PROFESSIONAL INCORPORATIONS (PART 2)

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.