Tax Matters V6 N3

Mike Lakhaniand his Team of Specialists.

Tax Advisors to theDental Community

Volume 6, Number 3InThisIssue:How Much Do You Needto Retire? p. 3Dr. Huang Needs $108,000 Annually DuringRetirement p. 4Bonuses vs. Benefits – Advantages of a Health Spending Account p. 6

Assante_V6N3_NOV10:Tax Matters 22/11/2010 5:31 PM

Tax Advisors to the Dental Community 3

Editorial

How Much Do You Needto Retire?

Retirement represents a very special time in lifewhen you can relax after a busy career and reflectupon your accomplishments. New opportunities

present themselves for you to enjoy a lifestyle youworked so hard to earn. It could include more travel,enjoyment of hobbies, time with family and friends, orperhaps time devoted to charity or faith. It is a time ofself-actualization to accomplish a lifetime of goals anddreams, and to give consideration to the legacy you willleave for others.

However, to fully enjoy your golden years, you shouldhave a sense of confidence that your finances have beenwell looked after. In many respects, retirement planningis about maintaining your independence and dignitythroughout your lifetime.

At times you may wonder, “Do I have enough toretire? How long will my money last? How much do Ineed to save for retirement?” These are very importantquestions and require thought and planning to give youthe best chance of enjoying retirement to its fullest.

There are many factors to consider when developinga retirement plan that pose a risk to achieving your goals:

• Spending Patterns• Inflation• Longevity• Investment Returns & Volatility• TaxationThe key is to recognize there are some factors that we

cannot control and others that can be controlled, andeach has its own characteristics.

Spending patterns may be the largest determinant ofhow much capital needs to be saved to meet yourretirement income needs. For example, someone whoneeds $150,000 per year will need to save twice as muchas someone who needs $75,000. While this seemsintuitive, it is extremely important to calculate howmuch is needed to cover not only fixed annual expenses(such as property taxes, food, clothing, auto, insurance,etc.) but also discretionary expenses (such asentertainment, recreation, travel, dining out, etc.). Thissimple yet important analysis is critical in building arealistic retirement plan.

At today’s inflation rate, the cost of goods andservices will double over 25 years.

Advances in medicine and health care mean we areall living longer. For a 65-year old couple, the medianlife expectancy for the last survivor is 91 years old. Thesedays, it is possible to live as many years in retirement as

working years! It requires a lot of capital to provideincome for 25 to 30 years from savings alone.

When calculating a retirement target, it is possible touse a simple rule of thumb—do not spend more than 4%of your initial capital per year. For example, an incomeneed of $100,000 per year requires $2.5 million investmentassets. While this may seem like a lot, it is a realisticamount given the financial risks mentioned above.

So rather than feeling victimized by risks beyondone’s control, we can address risks that are within one’scontrol. Investment assets will last longer using abalanced portfolio containing stocks and bonds; stocksprovide the ability to protect purchasing power overtime, and bonds provide protection of capital. Volatilityerodes portfolio values while consuming capital, so it’simportant to choose investments to minimize volatility.Finally, tax planning can be utilized to effectivelyminimize the tax burden over one’s lifetime.

The key to successful retirement planning is toidentify your needs and carefully assess the risks withinand outside your control. This is one of the mostimportant tasks we spend time on for our clients toensure a lifetime of hard work really pays off.

In this issue of Tax Matters For Dentists, Chris Molloypresents a case study to demonstrate how effective taxplanning in retirement can greatly enhance lifetimeincome and provide an improved sense of confidenceduring this important phase of life. Also, we are pleasedto include a guest writer, Sandie Baillargeon to thisedition. Sandie is a business analyst and dental practicemanagement advisor at her firm Dental OfficeConsulting Services. Sandie comments on the potentialpitfalls of incenting staff with traditional bonusmethods, and offers the advantages of a HealthSpending Account instead.

For a second opinion on planning your retirementincome or other matters to "Align Your Practice with YourLife ", please do not hesitate to contact my office at (905)273-6605 or electronically at [email protected] orwww.ddstaxes.com.

Mike Lakhani, B.Comm, F.C.C.A., C.G.A., CFP, RFP is VicePresident, Senior Financial Advisor with Assante FinancialManagement Ltd. Mike has over 20 years experience as af inancial advisor working in the Mississauga area. Mikespecializes in tax, estate and investment planning for the dentalprofession. You can contact him at 905-273-6605 or via email [email protected]

Mike Lakhani, B.Comm., F.C.C.A., C.G.A., CFP, R.F.P.


4 Tax Advisors to the Dental Community

Case Study

Chris Molloy, CFP

Dr. Huang Needs$108,000 AnnuallyDuring Retirement

Dr. Huang and his wife were looking forward toretirement after 30 years of running theirsuccessful dental practice. It was surprising to

them how quickly time had passed, they certainly didn’tfeel like seniors, in spite of the fact they each hadcelebrated their 65th birthdays. As fans of the TorontoBlue Jays, they planned to spend much more timewatching games at the ball park tracking their favouriteplayers and stats.

Dr. Huang recently sold the shares of his practice for$1 million. Dr. Huang incorporated years ago and addedhis wife as a shareholder. Steps were taken prior to thesale to “cleanse” the company to ensure both spouseswere eligible for the Capital Gains Exemption. Forexample, Dr. Huang was able to utilize the provisions of“terminal funding” to top-up the Individual PensionPlan (IPP) by an additional $75,000 to clear the lastremaining investment assets from the company (see theprevious edition Volume 6 Issue 1 for additional detailson terminal funding). As a result, the sale was completedon a tax-free basis.

ProblemA couple of years before putting the practice up for sale,Dr. Huang and his wife wondered whether they wouldhave enough funds set aside to meet their retirementincome needs. Without a traditional employer pensionfor either of them, all of their retirement income wouldbe derived from Dr. Huang and his wife’s savings (asidefrom modest government pensions). It was importantto know whether their money would outlast them, orregrettably, if the opposite might occur.

After a fair and reasonable assessment of theirspending patterns, the Huang’s anticipated fixed annualexpenses of $72,000 per year to cover typical items suchas property taxes, utilities, food, clothing, auto, andinsurance premiums. In addition, they wished toallocate $36,000 per year towards discretionaryexpenses, such as season’s tickets for Blue Jays games,travel, entertainment and dining out.

With various sources of savings available, would theHuang’s have enough to last for potentially the next 30years? When would be the best time to convert theirRRSPs to RRIFs? What would be the best solution formoney inside the IPP? All of these questions needed tobe addressed.

OpportunityThere are many variables beyond the control of retirees,such as longevity risk, inflation risk, and investment risk.But there are a variety of strategies within one’s control toimprove the reliability and sustainability of one’sretirement income, and to do so in a tax-efficient manner.

The Huang’s had taxable and non-taxableinvestment accounts (i.e. RRSP/IPP vs. Open). Thispresented a great opportunity to plan their sources ofincome in a manner that would minimize taxes overtheir lifetimes. If possible, we wanted to structure theiraffairs to avoid OAS clawback since this would putadditional pressure on their lifestyle spending or undueexpectations on their investment portfolio toaccommodate the reduction in benefits.

SolutionThere were various planning strategies available to theHuang’s to structure their income in a tax-efficientmanner and improve their retirement income.

Conventional wisdom suggests one should delay theconversion of an RRSP to a RRIF until age 71 to defertaxable income as long as possible. However, the Huang’scould begin RRIF income immediately and avoid a spikein their taxable income at a later date from the larger RRIFvalues. This would effectively be like income splittingwith themselves, or income averaging. While it doesresult in paying more tax in the early years of retirement,it avoids OAS clawback by allowing their taxable incometo remain below the threshold in later years. This effectalone can save thousands over their lifetimes. Based onthe minimum annual withdrawals, the Huang’s couldexpect to receive $12,000 each per year.



Due to changes inCanadian tax law a few yearsago, seniors now benefit fromthe ability to share sources ofpension and RRIF income.This allows spouses tominimize taxes. Thus, wewere able to equalize theirRRIF income for tax purposesand cause effective incomesplitting.

Another strategy is toattempt to match fixedexpenses with sources offixed income. Thisprovides a great degreeof stability andp r e d i c t a b i l i t y ,particularly desirablefor those who nolonger earnemployment income.It was suggested all thefunds from the formerIPP be used topurchase a life annuity.This would not onlyprovide a guaranteedsource of income, butit would also avoidimmediate taxconsequences ontransfers from the IPPto a Life Income Fund(LIF) for amountsabove the prescribedtransfer limit. Betweenthe CPP, OAS, andannuity income, it wasestimated the Huang’swould be able toreceive a guaranteedlifetime income of$52,000 per year fromthese sources. Thiswas sufficient to cover two-thirds of their fixed expenses.They were satisfied with this level of coverage becausethey also intended to rely on the remaining $2 millionof savings for their other expenses.

As a general principle, it is fair to say that a broadlydiversified and balanced portfolio can last 25 to 30years provided withdrawals do not exceed 4% of theoriginal value. There are various independent studies,not to mention historical empirical data, to supportclaims that this level of consumption is sustainableduring retirement. With the Huang’s remaining $2million of investment assets, they could expect to

receive $80,000 per year($24,000 split evenly fromRRIFs, and $56,000 split evenlyfrom Open investments).

The final remainingsuggestion is to maximize annualcontributions into Tax FreeSavings Accounts (TFSAs). Thiscould be accomplished simply byshifting investments from theirOpen accounts. Current lawsallow contributions of $5,000 perperson per year. Over time, theHuang’s would be able to transfer

a significant portion oftheir investments intotax-free accounts,reducing tax oninvestment income.

ResultDue to the identicalsources of taxableincome from pensions,savings, andinvestment income,we were able toprovide them with asustainable income of$114,000 per year netafter tax (exceedingtheir goal of $108,000).The Huang’s werecomforted knowingthey would be able toexceed their goal, andachieve a high degree ofpredictable incomewithout taking undueinvestment risk. Thetax planning providedrelief from drainingtheir investmentaccounts quicker thannecessary, allowing the

funds to last longer. Perhaps that little bit of extra savingswill allow them to bring their grandchildren to Blue Jaysgames on the weekends, too.

For a free consultation, please contact the LakhaniTeam at 905-273-6605 or [email protected].

Chris Molloy, CFP, is a Financial Planning Advisor with AssanteFinancial Management Ltd. Chris has over 15 years experience as af inancial advisor working in the Mississauga area. Chrisspecializes in tax, estate and investment planning for the dentalprofession. You can contact him at 905-273-6605 or via email [email protected].

Net Worth

IPP / LIF $ 275,000

RRSP / RRIF $ 600,000

Open Account (Proceeds of Sale) $1,000,000

Open Account (Other Savings) $ 400,000

Investment Assets $ 2,275,000

Home $ 750,000

Net Worth $ 3,025,000

Cash Flow Projections

Income per Spouse

Cash Flow Taxable Income

CPP $11,000 $11,000

OAS $ 6,000 $ 6,000

Life Annuity (IPP / LIF) $ 9,000 $ 9,000

RRSP / RRIF (Annual Minimum) $12,000 $12,000

Inv. Withdrawals (Open) $ 28,000($1.4M @ 4% x 50%)

Interest $ 7,000

Dividends (Grossed�up) $14,500

Capital Gains (Realized) $ 3,500

Net Income Before Tax $ 66,000 $ 63,000

Less: Personal Taxes ($ 9,000) ($ 9,000)

Net Cash Flow (per Spouse) $ 57,000

Family Cash Flow (Two Spouses) $ 114,000

Desired Lifestyle Spending $ 108,000 Goal Exceeded

*OAS Clawback avoided with taxable income below threshold ($66,733 in 2010)


Sandie Baillargeon

Advantages of a HealthSpending Account

6 Tax Advisors to the Dental Community

Hiring “the right people” can be tough andtedious work but it is arguably the mostimportant function you will ever perform. You

must have a top performing team in place to give youthe peace of mind that your patients are being welltaken care of and that you are able to do what you dobest - practice dentistry. To attract and retain highquality staff, employee compensation must include fairpractices and reward employees based on the merit ofeach individual's performance.

What happens if your practice has top performerswho are at the peak of their salary range? Cutting hoursand salaries is not the answer and bonus systems don'twork. Here are five reasons why:

1. This comment is not popular with employees, but itis worth considering, why should you give yourstaff a bonus for doing the job that they were hiredto do? It seems to me that this is a redundancy thatdoesn't make much sense and many practicescannot afford.

2. Incentive bonus plans are labour intensive toadminister. They require monitoring, analyzingand tracking. This requires that time and attentionof your manager is focused on production onlyinstead of being committed to excellence in thequality of services provided.

3. Bonuses become an expectation. If financial targetsare not achieved, employees may feel that they arestill entitled to receive a bonus. What if yourproduction is down and your practice is losingmoney and you cannot afford to provide a bonus? Ifemployees do not receive bonuses that they wereexpecting, they may view it as punitive and moraleis affected in a negative way.

4. If bonus plans are not administered well they createa sense of unfairness in your office and result inemployee unrest. The dynamics change from beingpatient focused to looking at the monetary rewards

which leads to internal competition. This is notgood for your practice. Even if you create a bonussystem where everyone at your practice receives abonus, then you are ostensibly rewarding poorperformance as well. If you have to discipline orterminate an employee, then you may run intodifficulties with employment labour laws becauseyou have rewarded the employee even thoughhe/she was not meeting performance expectations.

5. Some offices will choose to only provide bonuses tothe hygienists based on production goals. This typeof system is not patient-centered and it mayencourage hygienists to rush through patient care tomeet their production goals. It does not reward thehygienist who creates value for the patient by takingthe time to educate them about oral health thuscreating patient loyalty and trust. It also neglectsthe other supporting team members who haveworked hard to make the appointments, to preventcancellations and process the payments.

So how do you continue to motivate and retain thosestar team members while staying within your budget?Here is a win-win solution - provide your employees with aHealth Benefits Spending Account as part of youremployee benefits package. Traditional group benefitsprograms have been too cost prohibitive for many dentistsand eligibility requirements and group size often made theidea of offering health benefits not feasible or practical.

Bonuses vs. Benefits

"What happens if your practicehas top performers who are atthe peak of their salary range?Cutting hours and salaries is

not the answer and bonussystems don't work."



Health Spending Accounts provide your employeeswith the flexibility of obtaining services that suit theindividual needs of each of your employees whileproviding the dentist with a tax deduction. Youremployees will be able to choose what is right for themand not be restricted by plan designs that don't addressthe individual needs of your employees.

Health care spending accounts allow employees tomake personal decisions about their health carespending and actually save the employer money. Nowdentists can provide the same type of benefit programsfor your employees and enjoy a tax deduction. It is awin-win solution that helps dentists retain high quality

staff members. Adding a health spending account toyour personnel policies is a great way to keep the goodemployees and provide them with a meaningful rewardfor their dedication to your success.

Sandie Baillargeon is a leading authority on how to increase theeffectiveness of medical and dental business systems. Ms.Baillargeon is author of two text books, Dental Office Administrationand The Canadian Dental Office Administrator, published byNelson Canada. Sandie is the owner and operator of Dental OfficeConsulting Services, which specializes in dental business planning,staff development, consulting and continuing education seminars.Visit her website at www.dentalofficeconsulting.com or contact herdirectly at (905) 336-7624

For more information about implementing a Health Spending Account for yourself andyour staff, contact Jeff Meier or Raj Lakhani at ITCC Estate and Insurance Services.

Tel: (905) 277�7915 Website: www.ddsbenefits.ca

Are you or your staff currently paying for any of the following*:

Health BenefitsFor DentistsITCC Estate & Insurance Services Inc.

As a dentist, you may haveconsidered a health plan before, but now it's time to put one into action!

A Health Spending Account can help you controlcosts compared to traditional insurance plans.

All contributions are 100% tax�deductible to yourpractice, which can be far more tax�efficient

than claiming these medical expenses on yourpersonal tax return.

Learn how a HealthSpending Account

may be right for you and your practice.

• Prescription Drugs• Chiropractic & Naturopathic Services• Prescription Glasses / Lenses / Contacts• Laser Eye Surgery• Elderly Parent & Dependent Care

• Dermatology Services• Hair Replacement Surgery• Massage Therapists• Physiotherapist Services• Fertility Drugs and Treatment

*List of eligible services subject to change.

An Open Book…Discover how you can keep more of what you earn.

Coming this spring.

To obtain your copy, call us at 905 �273 �6605

Email: [email protected] Website: www.ddstaxes.com


Tax Matters V6 N3

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