Dear Medical Professionals:

Physicians make important decisions every day which affect their patients’ well being. When it comes to their own financial affairs however, physicians often make financial decisions without being fully informed of all the relevant facts and planning opportunities.

With this in mind, the Wealth Innovations Group have committed to publishing a series of newsletters detailing key financial planning opportunities available to medical professionals. This effort will present an easy to follow narrative of physician’s career from post-graduation to retirement. These discussions will be of interest to all medical professional as they will outline new planning opportunities or serve as a confirmation that you are on the right path.

Some of the topics of discussion will include:

  • Whether to incorporation of your practice is right for you.
  • Structuring business income to minimize taxes.
  • Developing a sound wealth accumulation plan.
  • A thorough discussion on insurance needs and strategies to minimize costs.
  • Planning opportunities to exit or sell your practice.

Every case is unique, however, by comparing your situation with our fictional case study, you may be able to discern many similarities to you r own personal circumstances. Armed with the knowledge that you acquire through these newsletters, we are confident that you will be able to analyze your personal position more effectively. Should you wish to discuss any of these topics in more detail, you are most welcome to contact us directly.

Please note that all information provided is of a general nature. You should always consult with your professional advisors to ensure that the information published within this newsletter is applicable to your personal circumstances.

The Case of the Dentists

Marc and Tanya, who were classmates in dental school, have been operating a partnership practice together for four years. The practice has been doing very well, and is now generating more income than wither partner requires to meet their current financial obligations.

Marc’s wife, Christine, has been hired to manage the office. Tanya’s husband, Ted, is not employed in the business, but is an engineer with a high technology firm. Both Marc and Tanya are earning much more income than their respective spouses.

Due to recent changes in Ontario legislation, Marc and Tanya are contemplating whether or not they should incorporate their practice. They would like to establish an efficient tax structure, while allowing themselves the ability to do what they do best - practice their profession.

They have asked our panel of experts to outline the benefits and /or drawbacks of incorporations. Some issues of concern to them are:

  • Legal liability
  • Tax deferral opportunities
  • Shareholder restrictions
  • Possibilities for income splitting
  • Life insurance planning opportunities
  • Disability insurance and group benefits

Corporate Insurance

Marc and Tanya have determined that they need to purchase life insurance to financially protect their family and their practice. They complete a financial needs analysis which determines that they each need $1 million of life insurance coverage. As they have expressed a desire to minimize insurance costs, it has been determined that term insurance is most appropriate at this time. They agree to purchase term insurance policies which are renewable every ten years. This will ensure that their premiums will be guaranteed not to increase for the next 10 years, giving them the time they require to build up their practice and accumulate more wealth. Within their term insurance contracts they have confirmed that the insurance policies are fully convertible to a more permanent insurance plan without evidence of insurability. The importance of this feature will become very evident as their practices mature.

They are also reviewing the advantages from a cost perspective of owning and paying for the life insurance policies corporately as compared to personally. They have asked the Wealth Innovations Group to do the overall analysis and present the results to them.

Marc and Tanya are both 30 years of age, non-smokers and in good health. It has been determined that Marc can purchase the insurance, on the preferred basis, for $510 a year and Tanya’s rate will be $340 given her longer life expectancy.

In Marc’ case, he will have to personally earn $1,098 on a pre-tax basis to net the $510 required for the insurance premium. This is based on the assumption that he is in the highest marginal tax bracket of 53.53% (Ontario rates). Were Marc to acquire the insurance corporately, the company would only have to earn $600. This assumes a corporate tax rate of 15% (Ontario small business rate). In summary, acquiring the insurance corporately results in a significant pre-tax savings of $498 or 83% as compared to purchasing the insurance personally.

In Tanya’s case, the results will be similar. Assuming the same tax rates, she will have to personally earn $732 in pre-tax dollars to net the $340 required for the insurance premium. Corporately, she would only have to produce $400 of pre-tax earnings, resulting in a savings of $332. Once again, acquiring the insurance corporately would result in pre-tax savings of 83%.


After reviewing the facts, Marc and Tanya decide that with all the advantages of incorporation, they should immediately begin the process of incorporating their respective practices. In our next edition, we will consider strategies to accumulate wealth within their new corporations. We will also discuss converting Marc and Tanya’s term insurance policies into Universal Life contracts with the ultimate objective of building tax-deferred investment growth within the corporately owned insurance contracts.

Incorporation Offers Major Tax Deferral

Having learned that dentists can now incorporate in Ontario, Marc and Tanya are wondering if this is the correct route for them, and what effect if any, the new regulations forthcoming may have on their decision.

Incorporation would certainly offer potential tax deferral, providing Marc and Tanya’s practice qualifies as a Canadian controlled private corporation engaged in active business, and they leave a portion of the practice’s profits within the company. If this is the case, income that would otherwise attract a personal tax rate of 53.53% would be taxed in the corporation at only 15%. When the corporation’s retained earnings are eventually withdrawn, personal tax of up to 38.53% will be applied. In the interim however, the corporation can put the money to good use.

Recent amendments to legislation governing professional corporations may allow certain groups to have outside shareholders. Assuming these outside shareholders, such as family members, have lower tax rates than the professionals, an excellent potential for income splitting will present itself.

For instance, using a family trust to hold shares in the professional dental corporation will enable Marc and Tanya to flow dividends to adult children in the future to fund post secondary education once they reach the age of majority.

An additional tax advantage from incorporation would be the capital gains exemption for qualifying small business corporations shares. This exemption can be used after Marc and Tanya incorporate and dispose of shares of the professional corporation for a gain. Providing certain conditions are met, up to $835,000 of total gains could be exempted!

Lower corporate tax rates are also helpful when it comes to paying for certain items. For example, if their practice required $100,000 of leasehold improvements, they would actually require $215,000 of personal profit to pay for them. Making these improvements through the professional corporation, however, would require only $118,000 of profit – a savings of over $97,000.

Corporations can also be effective ways of paying life insurance premiums and gold dues. Since these are not considered tax deductible, Marc and Tanya must use after-tax resources to pay for them. As an alternative, utilizing the professional corporation would mean using less pre-tax income. Annual gold dues of $5,000, for instance would require $10,800 in earnings by an individual but only $5,900 by a corporation.

Incorporation Changes to Benefit Dentists

Dentists in Ontario have been able to incorporate for sixteen years now, providing all the shares of the professional corporations were owned by the professionals. Many medical professionals like Marc and Tanya delayed incorporating, however, worried that ceasing to carry on business individually could result in additional tax on their pre-1995 deferred income. That concern had now passed as that deferred income has all been taxed.

The ability to split income with a spouse or adult child has always been a key benefit to incorporating. Prior to January 1, 2006, this tax advantage was not available to Ontario medical professionals who opted to incorporate. Ontario legislative changes now allow dentist and physician professional corporations to issue non-voting shares to a spouse, parent, adult child or a trust for minor children. These amendments will allow dentists and physicians to pay dividends to spouses, adult children and parents that will be taxed in their hands, generally at lower marginal tax rates.

A further benefit is the tax deferral opportunity on funds left in the professional corporation after the payment of the small business tax rate of 15%. The impact of compound investment returns on the extra 39 cents per dollar can, over the long term, be substantial. While tax will be payable when dividends are removed, the net amount remaining in the professional’s hands will be significantly greater than had that income been earned personally.

Incorporating does not shield dentists or other professionals from professional liability risks associated with practicing their profession. Insurers will continue to provide coverage, but they should be notified of the professional incorporation.

Comprehensive Disability Coverage a Must for Dentists

Regardless of whether Marc and Tanya professionally incorporate, careful consideration must be given to the protection of their income. After all, their greatest financial asset is their ability to earn an income. For example, were they to earn $100,000 annually, indexed at 5% over the next thirty years, they would each earn $6,643,885.

Marc and Tanya are also very aware of the risks of becoming disabled. They understand that:

  • The chances of becoming disabled for longer than 90 days at least once during their working career is 1 in 3.
  • The average length of a disability lasting over 90 days is 2.9 years.

Given their concerns, they have asked the advisers at Wealth Innovations to prepare a commentary on the primary definitions of disability, as they have been told by other colleagues that this is often the most important component of the disability contract. They have also asked for a detailed discussion regarding disability programs available to professionals as well as a review of business overhead insurance and how it might apply to their practice. Finally, they have requested that the Wealth Innovations Group make recommendations, on each topic, with respect to both their practice and their own personal circumstances.

Disability insurance contracts typically use once of the three following definitions:

  • “Own Occupation” To qualify, you must be totally disabled due directly to injury or sickness and under the care of a physician, whereby you cannot perform the substantial duties of your regular occupation. You may still qualify for benefits if you are able to work in another occupation. Individual contracts may include an “own occupation” clause to age 65 or offer it as a rider. This definition is usually offered only to certain professionals and/or higher income earners.
  • “Regular Occupation” The occupation which you are regularly engaged in at the onset of disability is the determining factor. Most basic policies will use this definition in the fire 24 months of claims, and then use the “any occupation” definition thereafter.
  • “Any Occupation” Disability for any suitable occupation according to your education, training and/or experience is the factor that determines if you qualify for benefits. Most, but not all, group contracts specify an “any occupation” definition after the first 2 years of disability.

As Marc and Tanya are high income earners, we recommend that they acquire disability contracts with an “own occupation” definition.

With respect to Marc and Tanya’s second request, there are three primary methods of acquiring disability coverage, with each category having its own unique characteristics:

Employer sponsored group benefits programs:

  • Premiums are generally cheaper than individual contracts.
  • If premiums are paid by the employer, the premiums will be considered a taxable benefit to the employee; however, the benefits at claim time will be non-taxable.
  • Qualifying for benefits is often more restrictive and usually has a 120 day waiting period.
  • Premiums and disability definitions are not guaranteed for usually more than a year.
  • Coverage will typically end when you leave your employment.
  • Come plans may have an option to convert coverage to a personal pan.

Association plans:

  • Individual disability coverage is offered to its members on a grouped basis.
  • Disability definitions and premiums are not guaranteed.
  • Premiums are usually renewable and can often increase every fiver years.
  • Individual must be a member of the association.

Personal disability plans:

  • Personal plans are typically more comprehensive than group plans.
  • Premiums and definitions of disability are normally guaranteed.
  • Personal plans are more flexible and can be customized to meet the insured’s specific needs.
  • Premiums for this coverage are usually more expensive and are subject to more in-depth medical and financial underwriting.

It is our recommendation that Marc and Tanya consider personal disability coverage as it is important to lock-in and guarantee their disability premiums to age 65. Since they are both healthy, they should easily qualify for the coverage.

The final discussion point concerns business overhead insurance and how it may apply to Marc and Tanya’s practice.

Business overhead insurance is designed to help the practice continue in the event of the professional’s disability by reimbursing the policy over for such qualifying expense as rent, eligible salaries, equipment loans and leases. Monthly benefits will be paid to the policy owner for the duration of the insured’s disability up to a maximum of two years.

With reference to premiums payments, they can be made by the individual, partnership or corporation and are considered to be a tax deductible business expense. The reimbursement of the expenses paid by the policy at claim time will be treated as taxable income, however, these expenses are deductible by the practice.

It is especially important to note that personal disability insurance insures the professional’s income whereby business overhead insurance covers the on-going expenses of the practice should the professional become disabled.

In conclusion, we strongly recommend that Marc and Tanya’s give careful consideration to business overhead coverage to ensure the continuation of the practice should either of them become disabled.

Disclaimer: The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please call to discuss your particular circumstances.

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