays $15,500 for next 5 years, after tax cash used to pay note tax free Slide 9 3

4 Comparison: Unicorporated Incorporated 3 Years of Tax $90,000 $46,500 Add l in year of sale 10,000 Total $90,000 vs. $56,500 Savings $33,500 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: First $44,701 21% Next $44,701 31%-39% Next $49, % Over $150, % o If incorporated Choice between salary or dividends o Tax savings by choosing dividend over salary <1% in most provinces, <1% cost in some provinces o Savings on CPP contributions $4,700 per year, provincial payroll taxes Slide 11 Pay Less Tax on Personal Income Income splitting o Split Income with lower income family members o Utilizes their lower graduated tax rates Methods: o Pay spouse or children salary for services to practice Reasonability test o Services corp/corporate landlord charges practice for services/rent o Family member shareholders or a family trust of service/landlord corp dividends paid Slide 12 4

5 Pay Less Tax on Personal Income Family Occupational Therapist Family Trust Pays Dividends Incorp. Occupational Therapy Practice Pays Rent Realco Slide 13 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 35% of cost previously funded with after tax personal dollars $15,000 of costs - $5,250 of tax savings! Slide 14 Pay Less Tax on Sale of Practice Options for sale: Sale of practice assets Sale of shares of incorporated practice Sales of assets Usually taxable Sale of equipment and leaseholds results in recaptured depreciation, taxable capital gains Sale of goodwill ½ of proceeds included as professional income Slide 15 5

6 Pay Less Tax on Sale of Practice Sale of shares May be exempt from tax! Lifetime capital gain exemption - $813,600, increasing annually Must be a sale of Qualified Small Business Corporation (QSBC) Conditions Slide 16 Pay Less Tax on Sale of Practice QSBC conditions: o Must not be owned by unrelated person anytime in 24 months period before sale o Must not have more than 50% of value of assets in passive assets in 24 months before sale Not used in active business such as excess cash, portfolio investments, real estate held for rental purposes o Must have more than 90% of asset value in active business assets at time of sale Possible to incorporate immediately before a sale and still qualify! Slide 17 Pay Less Tax on Sale of Practice Asset sale example: Equipment value $150,000 Undepreciated capital cost(ucc) $75,000, Recapture - $75,000 Leaseholds Value $50,000 UCC nil - Recapture - $50,000 Goodwill Value $500,000 - Income inclusion - $250,000 Total proceeds $700,000 Total income: $375,000 Tax approx ($187,500) CASH RETAINED FOR YOUR RETIREMENT: $513,500 ($700,000 - $187,500) Slide 18 6

7 Pay Less Tax on Sale of Practice Share sale example: Proceeds on share sale - $700,000 Capital gain $700,000 Capital gain exemption claimed Tax Nil!! CASH RETAINED FOR YOUR RETIREMENT: $700,000 - $187,500 MORE! Slide 19 Pay Less Tax on Sale of Practice Planning point What if you have investments in your corporation at time of sale? Qualifying for Capital Gain Exemption Worth up to $185,000 approx Purification Transactions Pay down accounts payable Accrue bonuses Pay dividends Establish Individual Pension Plan claim deduction in corporation Spin out investment assets to separate company caution! Slide 20 Pay Less Tax on Sale of Real Estate Sale of direct interest in real estate = Taxable capital gain Shares of a 2 nd corporation holding real estate owned by family members or family trust will also qualify for exemption o Key is shares must be sold at same time as practice sale or exemption crystallized while building used in practice to qualify o If rented to 3 rd party, no longer active business asset Slide 21 7

8 Pay Less Tax on Sale of Real Estate Family Occupational Therapist Family Trust Pays Dividends Incorp. Occupational Therapy Practice Pays Rent Realco Slide 22 Pay Less Tax on Purchase of a Practice Incorporation will allow a buyer to fund the purchase with low rate corporate dollars Buying a practice personally is expensive funding with after tax money Slide 23 Pay Less Tax on Purchase of Practice Example Buyer of practice paying $700,000 and financing it with bank debt Practice generating net income of $150,000, after paying occupational therapist a reasonable salary If practice bought personally: o $150,000 x 50% = $75,000 of tax o Leaves $75,000 to pay debt o When including bank interest, likely takes over 10 years to pay debt Slide 24 8

9 Pay Less Tax on Purchase of Practice Example If practice bought through corporation: o $150,000 x 15.5% = $23,250 of tax o Leaves $126,750 to pay debt o Debt paid in less than 6 ½ years! Slide 25 Pay Less Tax on Purchase of Practice Other considerations for purchaser: Make sure you understand your patient base Ensure continuity of clients consider transition of seller Understand the practice expenses what expenses will you inherit? Confirm normalized earnings Ensure the practice generates enough income to cover your living expenses and fund the purchase over a reasonable timeframe Slide 26 Maximize Value Understand your Practice Valuation Different methods of valuing a practice: Revenue approach Base price on multiple of practice revenue Income-based approach Base price on a multiple of net normalized earnings Valuation is subjective Practice is really worth what a particular purchaser is willing to pay Different valuators will arrive at different values for the same practice Slide 27 9

10 Normalized Earnings Represents a truer picture of profit Removes unusual/extraordinary items from profit Eliminates owner expenses such as vehicle, home office, meals & ent., etc. Adjusts profit for normalized wages - Deducts reasonable wage for occupational therapist, adds back actual wages taken - Adds back wages for family and deducts a market value wage Slide 28 Normalized Earnings Adjusts for normalized rent o In situations where not enough rent is being paid or to much is paid o Typical when occupational therapist owns the building Slide 29 Maximize value understand your practice valuation Lower multiple will usually mean higher risk practice o Declining population o Increasing costs o Increased competition o Broader industry regulations Lower risk, more specialized, profitable practices command a higher multiple Slide 30 10

11 Transition Planning Slide 31 Thank-you! Matt Holmes, CPA, CA ext Slide 32 Q & A 15 min. Slide 33 11

12 BDO CANADA LLP Slide 34 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. Registrants will receive a certificate of attendance by with the feedback form, which may be completed with their name in order to attest their participation in this webinar and to keep for their records. *Only those that have registered for this webinar should complete the certificate of attendance. Slide 35 12