Monthly Archive: February 2018

Case Study: How dividend tax changes hurt two Hamilton Physicians

This is a real-life situation from last week.  I’ve changed the names and some of the personal details, but the key takeaways are the same.

By now, all business owners and physicians have heard about the proposed passive tax changes (we’re expecting to hear the details during the upcoming budget).  But there was one change effective January 1, 2018 that has had a very real impact on business owners/physicians.  Tax on split income (TOSI)This is a real-life example (using fake names) from a meeting last week:

Client Profile
Dr. Mike Jones (45 years)
Dr. Emily Jones (43 years)
2 Children, 10 & 8

Client Circumstances
Mike & Emily met while attending medical school at The University of Florida.  Upon their graduation in 1996, they immigrated to Hamilton, Ontario.  Mike has been a full time pediatric specialist in Canada since 1999.  While Mike was building his professional practice in Hamilton, Emily stayed home to raise their brand new babies.  Fast forward, the children have gotten older and Emily is back at school to re-qualify as a physician (OBGYN) and is now in residency (for another 2 years).

Both Mike & Emily are shareholders of the same Medicine Professional Corporation.  While the family has earned one income, the corporation paid a dividend to both Mike & Emily for the past several years (this has been ‘normal’ tax planning for many years).  This type of income planning is commonly referred to as ‘dividend or income sprinkling.’

I sat down with Mike and Emily back in early 2016 to talk more specifically about their retirement planning (ie. savings, tax, wills, etc.) and review their insurance.  Given Mike is the only income earner for the family (until Emily becomes a full time physician), we all felt it was important to make sure he had adequate life, disability and critical illness insurance to make sure his family is protected in the event of a catastrophic health event (or death).  We implemented some term life insurance, a maximum long term disability contract with the Ontario Medical Association (OMA) and a critical illness insurance contract.

What Happened?
Effective January 1, 2017, the Liberal Government implemented new rules for dividends (referred to as “Tax on Split Income” or “TOSI”).  The biggest impact on Mike and Emily was the change of definition of “specified individual” which now excludes Emily’s ability to receive a dividend from the Medicine Professional Corporation (even though she’s a shareholder and a physician).

The new rule requires that Emily to satisfy a “reasonableness” test:

  • The work performed by the individual (min 20 hours per week);
  • The property contributed directly or indirectly by the individual (their corporation owns no property);
  • The risks assumed by the individual in respect of the business (not applicable);
  • The total amounts already paid to or for the benefit of the individual in respect of the business (not applicable); and
  • Any other factors that may be relevant.

Since Emily is a resident (and earning a salary from the hospital), she does not satisfy the reasonable test outlined above (if she were able to work 20 hours per week (in addition to the 60+ hours resident doctors currently work), it would be considered ‘reasonable’).

Why is raising a family not contribution? My friends at Moody Gartner said the following:

“Finally, as has been common with our existing government, a gender-based analysis commentary is included as part of the TOSI proposals:

Data show that men represent over 70% of higher-income earners initiating income sprinkling strategies, and women represent about 68% of recipients of sprinkled dividends (and 58% of recipients of income derived from trust and partnerships). While this income is of benefit for recipients, it also creates incentives that reduce female participation in the workforce. Increased participation of women in the workforce is a source of economic opportunity for individuals and is a major driver of overall economic growth.

We had to read the above twice to make sure the government was serious when they produced such commentary. Really? This statement is shocking especially to members of our firm who have children and stay-at-home spouses. Without exception, the decision for members of our firm who have stay-at-home spouses was made for the betterment of the family as a whole with tax impacts not at all being part of the analysis for the resulting decision. To suggest that the income-sprinkling proposals will contribute to incentives for stay-at-home females to enter the workforce is nonsensical and offensive (notwithstanding that the authors are not economists and have not studied gender-based issues but instead rely on real life and common sense).” (source)

Conclusion
As a result of this change in tax rules, I received a call from Mike and Emily last week saying that due to their increased tax burden (caused by the elimination of dividend sprinkling) they need to cancel the critical illness insurance that was intended to protect them.

Personally, I’m outraged.  We have two highly trained individuals who immigrated to Canada and help our children/families each day.  Despite their efforts to move ahead with proper planning and implement strategies to protect their own family, the rug has been ‘pulled out’ from under them, leaving their family at a financial risk if something unexpected happens to Mike.

Is this what the Liberal government intended?   Why are we treating our physicians this way?

 

 

Invitation: Burlington Dads Education Session – Financial Planning

Over the past 15 years I’ve been doing financial planning for primarily physicians and business owners.  Over the past 6 years, financial advisors, investment advisors and accounting firms from across Ontario hire my firm to develop a financial strategy that includes retirement income and tax (for typical families and business owners).  75-80% of my business are referrals from these advisors, so I have a tremendous amount of experience learning the inner workings of various planning firms

Which brings me to my point…….

Do Burlington dads know how advisors get paid?  How much?  What should you expect in return for those fees?   Why doesn’t your accountant proactively offer tax planning advice?  Do you know exactly how you advisor manages your investments?

I do between 12-20 new financial plans for families every month.  It always surprises me how little is known about the financial services industry.

I’m more than happy to host an education session at my office in Aldershot.  No cost.  No sales pitch.  Simply education for Burlington Dad’s.

When: Wednesday February 28th
Time: 7:00pm (1 hour)
Location: 678 Spring Gardens Road, Burlington (next door to Easterbrooks, behind Royal Botanical Gardens)

Please either send me an email (blaundry@blfinancial.ca) to RSVP or click this link to add the event to your calendar.  If you have specific questions you want answered, I can add those questions to my presentation.

Looking forward to meeting some of you guys!

Complete your Will & Power of Attorney in 15 minutes!

In 2016, a survey was conducted and determined that 56% of Canadians do NOT have a will (or power of attorney).  Below is an excerpt from RBC Insurance explaining the consequences of dying without a will:

“Many people incorrectly assume that if they were to die without a Will their estate would simply pass to their spouse. However, this would only happen for assets that were held jointly with right of survivorship with the spouse.

In Canada, if you die without a Will you are considered to have died “intestate.” Simply put, this means that your provincial government decides how your assets will be divided—and not you.

Each province has intestacy rules that define your estate’s beneficiaries and how much each is to receive. Usually, this means your legal spouse and biological and adopted children will likely end up with your estate’s assets. Intestacy rules, however, do not take into account any intentions you may have for distributing your assets. Even worse—intestacy can result in additional legal costs for your beneficiaries.

Most provincial intestacy rules do not recognize common-law spouse status, so he or she may be left out of the estate entirely. However, in most provinces, a common-law spouse may petition the courts for support as a dependent, leading the estate into litigation and further costs.

No matter what your family situation, intestacy does not take into consideration any intentions you may have for the distribution of your estate. For your peace of mind today and your family’s peace of mind tomorrow, making a Will is an easy, inexpensive solution.” (source: https://www.rbcinsurance.com/insuranceneeds/insurancewill/dying-without-will.html)

Over the past several months I’ve been working with the founder/owner of a company called “Willful”.  This company provides Canadian families the opportunity to get a will completed online for as little as $100 (mirror wills for spouses costs $250).  The online experience is so simple and takes no more than 15 minutes (below is a screen shot of the simple ‘point-and-click’ method).

An example of the very simple point-and-click process offered by Willful

To be clear, I recommend having an estate lawyer draft a personalized will and power of attorney (that’s what I did), but this service gives clients the ability to get a will completed quickly and effectively without the huge costs.

I have no ownership or financial interest in this company or product.  As a trusted advisor, my job is to help people arrange their affairs and this service provides a simple and cost effective solution.

Use my promo code “laundry” and you will receive a 10% discount.