Tax Wise Investing –
for Incorporated
Physicians
Presented by:
Dave Rose, CFP
Senior Financial Consultant
Wednesday October 24, 2012
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™
 Created in 1969 to manage the retirement finances of CMA members
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EQUITY
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billion inUS
assets
for over POOL
100,000 physicians and their
families
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non-commissioned advice and world-class investment management at a very
low price
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members
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“ 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 Peters
President and Chief Executive Officer
1
Source: MD Physician Services Loyalty Survey,
November 2011.
Why MD?
 Engineered exclusively for physicians
–
–
–
Over 40 years of experience working for physicians and their families to
provide the advice and services
you needUS EQUITY POOL
MDPIM
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
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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.
Tax-Wise Investing
for Incorporated Physicians
Dave Rose, CFP
Senior Financial Consultant
6
Managing your wealth: Purpose
7
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
8
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
Issue 1 (of 5)
Understanding Tax
on Investment
Income
Tax impact of traditional investments
2012 Tax Rate Comparison
Corporation
Individual
Active Business Income
<$500,000
>$500,000
15.50%
27.50%
45.00%
45.00%
Investment Income
Interest
Non-eligible dividends
Eligible dividends
Capital gains
47.00%
33.33%
33.33%
23.50%
45.00%
33.00%
26.00%
22.50%
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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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Understanding Tax on Investment
Income
Individual: Top Tax Bracket 50%
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Understanding Tax on Investment
Income
Corporate Intermediary – all tax brackets 50%
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Understanding Tax on Investment
Income
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Understanding Tax on Investment
Income
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Match your situation and your
tax preference:
High-Level Guidelines
Your Situation
Your Tax Preference
I want to defer tax to the future
 Capital Gains
I want income now
 Eligible Dividends
I’m in the top personal tax bracket
 Capital Gains
I’m in a low personal tax bracket
 Eligible Dividends
Issue 2 (of 5)
Asset Location
& Asset Mix
Strategy
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Your asset mix & asset location
strategy:
Should these be the same?
Asset Mix in RRSP
Asset Mix in Corporation
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Asset location: the long view
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!
Portfolio assumptions
Strategy
Professional
Corporation
Tax Efficient
100% equities
100% fixed income
Tax
Backward
100% fixed income
100% equities
Tax Sheltered
Accounts
FixedIncome
holdings
Equity Holdings
Balanced portfolio
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
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.
Pre-tax investment balance the numbers illustrated
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$-
Tax Efficient
Tax Backward
Prof Corp
RRSP
Total
After 25 years (at Dr. Smith’s retirement age 55) the difference
between a tax efficient and tax backward portfolio is about $500,000.
After-tax investment balance - The
numbers illustrated
$3,000,000
$2,500,000
$2,000,000
Tax Efficient
$1,500,000
Tax Backward
$1,000,000
$500,000
$Prof Corp RRSP
Total
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.
Another tax minimizing option
Individual 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
Individual Pensions Plans
Advantages:

Contributions generally increase
Disadvantages:

with age and can far exceed
maximum RRSP contribution limits


(compared to an RRSP)

Contributions must be made in
Additional contributions when
accordance with actuarial
initiating IPP or at retirement may
valuations
be possible

Administrative and actuarial costs
Tax deductible contributions

Complexity
increase, as necessary, if returns
are below 7.5%

Reduced withdrawal flexibility
Creditor-proof
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%?
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Another Option to Consider
Corporate-owned permanent life insurance, paid
with corporate dollars:
 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 taxsheltered 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 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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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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Tax-minimizing options Permanent Life Insurance

Investment earnings and growth within the policy are taxsheltered, 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.
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Asset Mix in the Tax Sheltered Accounts
and Corporation
What’s the bottom line?
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
Issue 3 (of 5)
Your Compensation
Decision
36
“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?”
37
Current Tax:
Gap on active business income
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Taking only dividends before
retirement:
Some implications
 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?
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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
Issue 4 (of 5)
Other Considerations
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?
Issue 5 (of 5)
Your Personalized
MD Team





MD
MD
MD
MD
MD
Advisor
Portfolio Manager
Insurance Consultant
Estate & Trust Advisor
Referral Network
– Canadian Medical Foundation
– Electronic Medical Records
– Banking Solutions
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Your Personalized MD Team
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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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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.
Tax-Wise Investing
for Incorporated Physicians
Questions?