2014 Tax Rate Comparison 14.52% 45.17% 27.68% 45.17% 47.38% 45.17% 33.33% 35.56% 33.33% 27.60% 23.69% 22.58% TOTAL TAX OF 44.98%

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1 Is Incorporation The Right Choice For Your Practice Agenda Presented by: Marisa Cobuzzi, F.Pl. ADVANTAGES 1 2 Should I Incorporate My Medical Practice RUNNING THE NUMBERS The Tax Deferral Advantage 2014 Tax Rate Comparison AVERAGE ACTIVE BUSINESS RATES AVERAGE INVESTMENT RATES CORPORATION INDIVIDUAL* <$ % 45.17% >$ % 45.17% INTEREST 47.38% 45.17% NON-ELIGIBLE DIVIDENDS 33.33% 35.56% ELIGIBLE DIVIDENDS 33.33% 27.60% CAPITAL GAINS 23.69% 22.58% TOTAL TAX EXAMPLE: Corporate small business rate X personal non-eligible dividend tax rate 1 ( ) X ( ) ( ) = TOTAL TAX OF 44.98% *This average tax rate represents the average top personal marginal rate as at September 30, 2014, except in Ontario where the rate above $509,000 was not considered 3 4 What Is Integration Should I Incorporate Case Studies A general tax policy designed to ensure that income earned and distributed by a Canadian Controlled Private Corporation (CCPC), is subject to (virtually) the same amount of total tax as if the same amount of income was earned by an individual taxpayer directly. 5 6

2 Case Study #1 Mary Case Study #1: Mary Illustrative Tax Rates Mary is a single GP who has been paying down debt and saving in her RRSP. She has now paid off her mortgage and is considering incorporating her medical practice. In order to meet her current lifestyle needs, Mary, along with the help of her accountant, has determined that she would need to pay herself a salary of $150,000 from the corporation. This salary level also allows for continued RRSP contributions. AVERAGE PERSONAL TAX RATES (AVERAGE BASIC PERSONAL EXEMPTION - $10,000) 25% 35% AVERAGE CORPORATE TAX RATES 14.5% 40% 45% 27.5% 7 8 Case Study #1: Mary The Numbers Case Study #1: Mary Conclusion CORPORATION YEAR CORPORATION YEAR UNINCORPORATED ONE TWO (AFTER EXPENSES) 200, , ,000 Incorporation is a valid option for Mary. SALARY (150,000) (150,000) ONGOING INCORPORATION COSTS (4,000) (2,000) NET 200,000 46,000 48,000 CORPORATE NET 46,000 48,000 TAXES - CORPORATION (6,670) (6,960) AFTER-TAX 39,330 41,040 (RETAINED IN CORP.) PERSONAL 200, , ,000 TAXES - PERSONAL (73,000) (50,500) (50,500) NET SALARY 127,000 99,500 99,500 CORPORATEL Y PERSONALLY Mary will benefit from tax deferral on the savings she retains in her professional corporation Mary can also use RRSP contributions (from her salary of $150,000) for additional tax deferral COMBINED PERSONAL & CORPORATE AFTER-TAX 127, , ,540 DEFERRAL ADVANTAGE N/A 11,830 13,540 Calculations are based on illustrative income tax rates Case Study #2 Joe and Julie Case Study #2: Joe and Julie The Numbers Joe is a young GP, married to Julie. They have three children and a large mortgage on their principal residence. To meet Joe s cash flow needs, the corporation would need to pay him a salary of $135,000 as well as a dividend distribution equal to the funds remaining in the corporation. Due to Julie s income level, Joe cannot claim the spousal tax credit. INCORPORATED INCORPORATED UNINCORPORATED YEAR ONE YEAR TWO (AFTER EXPENSES) 200, , ,000 SALARY (135,000) (135,000) ONGOING INCORPORATION COSTS (4,000) (2,000) NET 200,000 61,000 63,000 CORPORATE NET 61,000 63,000 TAXES - CORPORATION (8,845) (9,135) AFTER-TAX 52,155 53,865 DIVIDEND DISTRIBUTION* 52,155 53,865 FUNDS RETAINED IN CORPORATION 0 0 PERSONAL SALARY 200, , ,000 PERSONAL DIVIDEND * 52,155 53,865 TAXES - PERSONAL (73,000) (62,004) (62,603) NET SALARY 127, , ,262 COMBINED PERSONAL & 127, , ,262 CORPORATE AFTER-TAX INCREASE (DECREASE) IN SAVINGS N/A (1,849) (738) CORPORATEL Y PERSONALLY 11 *Non-eligible. Calculations are based on illustrative income tax rates. 12

3 Case Study #2: Joe and Julie Conclusion Key Considerations: Tax Deferral Joe says no to incorporation No savings retained in the corporation means no tax deferral, and the additional expenses of incorporation mean no tax savings Incorporation for Joe would mean more administrative work and very little (if any) tax saving In order to defer taxes, earnings must be retained within the corporation The tax deferral advantage is greater when funds retained in the corporation are taxed at the small business rate rather than the general corporate rate RRSP & TFSA Still consider RRSP contributions and the Tax Free Savings Plan (TFSA) Looking Long-Term: Realizing the Benefits of Tax Deferral Reducing tax now so you can invest the money saved and make more money over time can be - at least partially - a temporary benefit Maximize the amount you will receive personally by drawing the money out at the right time and turn tax deferral into tax savings It may be possible to withdraw funds and incur little or no tax: early retirement, leave of absence, and income-splitting The Income Splitting Advantage Share Ownership Regulations Simplified Case: The Income Splitting Advantage Legislation governing incorporation differs between provinces and includes restrictions on who can own shares of your medical professional corporation. Can family members, trusts, or even other corporations own shares Your MD advisor can provide this information as well as help with analysis. Speak to your legal advisor for recommendations regarding the structure most appropriate for you. Joe s high cash flow needs prevent him from realizing deferral benefits. We assume the corporation pays Joe a salary of $140,000 so he can maintain his RRSP contributions Julie, Joe s wife, earns no income for this example

4 Income Splitting: The Numbers Income Splitting: Key Considerations INCORPORATED INCORPORATED UNINCORPORATED YEAR ONE YEAR TWO (AFTER EXPENSES) 200, , ,000 SALARY (140,000) (140,000) ONGOING INCORPORATION COSTS (4,000) (2,000) CORPORATE NET 56,000 58,000 TAXES - CORPORATION (8,120) (8,410) AVAILABLE FOR DEFERRAL 47,880 49,590 CORPORATEL (OR PAID AS A DIV.) Y Splitting income with a spouse or adult child (or both) who is in a lower tax bracket than yours can provide for very attractive tax savings. SALARY - JOE 200, , ,000 TAXES - JOE (73,000) (46,000) (46,000) NON-ELIGIBLE DIVIDEND - 47,880 49,590 JULIE TAXES - JULIE (3,634) (4,010) AFTER-TAX 127, , ,580 INCREASE IN AFTER-TAX 11,246 12,580 PERSONALLY Kiddie tax rules negate the benefits of splitting income with minor children. Speak with your tax advisor about attribution rules which may also negate the benefits of income splitting. Calculations are based on illustrative income tax rates Physician Incorporation Myths & Facts true false Incorporation Myth #1 Greater expense deductions No! true false SAME RULES FOR DEDUCTING EXPENSES EXPENSES MUST BE INCURRED TO EARN THE AMOUNTS MUST BE REASONABLE PROOF OF PAYMENT IS REQUIRED OTHER CONSIDERATIONS: THE USE OF CHEAPER AFTER-TAX CORPORATE DOLLARS NON-DEDUCTIBLE EXPENSES (I.E. 50% OF MEALS & ENTERTAINMENT) REPAYMENT OF BUSINESS DEBT Incorporation Myth #2 Limited liability No! true false The Advantages of Incorporation PHYSICIANS STILL LIABLE FOR PROFESSIONAL ACTS LIMITED LIABILITY FOR CORPORATE CREDITORS 23 24

5 Incorporation: The Real Advantages Retirement Income Planning Tax deferral and income-splitting, plus the use of sophisticated products Withdrawals from a corporation are part of overall retirement planning. INDIVIDUAL PENSION PLANS FOR RETIREMENT PLANNING PERMANENT LIFE INSURANCE POLICIES FOR ESTATE PLANNING MORE EFFICIENT BUSINESS DEBT REPAYMENT INTEGRATE WITH OTHER TAX-ADVANTAGED PRODUCTS SUCH AS RRSPS OR INDIVIDUAL PENSION PLANS PLAN FOR OLD AGE SECURITY CLAWBACK AND CPP START DATE Advantage: Exit Strategies Advantage: Capital Gains Exemption Consider how to get the trapped corporate surplus out of your professional corporation. CONSIDER PROPERLY STRUCTURED, CORPORATE-OWNED PERMANENT LIFE INSURANCE. CONSIDER WHETHER YOU ARE ABLE TO ACCESS THE ENHANCED CAPITAL GAINS EXEMPTION. Many advisors target the $800,000 Enhanced Capital Gains Exemption as a potential retirement planning opportunity for corporations. UNFORTUNATELY MOST PHYSICIANS FIND IT DIFFICULT TO SELL THE SHARES OF THEIR PRACTICE EVEN IF THEY CAN, THE PROFESSIONAL CORPORATION MUST BE A QUALIFIED SMALL BUSINESS CORPORATION ACCORDINGLY, IT IS IMPORTANT TO FIND RETIREMENT AND ESTATE PLANNING ADVICE THAT IS TAILORED TO PHYSICIANS Dilemmas and Disadvantages - Incorporation: Dilemmas and Disadvantages - DISABILITY INSURANCE PARTNERSHIPS AND ALTERNATE FUNDING ARRANGEMENTS EMPLOYEES U.S. CITIZENSHIP POTENTIAL TAX COST LOSSES DO NOT FLOW THROUGH TO SHAREHOLDERS RISK OF CHANGES TO TAX LAWS COMPLEXITY AND COMPLIANCE COSTS 29 30

6 Incorporation: Costs Time and Money - Questions To Consider INITIAL SET-UP COSTS ONGOING ANNUAL FEES FOR LEGAL AND ACCOUNTING SUPPORT ADDITIONAL ADMINISTRATIVE BURDEN NEW BANK & INVESTMENT ACCOUNTS FOR PROFESSIONAL CORPORATION REGULAR CORPORATE TAX INSTALLMENTS AND SOURCE DEDUCTIONS ON SALARIES TAX INFORMATION RETURNS (T4S, T5S) ANNUAL CORPORATE RETURNS; DIRECTOR AND SHAREHOLDER RESOLUTIONS HOW MUCH DEBT DO I HAVE AM I A GOOD SAVER DOES MY LIFESTYLE ALLOW ME TO RETAIN A SUFFICIENT AMOUNT OF MONEY IN MY CORPORATION OVER A LONG-TERM PERIOD AM I WILLING TO SPLIT WITH MY SPOUSE AND/OR CHILDREN AM I WELL-ORGANIZED FINANCIALLY DO I HANDLE FINANCIAL COMPLEXITY WELL AM I AVERSE TO THE RISK OF LEGISLATIVE CHANGE DO I HAVE A GOOD RELATIONSHIP WITH MY ACCOUNTANT/LAWYER HAVE YOU INCORPORATED MANY PHYSICIANS WHAT EXPENSES CAN I EXPECT TO PAY FROM THE CORPORATION IN MY PARTICULAR SITUATION, HOW MUCH TAX COULD I SAVE BY INCORPORATING HOW SENSITIVE TO CHANGE ARE THESE SAVINGS COULD I BENEFIT FROM A PERMANENT LIFE INSURANCE POLICY OR AN INDIVIDUAL PENSION PLAN HOW WILL I SET UP THE BOOKS WHAT MIX OF DIVIDENDS AND SALARY SHOULD I HAVE WHAT LEGAL STRUCTURE SHOULD I HAVE FOR MY SITUATION CAN I USE THE ENHANCED CAPITAL GAINS EXEMPTION WHAT RANGE OF FEES WILL I BE EXPECTED TO PAY Is Incorporation Right For Me Questions For You Is Incorporation Right For Me Questions for your Accountant HAVE YOU INCORPORATED MANY PHYSICIANS WHAT ARE THE LIMITATIONS OF INCORPORATION IN THIS PROVINCE WHAT HAPPENS TO THE CORPORATION IN CASE OF MARITAL BREAKDOWN HOW MUCH WILL YOUR FEES BE Is Incorporation Right For You What next INCORPORATION IS A COMPLEX ISSUE. MD S GOAL IS TO ENSURE THAT YOU RECEIVE VALUABLE ADVICE TAILORED TO YOUR SPECIFIC SITUATION. WE WILL WORK WITH YOUR CURRENT ADVISOR TO ENSURE THIS IS ACHIEVED. BE SURE TO CONSULT YOUR: MD ADVISOR & PERSONALIZED MD TEAM ACCOUNTANT LEGAL COUNSEL Is Incorporation Right For Me Questions for your Lawyer 35 36

7 Why MD Your Expert Office For Total Wealth Management Strategies 2014 MD Financial Management MD FINANCIAL MANAGEMENT PROVIDES FINANCIAL PRODUCTS AND SERVICES, THE MD FAMILY OF FUNDS AND INVESTMENT COUNSELLING SERVICES THROUGH THE MD GROUP OF COMPANIES. FOR A DETAILED LIST OF THESE COMPANIES, VISIT MD.CMA.CA. THE MD EXO SERVICE PROVIDES FINANCIAL PRODUCTS AND GUIDANCE TO ELIGIBLE CLIENTS, DELIVERED THROUGH THE MD GROUP OF COMPANIES (MD FINANCIAL MANAGEMENT INC., MD MANAGEMENT LIMITED, MD PRIVATE TRUST COMPANY, MD LIFE INSURANCE COMPANY AND MD INSURANCE AGENCY LIMITED). MD FINANCIAL MANAGEMENT IS OWNED BY THE CANADIAN MEDICAL ASSOCIATION. INCORPORATION GUIDANCE IS LIMITED TO ASSET ALLOCATION AND INTEGRATING CORPORATE ENTITIES INTO FINANCIAL PLANS AND WEALTH STRATEGIES. PROFESSIONAL LEGAL, TAX AND ACCOUNTING ADVICE REGARDING INCORPORATION SHOULD BE OBTAINED IN RESPECT TO AN INDIVIDUAL S SPECIFIC CIRCUMSTANCES. MD FINANCIAL MANAGEMENT DOES NOT PROVIDE U.S.-LICENSED TAXATION, ACCOUNTING, LEGAL OR SIMILAR PROFESSIONAL ADVICE. THE INFORMATION PROVIDED IS NOT INTENDED TO OFFER SUCH ADVICE, NOR IS IT INTENDED TO REPLACE THE ADVICE OF INDEPENDENT TAX, ACCOUNTING OR LEGAL PROFESSIONALS. EMPLOYEES OF MD FINANCIAL MANAGEMENT ARE NOT PERMITTED TO MAKE ANY DETERMINATION OF A CLIENT S U.S. STATUS OR FILING OBLIGATIONS. ALL TAX CALCULATIONS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND ARE BASED ON TAX LEGISLATION ENACTED OR PROPOSED AS OF SEPTEMBER 30, 2014 (UNLESS OTHERWISE INDICATED). ACTUAL TAX AMOUNTS WILL VARY ACCORDING TO YOUR SPECIFIC FACTS AND CIRCUMSTANCES. ESTATE AND TRUST SERVICES ARE OFFERED THROUGH MD PRIVATE TRUST COMPANY, A CMA COMPANY MD FINANCIAL MANAGEMENT ALL RIGHTS RESERVED. NO PART OF THIS PUBLICATION MAY BE REPRODUCED OR TRANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC OR MECHANICAL, INCLUDING PHOTOCOPYING, PHOTOGRAPHING, RECORDING OR ANY OTHER INFORMATION STORAGE AND RETRIEVAL SYSTEM, WITHOUT THE EXPRESSED WRITTEN CONSENT OF MD FINANCIAL MANAGEMENT.. 38 Is Incorporation The Right Choice For Your Practice Questions Visit md.cma.ca to learn more about how MD can help you reach your goals 39