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October 2009 - PDF 6 by linzhengnd

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									                           tax
 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
existence.
                                          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.



                                                                  www.TaxBites.ca                                                       2
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
efficient manner.
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
                                                                                                             incorporated.
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



                                                                     www.TaxBites.ca                                                               3
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
maintenance costs:
                                  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

 Difference                                        $9,927

 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



                                                             www.TaxBites.ca                                                   4
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


                                                                                                          www.CorporateLawAdvice.com               416.574.8782
                      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
AnuragGupta.com.                                    amehra@mandco.ca.
            www.AnuragGupta.com.                                  www.MandCo.ca

About TaxBites

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 info@taxbites.ca or visit us at
www.taxbites.ca.

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.


                                                                 www.TaxBites.ca                                                                     5

								
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