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Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

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Page 1: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Tax Wise Investing –for Incorporated Physicians

Presented by:Dave Rose, CFP Senior Financial Consultant

Wednesday October 24, 2012

Page 2: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

MDPIM US EQUITY POOL

MD Puts Physicians First ™

Created in 1969 to manage the retirement finances of CMA members– Wholly owned by the CMA and an exclusive benefit of CMA membership– Guide more than $30 billion in assets for over 100,000 physicians and their

families– Uniquely focused on driving maximum value for members through objective

non-commissioned advice and world-class investment management at a very low price

Partnering with the OMA, everything we do is for the benefit of

our members– MD and the OMA are natural partners in delivering value to Ontario Physicians– Currently partnering through Membership and the Insurance Alliance initiatives

Page 3: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

MDPIM US EQUITY POOL

The First. The Best. The Only One.

“ In a recent study,1 48% of CMA members identified MD as their primary investment firm, making us by far the dominant wealth manager for members. By comparison, only 11% identified our closest competitor.”

Brian PetersPresident and Chief Executive Officer

1 Source: MD Physician Services Loyalty Survey, November 2011.

Page 4: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

MDPIM US EQUITY POOL

Why MD?

Engineered exclusively for physicians – Over 40 years of experience working for physicians and their families to

provide the advice and services you need– Team approach to bring specialization and strength to achieving client goals– Among the lowest management expense ratios (MERs) in the industry

Top scores in overall customer satisfaction– Scored 770/1000 in the 2011 J.D. Power survey of full service investment firms

in Canada– 5 out of 5 Power Circle ratings from J.D. Power = “among the best” in full-

service firms

Our private investment counsel arm ranked number one in asset growth amongst the 10 largest private investment counsel firms in Canada

MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca.

Page 5: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Tax-Wise Investingfor Incorporated Physicians

Dave Rose, CFP Senior Financial Consultant

Page 6: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Managing your wealth: Purpose6

Page 7: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Purpose = Financial Independence (aka “Retirement”)

Factors to consider (among others):

Your time horizon

Your risk tolerance & risk capacity

The value of professional management

Your desire to outperform

Tax considerations

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Page 8: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Tax-wise Investing

Five Big Issues

1.Understanding tax on corporate investment income

2.The asset location and asset mix strategy

3.Your compensation decision

4.Other considerations

5.Your Personalized MD Team

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Page 9: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Issue 1 (of 5)

Understanding Tax on Investment Income

Page 10: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

2012 Tax Rate Comparison Corporation Individual

Active Business Income<$500,000 15.50% 45.00%>$500,000 27.50% 45.00%

Investment IncomeInterest 47.00% 45.00% Non-eligible dividends 33.33% 33.00%Eligible dividends 33.33% 26.00%Capital gains 23.50% 22.50%

Tax impact of traditional investments

Page 11: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Managing the Corporate Tax Refund

Notional Accounts:

RDTOH: Refundable Dividend Tax on Hand

CDA: Capital Dividend Account

GRIP: General Rate Income Pool

Note: While the corporation receives a tax refund when distributing

investment income, the recipient often pays personal tax.

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Page 12: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Individual: Top Tax Bracket 50%

Understanding Tax on Investment Income

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Page 13: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Corporate Intermediary – all tax brackets 50%

Understanding Tax on Investment Income

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Page 14: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Understanding Tax on Investment Income

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Page 15: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Understanding Tax on Investment Income

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Page 16: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Match your situation and your tax preference:

Your Situation

I want to defer tax to the future

I want income now

I’m in the top personal tax bracket

I’m in a low personal tax bracket

Your Tax Preference

Capital Gains

Eligible Dividends

Capital Gains

Eligible Dividends

High-Level Guidelines

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Page 17: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Issue 2 (of 5)

Asset Location & Asset Mix Strategy

Page 18: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Asset Mix in RRSP Asset Mix in Corporation

Your asset mix & asset location strategy:

Should these be the same?

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Page 19: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Over a long time frame, when the assets at stake may add up to significant amounts of $1 million or more (even if you are starting with much less)…

Holding fixed income in your tax-sheltered account(s) (i.e. RRSP; TFSA; IPP; Permanent Life Insurance)

Could save you $$$$ in tax!

Asset location: the long view19

Page 20: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Portfolio assumptions

Strategy

Professional Corporation

Tax Sheltered

Accounts

Tax Efficient

100% equities

100% fixed income

Tax

Backward

100% fixed income

100% equities

Page 21: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Fixed-Income holdings

Equity Holdings

Balanced portfolio

Page 22: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Investment case study

Dr. Smith started practice at age 30

– Retirement target: Age 55

– Risk tolerance: Moderate

– Objective: Use corporate savings to cover retirement needs between retirement at age

55 and RRIF withdrawals at age 72

– Corporate Savings: $25,000/yr

– RRSP Contributions: $18,000/yr

Page 23: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Corporate investments

Assumptions:

Fixed income earns 4%1

Taxed yearly at top corporate investment tax rate

Equities earn 8% 1

No capital gains are realized until retirement therefore tax is deferred

In retirement, capital gains are realized yearly

Perfect integration

Perfect integration is assumed on investment income earned by the corporation and

then distributed to shareholders as dividends

–1Rates of return for fixed income and equity are for illustration purposes only, and may not be indicative of the actual rates of return these asset classes would generate.

Page 24: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Pre-tax investment balance - the numbers illustrated

After 25 years (at Dr. Smith’s retirement age 55) the difference between a tax efficient and tax backward portfolio is about $500,000.

$-$500,000

$1,000,000$1,500,000$2,000,000$2,500,000$3,000,000$3,500,000

Prof Corp RRSP Total

Tax Efficient

Tax Backward

Page 25: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

After-tax investment balance - The numbers illustrated

If all amounts were distributed from the corporation or withdrawn from the RRSP in a lump sum, the difference in after-tax funds between the tax efficient and tax backward portfolio is almost $500,000.

$-

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

Prof Corp RRSP Total

Tax Efficient

Tax Backward

Page 26: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Another tax minimizing optionIndividual Pension Plans (IPPs)

An IPP is a defined benefit pension plan sponsored by

your professional corporation on your behalf (in your

capacity as an employee).

IPP Contributions:

Determined by an actuary

Based on age, years of service, employment income,

etc.

Tax-deductible to the corporation

Page 27: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Individual Pensions Plans

Advantages:

Contributions generally increase with

age and can far exceed maximum

RRSP contribution limits

Additional contributions when

initiating IPP or at retirement may be

possible

Tax deductible contributions

increase, as necessary, if returns are

below 7.5%

Creditor-proof

Disadvantages:

Reduced withdrawal flexibility

(compared to an RRSP)

Contributions must be made in

accordance with actuarial valuations

Administrative and actuarial costs

Complexity

Page 28: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

IPPs - Who can benefit?

Current service

– Are you age 40+ and interested in increasing your registered

savings?

Past service

– Have you been incorporated for at least 10 years?

Terminal funding

– Are you planning to retire early?

Return requirements

– Are your registered investments likely to earn 7.5%?

Page 29: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Consider funding a corporately-owned policy with “cheaper” corporate surplus dollars (compared to personal dollars) more tax-efficient

Earn no annual accrual taxes—your investments grow tax-sheltered within the policy

Consider holding fixed income within the permanent life insurance policy, due to its tax-exempt status

Start early in your practice—and never worry about increased insurance costs

Another Option to ConsiderCorporate-owned permanent life insurance, paid with corporate dollars:

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Page 30: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Another Option to Consider:

Corporate-owned permanent life insurance

Advantages:

Excellent estate planning tool

Good “back-up plan” for retirement income–especially in conjunction with sheltering interest income

Access to liquidity

… a quick example follows…

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Page 31: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Assumptions

Male and Female both age 45, death benefit paid on

death of surviving spouse (joint-last-to-die)

Investment of $100,000/year for 10 years

Fixed income return of 3.2%

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Page 32: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

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Page 33: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Tax-minimizing options - Permanent Life Insurance

Investment earnings and growth within the policy are tax-sheltered,

reducing current taxes The death benefit is paid tax-free to the corporation The death benefit less the adjusted cost basis is paid as tax-free

dividends to your beneficiaries up to the Capital Dividend Account

balance Money within the policy can be invested in fixed income or equity-

linked accounts. You can adjust that investment mix without

realizing taxable capital gains.

Page 34: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

While maintaining the same overall portfolio risk, tax preferences guide us to position the assets as follows:

Put investments which generate interest and dividends in the

Tax Sheltered Accounts

Put investments which generate capital gains in the

corporate investment account

Asset Mix in the Tax Sheltered Accounts and Corporation

What’s the bottom line?

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Page 35: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Issue 3 (of 5)

Your Compensation Decision

Page 36: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

“Salary versus Dividends” Compensation in the News

“Rethinking RRSPs for business owners:Why taking a salary may not make sense”

“Paying yourself in dividends”

“A radical way for biz owners to pump up retirement savings”

“A Taxing Business Decision: Salary or Dividends?”

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Page 37: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Current Tax:Gap on active business income

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Page 38: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

No Canada Pension Plan contributions before retirement - or benefits in retirement. Must consider implications of losing CPP throughout your retirement years

No possibility of RRSP or IPP contributions

Dividend payments could impact Health and Welfare Plan

If this is your strategy, how will you create sustainable and tax-effective retirement income?

Taking only dividends before retirement:

Some implications

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Page 39: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Our Value Proposition:

Providing expert advice on your compensation decision, and partnering with you to implement effective strategies

Many physicians start with salary… and gradually convert to dividends

Your MD advisor can add broad perspective to your compensation decision—your tax advisor should play a role, too

If you change your compensation strategy—make sure your investment / product mix is adjusted to match

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Page 40: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Issue 4 (of 5)

Other Considerations

Page 41: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Other considerations

Should you contribute to an RRSP?

allows for tax-sheltered investments

earned income means you contribute to CPP

RESP vs. dividends?

Canada Education Savings Grant of 20% on RESP

Funds need to be used for education

Dividends allow flexibility on payments

Tax-Free Savings Accounts (TFSA)?

Health and Welfare plans?

Real Estate? Paying down personal debt?

Page 42: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

MD Advisor MD Portfolio Manager MD Insurance Consultant MD Estate & Trust Advisor MD Referral Network

– Canadian Medical Foundation

– Electronic Medical Records

– Banking Solutions

Issue 5 (of 5)

Your Personalized MD Team

Page 43: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Your Personalized MD Team43

Page 44: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Next Steps

If you’d like to explore how some of these investment or wealth management strategies can be tailored to your individual circumstances, let your MD advisor know

We’ll arrange for additional MD specialists as necessary

We are happy to work with your existing tax and legal advisors as required

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Page 45: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Thank you!

MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca.

The information in this presentation is for information purposes only and is not intended to be used as direct investment, legal or tax advice. Please contact your MD Advisor before acting upon any of this information or before implementing any investment or tax strategy.

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Page 46: Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

Tax-Wise Investingfor Incorporated Physicians

Questions?