1. Incorporation – The Right Choice for Your Practice? Presented by: Mark Donato, CFP Senior Financial Consultant Wednesday September 26, 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. Agenda  Advantages of incorporation – Tax deferral – Income splitting  Incorporation myths and facts  Is incorporation the right choice for me? – Questions to consider  Q&A – MD Advisor Panel

6. Should I incorporate my medical practice? Running the numbers

7. 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% Total tax example: Corporate small business rate x Personal non-eligible dividend tax rate 1 - (1-0.1550) x (1-0.3300) (1-0.5728) = Total tax of 43.41% The Tax Deferral Advantage

8. Integration  A general tax policy designed to ensure that: – Income earned and distributed by a Canadian Controlled Private Corporation (CCPC), – is subject to (virtually) the same amount of total tax, – as if the same amount of income was earned by an individual taxpayer directly.

9. Should I Incorporate? Case 1 - Mary  Mary is a single GP who has been paying down debt and saving in her RRSP.  She has now paid off her mortgage and is considering incorporating her medical practice.  In order to meet her current lifestyle needs, Mary, along with the help of her accountant, has determined that she would need to pay herself a salary of $150,000 from the corporation.  This salary level also allows for continued RRSP contributions.

10. Illustrative Tax Rates  Average Personal Tax Rates (Average Basic Personal Exemption - $10,000) – first $40,00025.00% – over $40,000 up to $80,000 35.00% – over $80,000 up to $130,00040.00% – over $130,00045.00%  Average Corporate Tax Rates – first $500,00015.50% – over $500,00027.50%

11. Case 1: The Numbers

12.  Mary will benefit from tax deferral on the savings she retains in her professional corporation.  Mary can also use RRSP contributions (from her salary of $150,000) for additional tax deferral.  Conclusion: Incorporation is a valid option for Mary. Case 1: Conclusions

13. Should I Incorporate? Case 2 – Joe and Julie  Joe is a young GP, married to Julie. They have three children and a large mortgage on their principal residence.  To meet Joe’s cash flow needs, the corporation would need to pay him a salary of $132,500 as well as a dividend distribution equal to the funds remaining in the corporation.  Due to Julie’s income level there are no splitting opportunities.

14. Case 2: The Numbers

15.  For Joe and Julie: Little savings retained in the corporation means minimal tax deferral  Due to the additional expenses of incorporation, there is little tax savings  Incorporation for Joe would mean more administrative work and very little (if any) tax savings  Result? Joe may decide not to incorporate Case 2: Conclusions

16. Key Considerations: Tax Deferral  In order to defer taxes, earnings must be retained within the corporation.  The tax deferral advantage is greater when funds retained in the corporation are taxed at the small business rate rather than the general corporate rate.  Should still consider RRSP contributions and the Tax Free Savings Plan (TFSA).

17. Looking Long-Term: Realizing the Benefits of Tax Deferral  Reducing tax now so you can invest the money and make more money over time can be, at least partially, a temporary benefit.  Turning tax deferral into tax savings: – To maximize the amount you will receive personally, drawing the money out at the right time is essential. – It may be possible to withdraw funds and incur little or no tax: early retirement, leave of absence, and income-splitting

18. The Income Splitting Advantage

19. Share Ownership Regulations  Legislation governing incorporation differs between provinces and includes restrictions on who can own shares of your medical professional corporation. – Can family members, trusts, or even other corporations own shares? Your MD Advisor can provide this information as well as help with analysis. – Speak to your legal advisor for recommendations regarding the structure most appropriate for you.

20.  Back to our example with Joe who has high cash flow needs which prevent him from realizing deferral benefits.  Again, we assume the corporation pays Joe a $132,500 salary so that he can maintain his RRSP contributions.  Julie, Joe’s wife, earns no income for this example. Simplified Case The Income Splitting Advantage

21. The Numbers

22. Key Considerations  Splitting income with a spouse or adult child (or both) who is in a lower tax bracket than yours can provide for very attractive tax savings.  “Kiddie tax” rules negate the benefits of splitting income with minor children.  Speak with your tax advisor about attribution rules which may also negate the benefits of income splitting.

23. Physician Incorporation Myths & Facts

24. Incorporation Myth #1  Greater expense deductions? No – No—same rules for deducting expenses – Expenses must be incurred to earn income – The amounts must be reasonable – Proof of payment is required  Other considerations: – Medical / Dental expenses (Health & Welfare Trusts) – The use of “cheaper” after-tax corporate dollars – Non-deductible expenses (i.e. 50% of meals & entertainment) – Repayment of business debt

25. Incorporation Myth #2  Limited liability – No—physicians still liable for professional acts – Limited liability for corporate creditors

26. The Real Advantages  Tax deferral  Income-splitting  The use of sophisticated products: – Individual Pension Plans for retirement planning – Health & Welfare Trusts – Permanent and Term Life Insurance policies  More efficient business debt repayment

27. Advantage: Retirement Income Pla nning  Withdrawals from a corporation are part of overall retirement planning.  Integrate with other tax-advantaged products such as RRSPs or Individual Pension Plans.  Plan for Old Age Security clawback and CPP start date.

28.  Incorporation Dilemmas – Disability insurance – Partnerships and Alternate Funding Arrangements – Employees – U.S. Citizenship  Incorporation Disadvantages – Losses do not flow through to shareholders – Risk of changes to tax laws Incorporation Dilemmas/Disadva ntages

29.  Initial set-up costs  Ongoing annual fees for legal and accounting support  Additional administrative burden – New bank & investment accounts for professional corporation – Regular corporate tax installments and source deductions on salaries – Tax information returns (T4s, T5s) – Annual corporate returns; director and shareholder resolutions Incorporation Costs Time & Money

30. Is Incorporation the Right Choice for Me? Questions to consider

31. Questions for You  How much debt do I have?  Am I a good saver?  Does my lifestyle allow me to retain a sufficient amount of money in my corporation over a long- term period?  Am I willing to split income with my spouse and/or children?

32.  Am I well-organized financially?  Do I handle financial complexity well?  Am I averse to the risk of legislative change?  Do I have a good relationship with my accountant/lawyer? More questions for You

33.  How might incorporation impact my saving strategy (RRSPs, TFSA, insurance)?  What is the opportunity for income splitting in my situation?  What are your thoughts on my compensation plan?  Do you see any significant ramifications for my investment, risk management, retirement, or estate plans? Questions for your MD Financial Consultant

34. Questions for your Accountant  Have you incorporated many physicians?  What expenses can I expect to pay from the corporation?  In my particular situation, how much tax could I save by incorporating?  How sensitive to change are these savings?  Could I benefit from a permanent life insurance policy or an Individual Pension Plan?

35.  How will I set up the books?  What mix of dividends and salary should I have?  What legal structure should I have for my situation?  Can I use the enhanced capital gains exemption?  What range of fees will I be expected to pay? More questions for your Accountant

36. Questions for your Lawyer  Have you incorporated many physicians?  What are the limitations of incorporation in this province?  What happens to the corporation in case of marital breakdown?  How much will your fees be?

37.  Incorporation is a complex issue.  MD’s goal is to ensure that you receive valuable advice tailored to your specific situation.  We will work with your current advisor to ensure this is achieved.  Be sure to consult your: – MD Advisor & personalized MD Team – Accountant – Legal counsel What next?

38. MD Delivers Total Wealth Management Team based approach synthesizes a full range of professional perspectives to create an integrated plan

39. Thank you! All tax calculations are for illustrative purposes only and are based on tax legislation enacted or proposed as of May 31, 2012 (unless otherwise indicated). Actual tax amounts will vary according to your specific facts and circumstances. MD Management Limited does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained in this document is not intended to offer such advice, nor is it to replace the advice of independent tax, accounting and legal professionals 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.

40. Questions?