Financial and Tax Update
Terrace
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
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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 Background
Canadian income taxes
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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!
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Proportional or “Flat” Tax
Rates
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“Flat” tax system
Same rate applies to each level of income
Higher income = higher taxes
Examples
Consumption taxes
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Provincial Sales taxes
HST
Gas taxes
Progressive Tax Rates
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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
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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
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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!
Time Passages
Fellowship
Practicing
Physician
Resident
Medical Student
Holdco
Trust
Physician
Professional
Corporation
Retired!
Incorporation
Incorporation
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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
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A corporation is a legal entity
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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
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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
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Disadvantages of Incorporation
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There is an increased amount of administration:
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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?
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Physicians who can leave money in the
corporation (e.g. if mortgage is paid off
and/or reasonable level of living expenses)
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Tax deferral advantage
Physicians who have a lower income spouse
Physicians supporting adult children or
parents > 18 years
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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
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Income Splitting Basics
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Solution?
Move income to lower tax rates…
Pay wages to family
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Wages must be reasonable
Consider dividends
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No reasonableness test
Pay over $30,000, no tax if no other income
Income Splitting - No
Incorporation
Dr. X
$300,000
Dr.X
$250,000
$94,000
CRA
$115,000
taxes & CPP
Spouse
$50,000
salary
$12,000
CRA
$106,000
taxes & CPP
Income Splitting - Corporation
Dr. X
$300,000
Corp.
Dr.X
$300,000
$175,000
Spouse
$108,000
dividend
$61,000
$16,000
$17,000
CRA
$115,000
taxes & CPP
CRA
$94,000 taxes
& CPP
CORPORATE TAX DEFERRAL
Corporate Tax Deferral
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13.5% Corporate vs.
43.7 % Personal =
30.2% current tax savings
delay paying difference for years
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(deferral)
payment after retirement at lower tax rates
payment now to family at lower tax rates
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(splitting)
BC Corporate Tax Rates - 2010
28.5%
13.5%
$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.
0-$500k
>$500k
2011 – 13.5% 26.5%
2012 – 11.0% 25.0%
Holding Company
Holding Company
What is it used for?
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Useful for separating non-active assets
from business
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Asset protection
Capital gains exemption
$750,000 tax free!
Keep the active company clean
Excess earnings transferred tax free to
Holding company
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Investments made in Holding company
Investments in Corporation
Anything that is legal !
 Typical
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Stocks, mutual funds, real estate
Investments in Corporation
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Watch out for personal assets
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Recreational property
Automobiles
Art
Boats
Other “toys”
Corporate Taxes
Active vs. Investment Income
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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
50.0%
45.0%
40.0%
35.0%
30.0%
26.7%
25.0%
20.0%
33.3%
15.0%
10.0%
33.3%
13.3%
19.0%
9.5%
5.0%
0.0%
Interest
Regular dividends Eligible dividends
Corporate tax
Capital gains
Refundable tax
Top Personal BC Tax Rates - 2010
43.7%
43.7%
Interest
Salary
33.7%
21.9%
Capital
Gains
21.5%
Eligible
Dividends
Dividends
Top Personal Tax Rates – 2010
53.0%
40.2%
43.7%
39.0%
BC
Quebec
Ontario
Alberta
Personal Tax Rates
Combined BC and Federal Personal
Tax Rates - 2010
43.7%
40.7%
38.3%
32.5%
29.7%
22.7%
20.1%
$0-10k
Accumulated Tax
Effective Tax Rate
$10-36k
$36-41k
$5,200
15%
$41-72k
6,400
16%
$72-82k
16,000
22%
Gallow ay Botteselle & Company
Maple Place Prof essional Centre
300 - 2000 West 12th A venue
V ancouver, BC V 6J 2G2
Phone: 604-736-6581
Fax: 604-736-0152
w w w .porterhetu.com
$82-100k
18,900
23%
$100-127k
25,700
26%
$127k+
36,700
29%
BC Corporate Tax Rates - 2010
28.5%
13.5%
$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.
0-$500k
>$500k
2011 – 13.5% 26.5%
2012 – 11.0% 25.0%
Capital Dividend Account
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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?
Less
Plus
Less
Multiplied by
Less
$ Practice Income
(Practice Expenses)
Net Income
Other Income (T4, T5, etc.)
(Other Deductions)
Taxable Income
X tax rates
Total taxes
(Tax Credits )
Taxes Owing
Deductible Expense vs. Tax
Credit
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Deductible
expenses
Tax Savings is
based on your tax
bracket
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Tax Credits
Tax savings is the
same regardless
of tax bracket
Allowable Deductions From
“Business Income”
Deductions – General
Comment
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Generally speaking, the same principles
apply to business income earned by either
self-employed proprietors or professional
medical corporations
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As a general rule, most expenses incurred
are deductible if they are:
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incurred to earn business income; and
are reasonable in the circumstances; and
are allowed by the Income Tax Act.
Business Expense Summary
The following are common business expenses
for 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
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Convention expenses (2 per year)
Maintenance & repair of office +
equipment
Professional development
Professional library
Office expenses
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medical supplies, postage, stationery,
telephone, answering service, etc.
Business Expense Summary
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Salaries and employee benefits
Travel expenses
Heat, light, power and water
Insurance
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malpractice
office
practice overhead
Comment re Life insurance
Can I deduct for a “Home
Office”
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Meet one of two tests…
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principal place of business
or
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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 Summary
Automobile Expenses
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Need to determine business portion of auto expenses
Keep a travel log
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Automobile deduction limits apply:
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Travel to and from work is not deductible!
Unless you have a home office
purchased = $30,000 + taxes
Leased = limit $800 per month + taxes
Automobile operating expenses include:
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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
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Business Expense Summary
Entertainment Expenses
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Only deduct 50% of
meals/entertainment
Specific prohibition for...
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Record client names on receipts
Be reasonable
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recreation facilities
certain club dues
Avoid being “red flagged” by CRA
Convention expenses
Other Business Deductions
Available
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Examination Fees
Medical Library and Equipment
Malpractice (CMPA) Membership
Fees
Medical Expenses
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As of July 12 2010
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No more medical receipts for cosmetic
procedures
Unless due to disease, accident congenital
defects
Home renovations
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Claimed Jan 28 2009 to Jan 31 2010
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Family based
$10,000 limit
1st $1,000 exempt
Audits starting now
CRA after the underground economy
Tax Shelters
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Leveraged donations
Art donations
New rules coming
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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?
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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
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Accurate accounting of your business income & expenses
will prepare you to meet with your accountant and save
you professional fees and income taxes
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Separate business bank accounts and records
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Onus is on taxpayer to prove why the expense is valid
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Best defense in an audit is to have all receipts and logs!
Objectives of Optimal Tax
Planning
To minimize income taxes
payable and maximize aftertax 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 - 2010
Combined BC and Federal Personal
Tax Rates - 2010
43.7%
40.7%
38.3%
32.5%
29.7%
22.7%
20.1%
$0-10k
Accumulated Tax
Effective Tax Rate
$10-36k
$36-41k
$5,200
15%
$41-72k
6,400
16%
$72-82k
16,000
22%
Gallow ay Botteselle & Company
Maple Place Prof essional Centre
300 - 2000 West 12th A venue
V ancouver, BC V 6J 2G2
Phone: 604-736-6581
Fax: 604-736-0152
w w w .porterhetu.com
$82-100k
18,900
23%
$100-127k
25,700
26%
$127k+
36,700
29%
BC Corporate Tax Rates - 2010
28.5%
13.5%
$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.
0-$500k >$500k
2011 – 13.5% 26.5%
2012 – 11.0% 25.0%
Tax on Investment Income
Interest
Income
Income
$ 1,000
Corp. tax
(457)
Div. refund
267
Available cash
810
Personal tax
(265)
After-tax cash $ 545
Regular Eligible Capital
Div.
Div.
Gains
1,000
(333)
333
1,000
(327)
673
1,000 1,000
(333) (228)
333
133
1,000
905
(199) (132)
801
773
(Assumes top marginal tax bracket)
HST
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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
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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
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Saving for Retirement
Tax Tips!
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RRSP
18% earned income
Matching funds from BCMA for doctors
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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!
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IPP
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RRSP
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Defined benefit plan
Defined contribution plan
Can be much larger deductions
Retroactive lump sum payment
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One time
Tax Tips!
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TFSA
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Tax Savings Accounts – growing quickly
$5,000 annual limit
Carried over
Consider “Hot” stock tips rather than 2%
interest returns
18 yrs +
Tax Tips!
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TFSA
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Recent new rules to stop abuse
Over contribute ,
Earn money tax free
Pay a small penalty to do so
Shut down!
Tax Tips!
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BC ULC
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Very recent
College approved
Applies to Americans only
Very helpful with cross border tax issues
RDSP
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Registered Disability Savings Plan
Parents can save for disabled kids
Limit of 59 years of age
Canada disability savings grant
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Canada disability savings bond
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3-1 on first
$500 = $1,500 from government
2-1 on next $1,000 = $2,000 from government
Additional $1,000
Great leverage on family savings
RDSP
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Registered Disability Savings Plan
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Parents can now “roll over” RRSP
Normally “roll” to spouse
But if no spouse…
Limit of $200,000 into RDSP
Saving for retirement
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Saving should be a life long goal
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Consider
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2%
3%
4%
5%
of nest egg annually – OK
probably OK
you are taking risks
- how do you like cat food?
Start with what you need monthly
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Difficult to begin saving as you approach
retirement
70% rule of thumb
Compare to return on nest egg
Saving for retirement
Another 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
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2002
Most recent year stats available
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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
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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
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www.cma.ca
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Module: Personal and Professional Accounting Issues and Taxation
Tax Tips for the Medical Student, Resident and Fellow
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www.cpso.on.ca/Info_physicians/members/inc.htm
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- College of Physicians and Surgeons – direct link to
Incorporation information and applications
Contact your provincial medical association or website
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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!
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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
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604.736.0152
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E-mail:

info@porterhetu.com
www.porterhetu.com