wealth management services for health care professionals
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Practical wealth management strategies for Health Care professionals looking to reduce taxes and maximize family estate using tax deferrals, income splitting, incorporation, insurance and Individual Pension Plans, among other strategies.TRANSCRIPT
WEALTH MANAGEMENT SYMPOSIUM SERIES
Tax Planning for Health Care Professionals
Susan Yao-Arkilander, CFP
Investment Advisor and Financial Planner
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WEALTH MANAGEMENT WEALTH MANAGEMENT NEEDSNEEDS
Client Needs
InsuranceRetirementEstate PlanAssist
ParentsAssist
Children
Income Protection
InvestmentsWills LivingExpenses
Education
Asset ProtectionRRSP
Trusts
Special Needs
IPP / RCA
Heirs Inheritance
Charitable Giving
Taxes
Disability
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Will & Estate
ConsultantFinancialPlanner
Susan Yao-Arkilander
Health Care Professionals
Susan Yao-Arkilander’s Wealth Management Team
Domestic and International
Trust Services
Tax PlanningSupport
RBC Private Banking /
Health Care Banking
RBC Private Banking /
Health Care Banking
Insurance Specialist
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Agenda
1) Taxation:Incorporation
Tax deferral Income splitting
2) Risk Management:Identifying the risksInsurance – what type, how much and when do you need it
3) Retirement:Individual Pension Plans
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Incorporation
What is a professional corporation?
– In many instances, health professionals earn their income either as a sole proprietor or an employee of an unrelated employer
– All provinces now allow a health care professional to earn professional income through their own corporation – which is called a “professional corporation”
– Various rules exist regarding share ownership. These rules differ based on
the profession and the province
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Characteristics of a Professional Corporation
– Business restricted to the practice of the profession
– Possible restrictions on share ownership (depending on province of incorporation and professional body regulations)
– No limit on professional liability
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Benefits of PC – Marginal Tax Rate Comparisons
Province Professional Corporation
Tax rates on taxable income
Sole Proprietor Tax Rates Highest Marginal Tax Rate
Eligible Dividends from PC (over $500,000)
Ineligible Dividends
from PC (under $500,000)
Up to $500,000 Over $500,000
BC 15.5 % 31.5% 43.7% 18.5% 31.6%
Alberta 14.0% 29.5% 39.0% 16.0% 26.5%
Saskatchewan 15.5% 32.0% 44.0% 20.4% 30.8%
Manitoba 13.0% 33.0% 46.4% 23.8% 38.2%
Ontario 16.5% 33.5% 46.4% 24.0% 31.3%
Quebec 19.0% 30.9% 48.2% 29.7% 36.4%
New Brunswick 16.0% 32.5% 47.0% 23.2% 35.4%
PEI 14.5% 35.5% 47.4% 24.4% 33.6%
Newfoundland 16.0% 33.5% 47.0% 30.6% 35.6%
Nova Scotia 16.0% 35.5% 48.3% 28.4% 33.1%
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Who, should set up a PC?
• No tax benefit of setting up a PC if all after-tax income is needed for lifestyle expenses.
• Don’t set up a PC if currently receiving T4 income from an employer (hospital employee or associate doctor/dentist) – “Personal Service Business” - double taxation
• Consider a PC if at least $25,000 of annual income can remain in the corporation
• Consider a Service Corporation (eg. Hygiene Services Corporation) to income split
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Corporate and Personal Tax Integration
There is generally no tax benefit of earning income through a corporation and
paying it to the professional in the same year.
Sole Proprietor Professional Corporation
Taxable Income $100,000 $100,000
Corporate Taxes N/A ($16,500)
Dividend from PC N/A $83,500
Personal Taxes ($46,400) ($26,135)
Net after-tax funds $53,600 $57,365
2009 Ont. rates
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Tax Deferral Example
Net billings after office expenses of $400,000; lifestyle expenses and personal taxes $300,000 .
Sole Proprietor Professional Corporation
Net billings $400,000 $400,000
Lifestyle expenses and taxes
($300,000) ($300,000)
Remaining funds $100,000 $100,000
Taxes ($46,400) ($16,500)
Net funds remaining $53,600 $83,500
Additional funds in PC $29,900
2009 Ont. rates
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• Taxes are deferred until taken out as dividends and may be used in
the interim to:
– Pay down business loans, purchase equipment, make lease payments
– Fund investments, insurance, IPP
Tax deferral benefits of a PC
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Income Splitting
1) Family members employed by the PC can receive salaries
1) Family members who are “shareholders” can receive dividends
1) Each shareholder qualifies for the $750K capital gains exemption
2) IPP benefits funded by corporation qualify for income splitting
3) A “trust” can own non-voting shares of the PC with “minor children beneficiaries” – but no tax benefit of PC paying dividends to minor children
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Income splitting with minors – $10,000 basic personal tax exemption
If taxable to parent
$20,000 x 50%= $10,000
Tax payable = $4,600
If taxable to child
$20,000 x 50%= $10,000
Less basic exemption = ($10,000)
Tax payable = $0
If taxable to parent
$20,000 x 50%= $10,000
Tax payable = $4,600
If taxable to child
$20,000 x 50%= $10,000
Less basic exemption = ($10,000)
Tax payable = $0
$20,000 Capital gains$20,000 Capital gains
InvestmentAccount
InvestmentAccount
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RBC Family Trust Structure
Parent
SmithFamilyTrust
Beneficiaries
loan or gift
Tax-free Capital gains $
Trustee(s)
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• Have children or grandchildren who have little or no income
• Possess surplus non-registered capital
• Want to have access to the capital you fund to the trust
• Children or grandchildren have expenses such as private school tuition, post-secondary education and extracurricular activities
Who should consider an RBC Family Trust?
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Risk Management
Risk Exposure:
Family
Business
Estate Retirement income, capital gains tax and long term care
Premature death, disability or critical illness
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Age 30 40 55 65 75 85
Long TermDisability Long Term
Care
Critical Illness
Income Protection Asset Protection Income Protection Asset Protection
Insurance Needs
Life
Insurance
Retirement
18 | WEALTH MANAGEMENT SOLUTIONS
Typical asset allocation
Fixed Income
Non-Registered
House
Business
Real Estate
Registered
19 | WEALTH MANAGEMENT SOLUTIONS
Insurance as Another Asset Pool
Fixed Income
Non-Registered
House
Business
Real Estate
Registered
Life Insurance
Non-Registered
House
Business
Real Estate
Registered
Fixed Income
20 | WEALTH MANAGEMENT SOLUTIONS
Tax-exempt insurance
• $ 300,000 of surplus assets are repositioned and deposited over five years into a $1MM tax-exempt Universal Life Solution.
• Non-Registered balanced portfolio, growing at 6.25%, taxed at the highest marginal tax rate.
• Insurance investment growth rate of 5% - tax-exempt on a joint last-to-die basis.
Non-Registered Investment Tax-exempt life Insurance
Year Age Account Estate Value Deposit
Estate
Value
Annual return on
Estate Value
1 51 $300,000 $ 311,569 $60,000 $ 1,454,833 2,325%
2 52 323,628 60,000 1,512,407 354%
3 53 336,199 60,000 1,572,860 157%
4 54 349,306 60,000 1,636,336 95%
5 55 362,973 60,000 1,725,497 65%
10 60 440,650 1,770,726 24%
15 65 536,749 1,857,515 15%
20 70 656,007 1,977,961 11%
25 75 804,480 2,162,817 9%
30 80 989,930 2,419,550 8%
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Retirement
Individual Pension Plans
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1. Diversify the retirement strategy
2. Significantly increase retirement savings
3. Attain a planned capital accumulation for retirement
4. Corporate tax deduction – retain small business tax rate
5. Creditor Proof
6. Succession Planning
7. Assist in the sale of the business
Reasons to establish an IPP
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Suitable Candidates
Incorporated business owners
Incorporated professionals
Senior executives
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• Individuals between the ages of 40 and 71 years
• Individuals earning T4 income of $124,722
• Individuals with past service dating back to 1991
Works best for ….
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Case Study Incorporated since 1991
Earning maximum T4 income of $124,722
Contributed maximum to an RSP
Age: 55
Year Age RRSP Transfer
($)
Past Service Cost ($)
Employer
IPP Current Cost ($)
Employer
IPP + RRSP
Total
RSP Cont.
($)
RSP Total
2010 55 367,950 203,195 31,154 648,605 22,000 418,356
2015 60 44,723 1,166,621 28,753 755,423
2020 65 61,256 2,008,245 37,579 1,286,850571,145
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Investment Strategy?
Return Objective 7 1/2%
Valuation Year
Start Date
Deficit$52,200
Surplus$30,000
9%
5%
• Additional contributions can be made to shore up any deficit
• Some surplus can be retained without limiting contributions (generally up to 25% of plan assets)
2013 - Age 58Current yr cost = $38,700Deficit = $52,200Total = $90,900
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Thank you!The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness. This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change.
This presentation has been prepared for use by RBC Dominion Securities Inc.* and RBC DS Financial Services Inc. (collectively, the “Companies). The Companies and Royal Bank of Canada are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by RBC DS Financial Services Inc. which is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., and RBC DS Financial Services Inc. Insurance products are only offered through RBC DS Financial Services Inc., a subsidiary of RBC Dominion Securities Inc. *Member CIPF
Unless otherwise indicated, securities purchased from or through RBC Dominion Securities Inc. are not insured by a government deposit insurer or guaranteed by Royal Bank of Canada and may fluctuate in value.
® Registered trademark of Royal Bank of Canada. Used under licence. RBC Dominion Securities is a registered trademark of Royal Bank of Canada. Used under license.
©Copyright 2008 Royal Bank of Canada. All rights reserved.