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For the past few years I know you have been inundated with all the great benefits of incorporating and how it will change your financial world. Like many professionals, you made the “incorporation leap” and now that you are a few years down the road, you are asking yourself: “Is this all there is? Am I missing something? What is everyone else doing?
These are all great questions and of course the answer varies from person to person but overall this is a great time to be in the “asset accumulation stage”.
Many of you have repaid your student debt and may have a mortgage that has a low interest rate and therefore not in a rush to repay. You are saving for your children’s education in RESP’s and, depending on your remuneration strategy, you are fully contributing to your RRSP’s and retirement is not in the cards in the near future. You also could be in a situation where you have more responsibilities (dependents, aging parents, financial obligations) and therefore more planning is needed for the “what if” scenarios.
Where do we begin? Start with a self-evaluation to reassess what your life and financial goals are. Considerations could include: Timeline to retirement, sabbaticals, maternity / paternity leave, or a slow-down period.
By evaluating these type of considerations, you can then determine where you need to go. Keep in mind that life can sometimes introduce a different plan, so review and revise regularly. Sometimes it is not all about investing and savings but more about lifestyle and choices. Research shows the families that spend time updating their financial plans when required are significantly better off in retirement and in personal wellness.
Income splitting / Family Plans: When the corporation was initially setup, did you consider all of the family members that were eligible to become shareholders? Do you have more children now? Once your children are 18, you have the option of paying out a portion of retained earnings to them as a dividend and depending on their taxable income levels there may be significant annual tax savings. In Ontario (each province varies) children and parents of the physician are eligible to become a shareholder and have the ability to receive dividends. Parents may now be at a point in life where they are retiring or have lower income levels, their taxable situation has changed significantly and is worth reviewing.
Tax Deferral: If you don’t need all of the income for personal reasons, leave it behind in the corporation. By making a remuneration plan and sticking with it, you can turn your residual savings into investment accumulations. This will automatically defer tax until you do need to access the funds and allows you to invest and grow your savings. With a sound financial plan you can optimize personal withdrawals for when you do need the funds and take advantage of lower tax rates, enabling absolute tax savings
Tax Changes: Is anyone reviewing new or updated tax changes that may affect either the professional corporation or the individual family members? In the past year there was a significant change to dividend rates and tax changes are sure to come – are you positioned correctly?
Insurance: Do you have sufficient insurance coverage? What happens if you are disabled, critically ill or worse? Will the family be able to financially cope? This is the stage where cash flow is the greatest so you should be contemplating a permanent insurance strategy that allows you to cover your insurance needs for life and that you have appropriately planned for your estate.
Estates: Do you have your Wills in place (including Living Wills)? Who has been chosen as the executor? Administering an estate is a complicated process that takes a significant time commitment as well as specific expertise in order to perform. Give this special consideration.
Regular Savings Schedule: Are you regularly contributing to savings and investing (corporate investment accounts, RSP, RESP)? The impact of time can greatly enhance your asset accumulation using solid investment strategies. The impact of time can greatly enhance your asset accumulation using solid investment strategies.
You are now an experienced practitioner running at your peak. Is your operation keeping up with you? Do you have the right staff mix? Are the operating processes in place allowing for the maximum efficiency? How do you compare to your colleagues? There are many tools that can be employed to review practice methods including bookings and software enhancements. It’s important to assess the tools and equipment being used and consider the financial systems and processes in place and where to streamline (i.e. faster collections greatly improves cashflow). Sometimes the small tweaks have the largest impact over the long run.
Reviewing Portfolios Regularly: Does your investment portfolio consider the best overall options? There is definitely a strategy to what types of investments should be held in a PC vs an RSP, vs TFSA. When you are earning corporate investment income you want to ensure it is as “tax efficient as possible”. Your investment advisor and accountant (as well as your banker and lawyer) should all be working together with your financial goals in mind.
Rules of the Specific Governing Bodies: You always need to consider the rules enacted by your professional governing body. They have specific limitations on how surplus funds can be invested and you do not want to be offside and putting your corporation at risk. In particular, real estate investments have to follow specific rules.
Tax Deferred Investment Products: There are more complex investments strategies to consider. Certain products are available that can defer a significant amount of tax. Note that they are NOT appropriate in all cases, and therefore you should obtain professional advice to determine if they should form part of your investment portfolios.
Diversification: Have you considered other types of investments? Real estate, insurance products? Do these fit in with your risk comfort level?
Vacation Properties: These are common “investments” that are usually held personally. Complications can arise especially if purchasing outside of the country. Many factors come into play including the locations, their specific tax and ownership laws.
Investment Protection: As you are building up your assets, you need to consider if maintaining them in the professional corporation is the correct plan. Depending on risks (and family), you may want to utilize Family Trusts or Holdco’s (Sister Corporations) to strip out some of the value from your corporation and hold separately.
Estate Planning: With the addition of a more complicated structure and investments strategy, your estate becomes more involved. As such, it’s important to seek both a proper plan in the event of death to meet your wishes and to minimize taxes while ensuring that your executors have the ability to execute your estate.
Sabbaticals / Maternity and Paternity Leaves: Will you be able to financially adjust to having reduced income in certain time periods and take advantage of the graduated tax rates or income smoothing strategies?
Retirement Plans: A great exercise is to consider what you think will be required in assets at the date of retirement, and plan to see what you need to accumulate each year to make that happen.
There are going to be significant differences in each individual plan, risk tolerances, lifestyles, and savings strategies. If you are getting the advice that “this is the best strategy”, make sure it considers your unique and individual circumstances and that it has been customized for you.
Tax Changes Could Spell Trouble for Professional Corporations
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