Recommendations and considerations Tax (1) Incorporate soon (2) Consider an income splitting option with your partner (consult your accountant and lawyer) (3) Move permanent insurance into the corporation when established, however look at tax implication if cash value exists. Ensure there are several classes of shares created for future spouse, kids. (4) Establish a corporate health trust to write off health expenses. We can set up. (5) Consider moving Calgary property into holding company. Accountant must be consulted.

LATITUDE WEST FINANCIAL

Insurance (1) Set up a critical illness plan corporately to cover 1 year’s income. Split dollar strategy. We

BY can set up. (2) Reassess the projected cash value of your insurance policy to ensure your intentions of withdrawals are being met, or if it is for estate planning. Christian Dy and Joel

Robertson

Retirement (1) You will need to build up 4-5 Million in depletable capital before retirement as a base line or in your late 50s to have approximately 220,000/year in after tax investment income. We recommend a real estate strategy, mixed with your existing multiple dental practices. We can set up. (2) We recommend growing your practice in Saskatchewan (multi-chair) to create a selfcontained business with passive cash flow.

Estate Planning (1) If your life goes according to plan you will have considerably more money than you can

spend. This is FINANCIAL where transitioning wealth to the next generation is important and the most EXAMPLE PLAN

efficient way to do that is through permanent insurance. At this time we believe you have adequate insurance for this need, however if you plan on investing in a holding company your insurance would most likely be best suited in the holding company as well. (2) In the future if you have a family, the insurance replacement based on your income is approx. 4 million. Going forward, you may want to consider adding term insurance to your plan. This will allow for no further medicals, and several conversion options. We can set up.

Recommendations and considerations Tax Recommendations (1) Incorporate in the next 3 months (2) Income split with your partner (consult your accountant and lawyer) (3) Move permanent insurance into the corporation when established. (4) Ensure there are several classes of shares created for future spouse, kids. (5) Establish a corporate health trust to write off health expenses. (6) Consider moving property into holding company. Accountant must be consulted. Insurance Recommendations (1) Set up a critical illness plan corporately to cover 1 year’s income. Consider split dollar strategy. (2) Reassess the projected cash value your insurance policy to ensure your intentions of withdrawals are being met, or if it is for estate planning.

Retirement Recommendations (1) You will need to build up 4-5 Million in depletable capital before retirement as a base line or in your late 50s to have approximately 220,000/year in after tax investment income. If you had NO current invested assets at age 28, and retired at age 58, you would need to contribute $53K/yr at 7% to achieve $5M. We recommend a real estate strategy, mixed with your existing multiple dental practices. (2) We recommend growing your practice (multi-chair) to create a self-contained business with passive cash flow.

Estate Planning (1) At this time we believe you have adequate permanent life insurance, however, if you continue to grow the taxable assets in your holding company it would be most efficient to add additional insurance. We will do an analysis on this in 5-10 years. (2) In the future if you have a family, the insurance replacement based on your income is 4-5 million. Going forward, consider adding term insurance to your plan. This will allow for no further medicals, and several conversion options.

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Table of Contents Section 1: Incorporation (1) Brief overview of incorporation benefits

Section 2: Corporate Structure Considerations (1) Income split break down and independent professional opinions (2) Analysis of life insurance move to inside the corporation (3) Analysis of Calgary house move to holding company Section 3: Cash Flow (1) Summary of current cash flow (2) Overview of dividends vs salary (3) Immediate recommendations

Section 4: Retirement Planning (1) General overview of capital required to support retirement (2) Considerations on how to achieve capital required

Section 5: Insurance (1) Critical illness insurance analysis (2) Corporate health trust overview (3) Permanent insurance considerations

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Disclaimer: we are not accountants, and any tax advice is meant to be a consideration of what to discuss with your accountant or lawyer.

Section 1: Incorporation Benefits: • • •

• • •

Detailed in section 3, there is a large advantage for drawing dividends instead of salary. Dividends are subject to lower tax rates and they don’t require CPP contribution. However, dividends do not create RRSP room. To get around this you can get similar deferred growth of investments through the use of insurance such as whole life or universal life. As well, investing inside the corporation is deferring tax by allowing for dividends not to be drawn until later in life. Detailed in section 2, income splitting is a very effective way to lower personal tax when a spouse is making less income. Putting investment properties inside a holding company will lower taxes by allowing mortgage payments to be made by retained earnings, and by the mortgage itself as well as any housing expenses being tax deductible.

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Section 2: Corporate Structure Considerations (1) Income splitting:

Income splitting is the way you can use our graduated tax system to your advantage. The more times you can split your income the lower your taxes will be. Example: You redeem 180K in Dividends •

$25,350 will be your approximate tax bill

Example: You redeem 90K in dividends and your spouse does the same •

$12,500 will be your combined approximate tax bill

We consulted with an accountant who specializes in dentists and an estate planning lawyer about your situation (serious relationship but not ready to give financial liability to partner yet) and these where the responses: Accountant: “There would certainly be an increased liability for him if they break up and she is a shareholder of his corporation. However, if she has no income, there would certainly be the potential for some big annual tax savings by income splitting with her. One option would to consider using a trust instead of direct ownership. That being said, if he is earning $250,000 he should be considering incorporating regardless of whether or not he wants to income split with his girlfriend.” Lawyer: “From a family law perspective, it doesn’t make much difference if she becomes a shareholder or not. In the event of a separation, all of the assets/debts accumulated during the relationship are subject to a 50/50 split (unless the parties agree on something different). Therefore, the value of his business could be subject to a 50/50 division, whether or not she is a shareholder of it. If they are common law spouses, I would recommend a Cohabitation Agreement. This type of contract sets out the financial situation of each party and determines how all of the assets/debts will be divided in the event of a separation. Alternatively, if she is a shareholder of the company, he could consider a Shareholders’ Agreement. This type of contract sets out what will happen to the business if one party dies, or wants to sell their shares, or wants to sell the business, etc. Perhaps it could include some language relating to a separation of the parties as well.”

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Our Response: It is definitely a challenging situation, and depending on how openly you talk about finances with your partner it may be more trouble than it’s worth, at least at this stage. But it’s definitely worth talking to your accountant/lawyer about it. (2) Analysis of Corporate Life Insurance

When a life insurance policy is active for a long period of time it creates a tax credit, and almost 100% of the money in your policy will be able to flow to your beneficiaries tax free at life expectancy. Because of this, moving insurance into the corporation makes a lot of sense because there is no tax consequence when it does flow to your beneficiaries. So it will be cheaper to pay with corporate dollars with little downside. To move permanent insurance into a corporation there is a deemed disposition of assets, so a capital gain will occur. Since your policy is young this may not be a large gain, but it is something to keep in mind because if you do decide to do it, it is best to do it soon. (3) Analysis of house into holding company:

As mentioned in section 1, the ability to write off mortgage and maintenance payments while paying with corporate dollars is attractive. The downside is that rental income is paid to the company, there will be a deemed disposition to move the house in, and if you decide to live there you will have to pay your company rent. The main barrier is the capital gain that will occur when you move the house into the holding company. If it is to be used as 100% investment property, most accountants would recommend moving it into a holding company. Capital Gain Estimate: Home purchased for 480K Home assessed at 515K Capital gain 35K Capital gain tax credit (17.5K) Taxable capital gain 17.5K Tax payable approx. $8200

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Section 3: Cash Flow (1) Summary of current cash flow

Approximatly $1100/month is left for savings, this can be increased by lowering personal taxes through incorperating.

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(2) Analysis of Dividend income vs Salary

Below is a new cash flow summary assuming that 180K was taken as a dividend, meaning that 36,250 would be retained in the company after the 13.5% corporate tax.

Note: miscellaneous expenses = insurance premiums The unallocated expenses columb represents savings. If you add this number to the retained earnings, you get an annual savings of $43,000. Compare that to the 100% salary exaple (1) where only $13,850 was retained in annual savings. These figures are estimates, and since insurance and property may be moved into the company the dividend amounts may be lower, but this is meant to show the large difference in annual tax.

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Recommendations: We advise for you to talk to an account to discuss incorporating. The tax savings are large at your level of income so even if you have to put some of the accounting fees on a line of credit it would be worth it.

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Section 4: Retirement (1) Capital Requirements

Below is a table of estimated retirement withdrawals:

The table on this page illustrates the estimated cash flow needed in retirement. The assumptions are that inflation is 2% and that you will need 120,000/yr in today’s dollars in retirement. You will need 4-5 million in depletable assets to have sufficient funds in retirement. We Chose 120,000/yr because we have seen many people in similar situations and that is what they need to live comfortably.

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(2) How to reach the goal

There are many ways to reach this amount of money in retirement and this will change over time. Christian and I both believe that your business should produce a good amount of money, and growing this could result in huge opportunity. We also recommend growing your real estate, market, and possibly insurance holdings as well to make your picture as well rounded as possible. Selecting good investments is key and we will be here to help aid in those important decisions. Section 5: Insurance: (1) Critical Illness Insurance Analysis

Critical illness insurance covers the holes in a disability plan. When we work with young dentists they often need coverage for only about the first 15 years of practice. In this time it is important to build up assets so we protect their ability to do so. We recommend to dentists 1 year’s salary in insurance to cover costs that come up and make sure everything remains on track. There are 2 ways to structure it: 1. Term (most popular is a 20 year) 2. Permanent with a return of premium (corporate) •

The corporation pays for the insurance part (50-90%), the individual pays for the return of premium part (50-10%), and after 15 years the individual has the option of returning all the premiums personally outside of the corporation. It is a good way to move money out of the corporation potentially tax free. The IRR on the return of premium portion tends to be around 25% annually.

(2) Health Trust

You can write off any health expenses when you have a corporation as long as it goes through a health trust. Group benefit plans tend to be expensive and not that worth it for our dental clients so we have found a cheap alternative that saves a lot of tax money. I imagine your health expenses are not that high now, but this is something we recommend setting up when you incorporate.

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(3) Life insurance considerations

You are currently over funding your whole life insurance policy. It is important to know how much cash is in the policy so that if you want to pay less one year to focus on another investment opportunity you understand your flexibility. You currently have 1 million in life insurance, for people in your position who are starting a family we recommend around 4 million. This is something that you could address now so you lock in your health, and this would be our recommendation if you were considering having a family. It would also allow you to get more permanent insurance if that fit your plans in the future.

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Example Retirement Plan:

Example Client 2

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Notes: Given your current situation your savings are 100% matched for your retirement goal. However, as shown on the following page rate of return changes and above average life span may cause a lack of funds in retirement. Because of this it is important to closely monitor progress and adjust saving/spending as required.

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Thank you for taking the time to see what our planning looks like. A financial plan is an important starting point that everyone should have to evaluate their progress through life.

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