October 2009 BITE$
Financing a Practice Start-Up or Cost-Sharing vs. Partnership – Protection in a Time of
Acquistion Maximize the Small Business Deduction Critical Illness
Jamie Pritchard Anurag Gupta, LL. B. David Agius
Financing a Practice Start-Up or Health professionals in a group practice generally If you’re like most people, you probably
Acquisition, By Jamie Pritchard work in association with one another which is know of someone who has been
Understanding the financing options basically a partnership. The health professionals diagnosed or suffered from a serious
available to a health professional can will share the staff, office rent, utilities, marketing, illness. Because of this life-altering
be difficult to navigate. Some simple and possibly the profits. The overhead cost will illness, that person and their
rules of thumb can be followed to likely be cheaper than operating individual clinics. family also likely suffered from the
ensure a smooth transition whether that Keeping legal matters aside, what does this mean financial impact of their condition.
be starting your practice or acquiring for health professionals? You may have asked yourself many
an existing practice. times, “If I were diagnosed with a
Simply put. Taxation. serious illness, who would take care of
Start-Up Financing me and my family? Who would pay the
The first thing you need to determine The health professionals will not be able to utilize bills?”
is what if anything you are going to the small business deduction and will end up paying
put into the start-up of your practice. higher taxes. Continued on page 3
This can be a challenging question The best things in life are
because upon graduation your financial Continued on page 2 for FREE
resources may be limited or non
Atul Mehra, CA, CPA
Should I fix it or buy a different car?
Master Mechanic, Bjorn Holm Some people say “There Is No Free Lunch”
Not to worry at TD Canada Trust
however with proper structuring of your
for example our Health Professional
Here’s the single most reliable way to save money disability insurance premium payments
programs will finance up to 100%
on cars: Keep your clunker and drive it till it drops. there are opportunities for receipt of
of the needed costs of starting your
A decently cared-for vehicle should still be running cumulative disability beneﬁts on a tax-free
practice. There are also some great
long after the odometer has clocked 160,000 km. basis.
features to manage cash flow while
your building your practice, like a 10 Keep driving it and you save money not only
because you don’t have to make payments on a new With the Canadian government facing
year amortization of the loan, or up to
car, but also because insurance premiums are lower, immense pressure from the restructuring
12 month deferred principal payments
and in some provinces, so are registration fees and of the global economy and the Canadian
at the start of your practice or if you
federal budget deﬁcit forecasted to be over
have to take a temporary leave. personal-property taxes.
$50 billion in 2009/2010, there are many
economists who agree increases in taxation
Continued on page 2 Continued on page 4
in the long-run are inevitable. With taxes
Continued on page 2
IN THIS ISSUE Financing a Practice Should I fix or buy a Disability Insurance and
Start-Up or Acquisition different car? deductibility
Cost-Sharing or Partnership Protection in a Time of Technical Services
– Maximize the Small Critical Illness Corporation – Second
Business Deduction Business – Stay Ahead of
Why Incorporate? the Game!
Financing a Practice Start-Up or Technical Services Corporation – Your second business could be owned by a
Acquistion Second Business – Stay Ahead of the family trust where you would be able to split
cont’d from page 1 Game! the income of that business with the rest of your
family members. Also, at the time of sale of the
Anurag Gupta, LL. B.
Acquisition Financing shares of your second company, and if struc-
Acquiring another practice requires some due It is not uncommon to have multiple businesses. tured efﬁciently, you would be able to capitalize
diligence mainly to determine a value and to You may be a doctor or a dentist, and you want to on the life time capital gains exemption with the
ensure that you are paying a reasonable price sell widgets. Or you are a doctor and want to open rest of the family members.
for the practice. There are some questions you up an ultrasound or x-ray clinic. As a dentist you
want to know as a buyer and that a business may want to split the hygienist services. There is However, planning must carefully implemented
banker will request when considering assistance good news, and then there is better news, but there so attribution rules and association rules do not
with funding your acquisition. is always the ﬂip side, being the bad news. take precedence. We also have to be careful of
de facto control where the courts may deem that
Your due diligence and ask questions related The bad news is simple – if you are not properly despite the fact you were a minority shareholder,
to the following key areas, business strategies, structured, you could be sharing the small business you in fact had control over the company. It
ﬁnancial analysis, Operations, Products and deduction limit with your companies. This means is beyond the scope of this article to cover
Facilities and ﬁnally Customers, Marketing and that as a health professional you were making hundreds of court cases on associated rules.
Competition. $400,000 net, and you made additional $200,000
net with your other business, you would be Simply put – association rules may prevent you
These are some of the key areas that a business paying higher taxes on the $200,000 even if you from having effective tax planning. Plan ahead
banker will want to understand before applying had separate companies. This commonly occurs and talk to professional advisors before you
for a business acquisition loan. Typically the when you are the controlling shareholder of both launch that second business.
structure of the purchase should be completed corporations. While this article cannot conceive Cost-Sharing vs. Partnership –
as an “Asset Purchase” versus a “Share every possibility, it will provide some basic Maximize the Small Business Deduction
Purchase”. This is certainly to your beneﬁt as guidelines. cont’d from page 1
a buyer from a tax perspective but may not be
preferred by the seller. Example 1. We will assume there are ﬁve health
Zebra owns 70% of Corporation A. Zebra owns professionals in a group practice with an average
Typically health professionals can expect 51% of Corporation B. The two corporations are net income of $300,000 per professional.
between 80% to 100% ﬁnancing of an considered associated so they will have to share
acquisition, depending on the existing ﬁnancials the small business deduction (SBD), unless one
In a partnership scenario, each partner will pay
of the business and the credit worthiness of corporation claims it will take advantage of the approximately $119,980 in taxes. If each health
the new business owners. In addition TD will SBD. professional incorporates professionally, each
provide funding for working capital up to
PC shall be approximately $49,500 in taxes.
$250,000 based on 3 months of actual OHIP Example 2.
billings. Zebra owns 40% of Corporation A. Bear owns But you want to share the expenses? We do this
20% of Corporation A. Zebra owns with a cost-sharing structure that allows each
So whether you are starting a new practice or 25% of Corporation Bear owns 40% of health professional to contribute towards his
acquiring an existing one, be sure to deal with a Corporation B. The two corporations are
or her portion of the expenses. We can also
business banking professional who understands considered associated because they are controlled
structure a partnership scenario where each
business and speciﬁcally health care services. by the same group of persons – Bear and Zebra. health professional will incorporate his or her
For further information on TD’s Professional
own professional corporation and enter into a
programs, please refer to the following link There are numerous other scenarios where two partnership structure still be able to claim the
http://www.tdcanadatrust.com/smallbusiness/ corporations may be related by virtue of family small business deduction individually. A cost
professionals.jsp or strangers. As a doctor or a dentist, and assume sharing agreement is necessary to allow for the
you are professionally incorporated, you are closer small business deduction.
Jamie Pritchard is a Business Banking Advisor to making $400,000 net. With a second business,
with TD Canada Trust. He brings over 25 years whether it is a widget company, hygienist or
of business experience as an entrepreneur and an
If you are working in association with another,
ultrasound services, you may be sharing the SBD CRA would likely attribute your proﬁts at the
account executive in the ﬁnancial services and
between the two companies. partnership level and deny your small business
telecommunications industries. He can be reached
at 416-659-4770 or via e-mail at jamie.pritchard@ deduction. There are provisions in the Income
td.com Remember I stated earlier there is better news? Tax Act that will allow each individual partner
to transfer their partnership interest to a PC
under certain conditions.
The best things in life are for FREE
con’t from page 1
likely on the rise, it becomes important for taxpayers to take advantage of any tax-free beneﬁts available to them under the Income Tax Act. While
the beneﬁt of tax-free treatment of disability premiums is a relatively straight forward concept, caution should be used in evaluating the most tax
efﬁcient structure of such plans and the related provisions in the Income Tax Act.
Here is an example of a situation where the taxation of disability income can change from tax-free to taxable depending on the nature and source of
the premium payments.
Dr. Xavier is insured under a group plan which he is paid $8,500 per month if disabled. The premium is $200 per month. Dr. Xavier commenced the
insurance policy on January 1, 2006. The employee’s share of the premium is waived in the event of a disability. In April 2009, Dr. Xavier was struck
by car and was away from his practice from May 1, 2009 to August 31, 2009. During this period Dr. Xavier received disability beneﬁts of $34,000.
Situation A – Disability premiums of $200 per month are paid 100% by Dr. Xavier personally.
Tax Consequences: Total disability beneﬁts received of $34,000 during the 2009 year are received tax-free.
Situation B – Disability premiums are paid one half by his employer and one half by Dr. Xavier
Total cumulative disability beneﬁts received in 2009 $34,000
Less: Total contributions made by the employee from
January 1, 2006 to April 30, 2009 (1/2 x $200 x 40 months) (4,000)
Amount to be included on 2009 personal tax return $30,000
Tax payable (assuming high tax rate of 46.41%) $13,923
As the above example illustrates there is a trade off that needs to be considered in evaluating the best approach for each individual’s circumstances.
First off, the taxpayer could receiving a tax-free beneﬁt by having the employer pay the disability premiums, however in the unfortunate event of
a disability claim the disability payments will be taxed personally. On the other hand, by paying the disability premiums personally any future
disability claim will be received tax-free.
M & Co. Chartered Accountants recommends independent accounting and tax advisory be sought to ensure your disability plan is structured in a tax
Protection in a Time of Critical sum payment, which varies depending on the Why Incorporate?
Illness coverage you choose. Anurag Gupta, LL. B.
cont’d from page 1
The beneﬁt of this coverage is yours to use The basic answer is tax savings. Having a
Thanks to improvements in healthy living the way you want. That means you’ll have the professional incorporation allows the health
and medical science, there is a good freedom to: professional to take have more money at the
chance you would recover from a serious • complement your health-care alternatives family table at a lower tax rate. There is also a
illness and get on with your life. • hire a nurse or caregiver surplus of more money in bank at the corporate
• pay off your mortgage level. Based on a scenario where a health
Critical Illness Insurance is a product that • complete illness-related home renovations professional has made $400,000 net, there is
provides you with the funds needed to • pay for childcare and housekeeping more than $50,000 of additional funds available
ease the burden of a life-altering illness, • send your children to college or university which can be used to pay corporate debt. In
so you can focus on getting better without • provide ready cash for expensive drugs and addition, a family of four, total taxes paid is
the disruption to your lifestyle or income. treatments in the United States and abroad approximately $60,000 less taxes paid if you were
Here’s how it works. Upon survival of a If you have any questions or want the full details about
this type of coverage, please call David Agius at the
designated waiting period after the diagnosis To ﬁnd out more about our calculation, visit
Co-operators. He can be reached at 905.819.8111 or
of one of several speciﬁc critical conditions, www.TaxBites.ca.
by email at David_Agius@cooperators.ca.
such as life-threatening cancer, heart attack
or stroke, you will be provided with a lump
Should I fix it or buy a different car?
cont’d from page 1
Unfortunately, at some point the statute of limitations runs out on this particular money-saving tip. The more the car is in the shop,
and the wider the oil slick grows on your usual parking spot, the more you may think seriously about replacing the old chariot with
something, well, nicer. Meanwhile, the money you save by not buying a new car tends to be eaten up by the growing cost of keeping the
old one on the road.
The question is: Where’s the tipping point? How long does it take for the higher cost of purchasing a new car to be justified by the
growing cost of maintaining the old one?
Longer than you think. Runzheimer International, a management consulting firm that specializes in measuring travel and living costs,
runs this sort of calculation on a regular basis. Recently it compared ownership costs of a brand-new car against a similar four-year-old
car. Both were sensible sedans. The new car was assumed to cost $20,000, financed over four years at 8%. The old car was worth about
$4,500 and was assumed to be traded in as the down payment on the new one. The old car has 96,000 km on it, both cars are driven
24,000 km per year, and both get 9L/100 of regular unleaded gas.
Here’s how four years with car payments and low maintenance costs matched up against four years without car payments but higher
Old Car New Car The actual numbers are less important than the overriding
message: Those loan payments stack the deck against a
Mileage at end of four years 192,000 96,000
new car. You could encounter much higher repair costs than
assumed and still come out ahead by keeping the old one.
Total car payments $0 $18,246 If you’re confronting this question, you can use the format
above to run estimated numbers and see how they come out.
Gas and oil 3,456 3,348 Better yet, don’t bother. In the absence of a gigantic repair bill
-- you need a new engine, for example -- an old car is almost
License, registration, taxes 1,347 1,882 always cheaper to own than a new one. You can close the gap
a bit with a couple of strategies.
Insurance 3,457 3,946
Pay cash. This will reduce your total expense by eliminating
Repairs, maintenance, tires 5,022 2,744 the interest on the loan, but in order to make a fair comparison
you’d also have to take into account what else you might have
Resale value at end 451 7,408
done with that money and the interest you might have earned
if you hadn’t spent it on a car.
Total expenses $13,282 $30,166
Pay a lower interest rate. A lower rate helps. But if you
eliminated all the interest in the example above, the old car
(minus resale value) -451 -7,408 would still be about $6,300 cheaper to own than the new one
over the four-year period.
Total costs $12,831 $22,758
Source: Runzheimer International
Buy a used car. This is probably your best bet to close the gap completely. The problem is, a used car doesn’t come with a new-car
warranty, so you take on the same risks of unanticipated high repair bills that you already have with the car you’ve got.
But let’s face it: When all is said and done, most of us don’t base decisions on such a detailed accounting of the costs. Comfort, style,
image, safety, convenience and reliability -- these are the forces motivating the vast majority of Americans who decide to buy a new car.
So be it. The important thing is to choose the right car and get to the best possible deal.
For more information how you can keep your car tuned, visit Master Mechanic at 2292 A Dundas Street W, Missisauga, L5K 1R5 or
contact Bjorn Holm at 905.822.2555
Anurag Gupta, LL. B. Atul Mehra, CA, CPA
BUSINESS + TAX LAW
A N U R AG G U P TA Pr o f e s s i o n a l C o r p o r a t i o n
Anurag Gupta is Atul is a Chartered
a business and tax Accountant, specializ-
lawyer practicing in ing in advising health-
the Greater Toronto care professionals on
Area. Anurag has corporate and personal
worked in-house at tax planning mat-
the legal departments ters, tax minimization
of the Canadian Medical Association, strategies, purchase and sale of healthcare
Canadian Blood Services, and an practices. Atul Mehra holds a B.A. (Hon-
information technology company in Otta- ours) in Accounting from York University,
wa. He also has experience advising health a Canadian Chartered Accounting Desig-
professionals, technology, manufacturing nation (C.A.), Certified Public Accountant
and small to medium sized businesses designation (C.P.A) from the United States
on business, tax, privacy and trade-mark of America and is a member of the Cana-
matters. Anurag Gupta holds a law degree dian Institute of Chartered Accountants
from the University of (CICA) and Institute of Chartered Ac-
Ottawa and a Bachelors of Science de- countants of Ontario (ICAO). He serves
gree in Microbiology and Immunology on the loan committee of the Canadian
from the University of Miami. Anurag is Youth Business Foundation (CYBF), and
a member of the Law Society of Upper Consults to various public companies in
Canada and the Canadian Bar Association. the US.
To receive legal and tax advice, you should To receive accounting and tax advice, you
speak with a qualified lawyer. For more should speak with a Chartered Accoun-
information contact Anurag Gupta at tant. For more information contact Atul
416.574.8782 or email him at anurag@ Mehra at 416.727.7875 or email him at
Tax Bites is a joint publication of Anurag Gupta Professional Corporation and M&Co. Chartered
Accountants Professional Corporation. The purpose of Tax Bites is to provide business owners with
a range of topics of interest, but with a particular focus on legal and accounting matters. While Tax
Bites implies a “tax” consequence, this publication will not only endeavour to provide you with tax
efﬁcient mechanisms, but also with other matters that will allow you to operate your practice efﬁcient-
ly. Each edition will include tax bits relevant to your profession.
We plan to make our publication and other newsletters online at www.taxbites.ca. In the meantime, if
you have a burning question that you would like answered, contact Atul for all your accounting needs
and Anurag for all your legal needs. You can also send your emails to email@example.com or visit us at
The title TaxBites, newsletter and its contents are a joint-ownership of Anurag Gupta Professional
Corporation and M & Co. Chartered Accountants P.C. (the “Owners”) and is protected under copy-
right laws of Canada. The information provided in this newsletter contains general information about
certain legal, tax and other related developments. It is not intended to be a complete statement of the
law and is not a substitute for legal, accounting and tax advice. No part of this newsletter may be
republished or reproduced without the prior written permission of the Owners.