1. Tax Wise Investing – for Incorporated Physicians Presented by: Dave Rose, CFP Senior Financial Consultant Wednesday October 24, 2012

2. MDPIM US EQUITY POOL MD Puts Physicians First ™  Created in 1969 to manage the retirement finances of CMA members – Wholly owned by the CMA and an exclusive benefit of CMA membership – Guide more than $30 billion in assets for over 100,000 physicians and their families – Uniquely focused on driving maximum value for members through objective non-commissioned advice and world-class investment management at a very low price  Partnering with the OMA, everything we do is for the benefit of our members – MD and the OMA are natural partners in delivering value to Ontario Physicians – Currently partnering through Membership and the Insurance Alliance initiatives

3. MDPIM US EQUITY POOL The First. The Best. The Only One. “ In a recent study, 1 48% of CMA members identified MD as their primary investment firm, making us by far the dominant wealth manager for members. By comparison, only 11% identified our closest competitor.” Brian Peters President and Chief Executive Officer 1 Source: MD Physician Services Loyalty Survey, November 2011.

4. MDPIM US EQUITY POOL Why MD?  Engineered exclusively for physicians – Over 40 years of experience working for physicians and their families to provide the advice and services you need – Team approach to bring specialization and strength to achieving client goals – Among the lowest management expense ratios (MERs) in the industry  Top scores in overall customer satisfaction – Scored 770/1000 in the 2011 J.D. Power survey of full service investment firms in Canada – 5 out of 5 Power Circle ratings from J.D. Power = “among the best” in full- service firms  Our private investment counsel arm ranked number one in asset growth amongst the 10 largest private investment counsel firms in Canada MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca.

5. Tax-Wise Investing for Incorporated Physicians Dave Rose, CFP Senior Financial Consultant

6. Managing your wealth: Purpose 6

7. Purpose = Financial Independence (aka “Retirement”) Factors to consider (among others):  Your time horizon  Your risk tolerance & risk capacity  The value of professional management  Your desire to outperform  Tax considerations 7

8. Tax-wise Investing Five Big Issues 1.Understanding tax on corporate investment income 2.The asset location and asset mix strategy 3.Your compensation decision 4.Other considerations 5.Your Personalized MD Team 8

9. Issue 1 (of 5) Understanding Tax on Investment Income

10. 2012 Tax Rate Comparison Corporation Individual Active Business Income <$500,000 15.50% 45.00% >$500,000 27.50% 45.00% Investment Income Interest 47.00% 45.00% Non-eligible dividends 33.33% 33.00% Eligible dividends 33.33% 26.00% Capital gains 23.50% 22.50% Tax impact of traditional investments

11. Managing the Corporate Tax Refund Notional Accounts:  RDTOH: Refundable Dividend Tax on Hand  CDA: Capital Dividend Account  GRIP: General Rate Income Pool Note: While the corporation receives a tax refund when distributing investment income, the recipient often pays personal tax. 11

12. Individual: Top Tax Bracket 50% Understanding Tax on Investment Income 12

13. Corporate Intermediary – all tax brackets 50% Understanding Tax on Investment Income 13

14. Understanding Tax on Investment Income 14

15. Understanding Tax on Investment Income 15

16. Match your situation and your tax preference: Your Situation  I want to defer tax to the future  I want income now  I’m in the top personal tax bracket  I’m in a low personal tax bracket Your Tax Preference  Capital Gains  Eligible Dividends  Capital Gains  Eligible Dividends High-Level Guidelines 16

17. Issue 2 (of 5) Asset Location & Asset Mix Strategy

18. Asset Mix in RRSP Asset Mix in Corporation Your asset mix & asset location strategy: Should these be the same? 18

19. Over a long time frame, when the assets at stake may add up to significant amounts of $1 million or more (even if you are starting with much less)…  Holding fixed income in your tax-sheltered account(s) (i.e. RRSP; TFSA; IPP; Permanent Life Insurance)  Could save you $$$$ in tax! Asset location: the long view 19

20. Portfolio assumptions

21. Fixed- Income holdings Equity Holdings Balanced portfolio

22. Investment case study Dr. Smith started practice at age 30 – Retirement target: Age 55 – Risk tolerance: Moderate – Objective: Use corporate savings to cover retirement needs between retirement at age 55 and RRIF withdrawals at age 72 – Corporate Savings: $25,000/yr – RRSP Contributions: $18,000/yr

23. Corporate investments Assumptions: Fixed income earns 4% 1 Taxed yearly at top corporate investment tax rate Equities earn 8% 1 No capital gains are realized until retirement therefore tax is deferred In retirement, capital gains are realized yearly Perfect integration Perfect integration is assumed on investment income earned by the corporation and then distributed to shareholders as dividends – 1 Rates of return for fixed income and equity are for illustration purposes only, and may not be indicative of the actual rates of return these asset classes would generate.

24. Pre-tax investment balance - the numbers illustrated After 25 years (at Dr. Smith’s retirement age 55) the difference between a tax efficient and tax backward portfolio is about $500,000.

25. After-tax investment balance - The numbers illustrated If all amounts were distributed from the corporation or withdrawn from the RRSP in a lump sum, the difference in after-tax funds between the tax efficient and tax backward portfolio is almost $500,000. $- $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 Prof Corp RRSPTotal Tax Efficient Tax Backward

26. Another tax minimizing option Individual Pension Plans (IPPs)  An IPP is a defined benefit pension plan sponsored by your professional corporation on your behalf (in your capacity as an employee).  IPP Contributions:  Determined by an actuary  Based on age, years of service, employment income, etc.  Tax-deductible to the corporation

27. Individual Pensions Plans Advantages:  Contributions generally increase with age and can far exceed maximum RRSP contribution limits  Additional contributions when initiating IPP or at retirement may be possible  Tax deductible contributions increase, as necessary, if returns are below 7.5%  Creditor-proof Disadvantages:  Reduced withdrawal flexibility (compared to an RRSP)  Contributions must be made in accordance with actuarial valuations  Administrative and actuarial costs  Complexity

28. IPPs - Who can benefit?  Current service – Are you age 40+ and interested in increasing your registered savings?  Past service – Have you been incorporated for at least 10 years?  Terminal funding – Are you planning to retire early?  Return requirements – Are your registered investments likely to earn 7.5%?

29.  Consider funding a corporately-owned policy with “cheaper” corporate surplus dollars (compared to personal dollars) more tax-efficient  Earn no annual accrual taxes—your investments grow tax- sheltered within the policy  Consider holding fixed income within the permanent life insurance policy, due to its tax-exempt status  Start early in your practice—and never worry about increased insurance costs Another Option to Consider Corporate-owned permanent life insurance, paid with corporate dollars: 29

30. Another Option to Consider: Corporate-owned permanent life insurance Advantages:  Excellent estate planning tool  Good “back-up plan” for retirement income–especially in conjunction with sheltering interest income  Access to liquidity … a quick example follows… 30

31. Assumptions  Male and Female both age 45, death benefit paid on death of surviving spouse (joint-last-to-die)  Investment of $100,000/year for 10 years  Fixed income return of 3.2% 31

32. 32

33. Tax-minimizing options - Permanent Life Insurance  Investment earnings and growth within the policy are tax- sheltered, reducing current taxes  The death benefit is paid tax-free to the corporation  The death benefit less the adjusted cost basis is paid as tax-free dividends to your beneficiaries up to the Capital Dividend Account balance  Money within the policy can be invested in fixed income or equity- linked accounts. You can adjust that investment mix without realizing taxable capital gains.

34. While maintaining the same overall portfolio risk, tax preferences guide us to position the assets as follows:  Put investments which generate interest and dividends in the Tax Sheltered Accounts  Put investments which generate capital gains in the corporate investment account Asset Mix in the Tax Sheltered Accounts and Corporation What’s the bottom line? 34

35. Issue 3 (of 5) Your Compensation Decision

36. “Salary versus Dividends” Compensation in the News “Rethinking RRSPs for business owners: Why taking a salary may not make sense” “Paying yourself in dividends” “A radical way for biz owners to pump up retirement savings” “A Taxing Business Decision: Salary or Dividends?” 36

37. Current Tax: Gap on active business income 37

38.  No Canada Pension Plan contributions before retirement - or benefits in retirement. Must consider implications of losing CPP throughout your retirement years  No possibility of RRSP or IPP contributions  Dividend payments could impact Health and Welfare Plan If this is your strategy, how will you create sustainable and tax-effective retirement income? Taking only dividends before retirement: Some implications 38

39. Our Value Proposition: Providing expert advice on your compensation decision, and partnering with you to implement effective strategies  Many physicians start with salary… and gradually convert to dividends  Your MD advisor can add broad perspective to your compensation decision—your tax advisor should play a role, too  If you change your compensation strategy—make sure your investment / product mix is adjusted to match 39

40. Issue 4 (of 5) Other Considerations

41. Other considerations Should you contribute to an RRSP?  allows for tax-sheltered investments  earned income means you contribute to CPP RESP vs. dividends?  Canada Education Savings Grant of 20% on RESP  Funds need to be used for education  Dividends allow flexibility on payments Tax-Free Savings Accounts (TFSA)? Health and Welfare plans? Real Estate? Paying down personal debt?

42.  MD Advisor  MD Portfolio Manager  MD Insurance Consultant  MD Estate & Trust Advisor  MD Referral Network – Canadian Medical Foundation – Electronic Medical Records – Banking Solutions Issue 5 (of 5) Your Personalized MD Team

43. Your Personalized MD Team 43

44. Next Steps  If you’d like to explore how some of these investment or wealth management strategies can be tailored to your individual circumstances, let your MD advisor know  We’ll arrange for additional MD specialists as necessary  We are happy to work with your existing tax and legal advisors as required 44

45. Thank you! MD Physician Services provides financial products and services, the MD family of mutual funds, investment counselling services and practice management products and services through the MD group of companies. For a detailed list of these companies, visit md.cma.ca. The information in this presentation is for information purposes only and is not intended to be used as direct investment, legal or tax advice. Please contact your MD Advisor before acting upon any of this information or before implementing any investment or tax strategy. 45

46. Tax-Wise Investing for Incorporated Physicians Questions?