Financial and Tax UpdateTerrace

September 22, 2010

Disclaimer: The information contained in this

presentation is of a general nature. Although all attempts are made to ensure the accuracy and timeliness of the information, an individual or organization should not act upon it without appropriate professional advice and a thorough examination of the facts of their particular situation.

Brian M. Galloway CFP,FCGA

Over 30 years in practice CGA 1980; CFP 1997 Tax & financial planning Member CGA-BC, Alberta, Manitoba

& Nova Scotia Partner, Galloway Botteselle &

Company

How are we taxed?

Historical BackgroundCanadian income taxes Income taxes were introduced in 1916 Temporary measure to finance WW I “Income War Tax Act” Idea was to review a year or two after

the war was over . WW I ended in 1918. It was 10 pages Today - over 2,000 pages Expanding rapidly!

Two types of people in Canada who complain about taxes…

Men and Women!

Proportional or “Flat” Tax Rates “Flat” tax system Same rate applies to each level of

income Higher income = higher taxes Examples Consumption taxes

Provincial Sales taxes HST Gas taxes

Progressive Tax Rates General concept is the more you make

… The more you pay How much more is fair? It could be said that most people

believe the tax system is fair as long as it taxes somebody else!

Canada uses a Progressive income tax system

Progressive Tax Rates Higher incomes attract tax at

progressively higher rates Progressive in the sense that the

tax rate is rising Not in the sense that Canada’s tax

system is particularly new and innovative!

Progressive rates Thus higher income means not

only higher actual dollars paid Plus a higher % of each dollar Based on ability to pay (in theory) Not willingness!

Medical Student

Resident

Practicing Physician

Physician Professional Corporation

Time Passages

Fellowship

Retired!Holdco

Trust

Incorporation

Incorporation

What is it? What is “integration”? What are the potential benefits of

incorporation? Will incorporation be beneficial for

all physicians? Should I incorporate? If so when?

Overview of Corporations

A corporation is a legal entity For example, Dr. X may die but Dr. X Inc. can still

send flowers to the funeral. Will continue to exist so long as filing requirements

satisfied Corporation has own accounting records, financial

records and payroll and it files its own tax return (T2) The corporation may pay a salary (deductible

expense) or may issue dividends (after-tax income to shareholder's). Proportion of any distribution is usually at discretion of voting shareholder (Doctor)

Advantages of Incorporation

Increased flexibility in deciding how much to pay oneself and how to pay it

Can be paid either through salary and/or dividends.

Opportunities for income splitting Tax deferral and… You can call yourself PRESIDENT!

Advantages of Incorporation Inc. can evolve into future

HOLDCO Does not need to wind up at

retirement Possible use of IPP vs RRSP

Disadvantages of Incorporation

There is an increased amount of administration: Has to maintain its own set of books and

records Annual reporting requirements (financial

statements need to be prepared for the corporation + its own tax return)

Tax installments required for the Corporation

Fees to set up (incorporation costs, legal and accounting )

Who Should Take a Closer Look at Incorporation?

Physicians who can leave money in the corporation (e.g. if mortgage is paid off and/or reasonable level of living expenses)

Tax deferral advantage Physicians who have a lower income

spouse Physicians supporting adult children or

parents > 18 years Income splitting advantage

Income Splitting

Income Splitting Basics Remember Canada has

progressive income taxes The higher the income the

higher the % of taxes paid on each dollar earned

Income Splitting Basics Solution? Move income to lower tax

rates… Pay wages to family

Wages must be reasonable Consider dividends

No reasonableness test Pay over $30,000, no tax if no other

income

Dr. X $300,000

CRA

$115,000 taxes & CPP

Dr.X

$250,000

Spouse $50,000 salary

CRA

$94,000 $12,000

$106,000 taxes & CPP

Income Splitting - No Incorporation

Dr. X $300,000

CRA

$115,000 taxes & CPP

Dr.X

$175,000

Spouse $108,00

0 dividend

CRA

$17,000$16,000

$94,000 taxes & CPP

Income Splitting - Corporation

Corp.

$300,000

$61,000

CORPORATE TAX DEFERRAL

Corporate Tax Deferral 13.5% Corporate vs. 43.7 % Personal = 30.2% current tax savings delay paying difference for years

(deferral) payment after retirement at lower tax

rates payment now to family at lower tax rates

(splitting)

0-$500k >$500k

2011 – 13.5% 26.5%2012 – 11.0% 25.0%

BC Corporate Tax Rates - 2010

13.5%

28.5%

$0 - 500,000 > $500,000

The above graph shows the corporate tax rates in British Columbia on active small business income for Canadian Controlled Private Corporations effective January 1, 2010.

Holding Company

Holding CompanyWhat is it used for?

Useful for separating non-active assets from business Asset protection Capital gains exemption $750,000 tax free!

Keep the active company clean Excess earnings transferred tax free

to Holding company Investments made in Holding company

Investments in Corporation

Anything that is legal ! Typical

Stocks, mutual funds, real estate

Investments in Corporation

Watch out for personal assets Recreational property Automobiles Art Boats Other “toys”

Corporate TaxesActive vs. Investment Income

Please note... 13.5% applies to Active income

only Higher taxes for investment

income 45.17% in BC (interest) Prevents “incorporating” investments Tax system integration

Tax on Investment Income

Corporate Tax on Investment Income

19.0%9.5%

26.7%

33.3% 33.3% 13.3%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

Interest Regular dividends Eligible dividends Capital gains

Corporate tax Refundable tax

21.9%

33.7%

43.7% 43.7%

CapitalGains

Dividends Interest Salary

Top Personal BC Tax Rates - 2010

21.5%

EligibleDividends

43.7%

53.0%40.2%

39.0%

BC Quebec Ontario Alberta

Top Personal Tax Rates – 2010

Personal Tax Rates

Combined BC and Federal Personal Tax Rates - 2010

20.1%22.7%

29.7%32.5%

38.3%40.7%

43.7%

$0-10k $10-36k $36-41k $41-72k $72-82k $82-100k $100-127k $127k+

Accumulated Tax $5,200 6,400 16,000 18,900 25,700 36,700Effective Tax Rate 15% 16% 22% 23% 26% 29%

Gallow ay Botteselle & CompanyMaple Place Professional Centre300 - 2000 West 12th Avenue

Vancouver, BC  V6J 2G2Phone:  604-736-6581Fax:  604-736-0152

w w w .porterhetu.com

0-$500k >$500k

2011 – 13.5% 26.5%2012 – 11.0% 25.0%

BC Corporate Tax Rates - 2010

13.5%

28.5%

$0 - 500,000 > $500,000

The above graph shows the corporate tax rates in British Columbia on active small business income for Canadian Controlled Private Corporations effective January 1, 2010.

Capital Dividend Account Corporate capital gains

50% taxed 50% tax free Tax free portion is added to CDA

Tax election to get it home tax free

Use it or lose it!

How are Income Taxes calculated?

$ Practice IncomeLess (Practice Expenses)

Net IncomePlus Other Income (T4, T5, etc.)Less (Other Deductions)

Taxable IncomeMultiplied by X tax rates Total taxesLess (Tax Credits ) Taxes Owing

Deductible Expense vs. Tax Credit

Deductible expenses

Tax Savings is based on your tax bracket

Tax Credits Tax savings is

the same regardless of tax bracket

Allowable Deductions From “Business

Income”

Deductions – General Comment Generally speaking, the same principles

apply to business income earned by either self-employed proprietors or professional medical corporations

As a general rule, most expenses incurred are deductible if they are: incurred to earn business income; and are reasonable in the circumstances; and are allowed by the Income Tax Act.

Business Expense SummaryThe following are common business expensesfor physicians: Accounting and legal fees (important!) Advertising and promotion Automobile Meals and entertainment (50%) Annual license fees and professional dues Bank charges Interest on office loans and lease payment

Business Expense Summary Convention expenses (2 per year) Maintenance & repair of office +

equipment Professional development Professional library Office expenses

medical supplies, postage, stationery, telephone, answering service, etc.

Business Expense Summary Salaries and employee benefits Travel expenses Heat, light, power and water Insurance

malpractice office practice overhead Comment re Life insurance

Can I deduct for a “Home Office”

Meet one of two tests… principal place of business

or

used exclusively for your business + used on a regular basis to meet patients

Comment re: “regular basis” % of rent, taxes, utilities etc. proper records must be kept

Business Expense SummaryAutomobile Expenses

Need to determine business portion of auto expenses Keep a travel log

Travel to and from work is not deductible! Unless you have a home office

Automobile deduction limits apply: purchased = $30,000 + taxes Leased = limit $800 per month + taxes

Automobile operating expenses include: fuel and oil, maintenance and repairs insurance, license fees interest on car loans or lease payment

Automobile Expenses Alternative method

Auto allowance Travel log still required

2009/10 rates $.52 for 1st 5000 km $.46 for > 5000 km

Business Expense SummaryEntertainment Expenses Only deduct 50% of

meals/entertainment Specific prohibition for...

recreation facilities certain club dues

Record client names on receipts Be reasonable

Avoid being “red flagged” by CRA Convention expenses

Other Business Deductions Available

Examination Fees Medical Library and Equipment Malpractice (CMPA)

Membership Fees

Medical Expenses As of July 12 2010

No more medical receipts for cosmetic procedures

Unless due to disease, accident congenital defects

Home renovations Claimed Jan 28 2009 to Jan 31

2010 Family based $10,000 limit 1st $1,000 exempt Audits starting now CRA after the underground economy

Tax Shelters Leveraged donations Art donations New rules coming

Must disclose if involves commissions or

“secret “ deals or Indemnity if it does not work

Moral of the Story…

….When in doubt, keep all receipts

and talk to your Accountant….

Why is Professional Accounting Advice Important?

Physicians are generally in the top 10% of earners in Canada

Largest expense in a medical practice is income taxes

Accounting and tax advice can reduce overall taxes and increase after-tax take home pay for the family.

Bookkeeping is Essential

Accurate accounting of your business income & expenses will prepare you to meet with your accountant and save you professional fees and income taxes

Separate business bank accounts and records

Onus is on taxpayer to prove why the expense is valid

Best defense in an audit is to have all receipts and logs!

Objectives of Optimal Tax Planning

To minimize income taxes payable and

maximize after-tax take home pay for the family

unit as a whole

It’s not what you make, it’s what you

keep after taxes!

Personal Tax Rates - 2010Combined BC and Federal Personal

Tax Rates - 2010

20.1%22.7%

29.7%32.5%

38.3%40.7%

43.7%

$0-10k $10-36k $36-41k $41-72k $72-82k $82-100k $100-127k $127k+

Accumulated Tax $5,200 6,400 16,000 18,900 25,700 36,700Effective Tax Rate 15% 16% 22% 23% 26% 29%

Gallow ay Botteselle & CompanyMaple Place Professional Centre300 - 2000 West 12th Avenue

Vancouver, BC  V6J 2G2Phone:  604-736-6581Fax:  604-736-0152

w w w .porterhetu.com

0-$500k >$500k

2011 – 13.5% 26.5%2012 – 11.0% 25.0%

BC Corporate Tax Rates - 2010

13.5%

28.5%

$0 - 500,000 > $500,000

The above graph shows the corporate tax rates in British Columbia on active small business income for Canadian Controlled Private Corporations effective January 1, 2010.

Tax on Investment Income

IncomeCorp. taxDiv. refundAvailable cashPersonal taxAfter-tax cash

InterestIncome

$ 1,000 (457) 267 810 (265)$ 545

RegularDiv.

1,000 (333) 333 1,000 (327) 673

EligibleDiv.

1,000 (333) 333 1,000 (199) 801

CapitalGains

1,000 (228) 133 905 (132) 773

(Assumes top marginal tax bracket)

HST Caution re: non-medical fees earned +$30,000 per annum must register for

HST Admin. type work vs medical earnings If registered can claim related input tax

credits The “Teflon tax” If not reporting you will need to pay on

fees earned, thus a loss of 12%

Prescribed interest rates Rate set each quarter by CRA

2010 Q1 , Q2 and Q3 5% on overdue taxes 3% on tax refunds ( 1% Q3 ) 1% cost of any taxable benefits

Saving for Retirement

Tax Tips! RRSP 18% earned income Matching funds from BCMA for doctors

Free money! Need to have salary large enough Can borrow from RRSP to purchase

home as well as for education Transfer to a RRIF @ 71 years Spousal RRSP if younger than 71 years

Tax Tips! IPP

Defined benefit plan RRSP

Defined contribution plan Can be much larger deductions Retroactive lump sum payment

One time

Tax Tips! TFSA

Tax Savings Accounts – growing quickly

$5,000 annual limit Carried over Consider “Hot” stock tips rather than

2% interest returns 18 yrs +

Tax Tips! TFSA

Recent new rules to stop abuse Over contribute , Earn money tax free Pay a small penalty to do so Shut down!

Tax Tips! BC ULC

Very recent College approved Applies to Americans only Very helpful with cross border tax

issues

RDSP Registered Disability Savings Plan Parents can save for disabled kids Limit of 59 years of age Canada disability savings grant

3-1 on first $500 = $1,500 from government 2-1 on next $1,000 = $2,000 from government

Canada disability savings bond Additional $1,000

Great leverage on family savings

RDSP Registered Disability Savings

Plan Parents can now “roll over” RRSP Normally “roll” to spouse But if no spouse… Limit of $200,000 into RDSP

Saving for retirement Saving should be a life long goal

Difficult to begin saving as you approach retirement

Consider 2% of nest egg annually – OK 3% probably OK 4% you are taking risks 5% - how do you like cat food?

Start with what you need monthly 70% rule of thumb

Compare to return on nest egg

Saving for retirementAnother rule of thumb… % of safer investments should rise with

your age At 40 years – 40% in bonds / term deposits At 60 years – 60%

And so on 20% fudge factor depending on risk

tolerance

National System 2002 Most recent year stats available

4 % of returns > $100,000 1 % of returns > $150,000 1/2% of returns >$250,000

(mostly doctors!) Top group ½% paid 16% of overall

taxes The rich do pay taxes!

Summary Taxes are an expense Planning CAN reduce taxes Corporations can be very useful for

tax planning Remember… It’s not what you earn… It’s what you keep after taxes!

Questions?

Useful references

www.cma.ca Module: Personal and Professional Accounting Issues and

Taxation Tax Tips for the Medical Student, Resident and Fellow

www.cpso.on.ca/Info_physicians/members/inc.htm - College of Physicians and Surgeons – direct link to Incorporation information and applications

Contact your provincial medical association or website

www.cra-arc.gc.ca/tax/business/menu-e.html - Canada Revenue Agency – direct link to “Business” info

Remember…

It’s not what you earn, it’s what you keep. . .

after taxes!

Associated with Porter Hetu International Canada’s Largest CGA

Group offices coast to coast

www.porterhetu.com

CERTIFIED GENERAL ACCOUNTANTS Maple Place Professional Centre 300 - 2000 West 12th Avenue Vancouver , B.C. Canada 604.736.6581 604.736.0152 E-mail: info@porterhetu.com

www.porterhetu.com