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Kickstart Your Corporation. The Incorporated Professional's Financial Planning Coach. Edition No. 1

  • Book

  • 288 Pages
  • December 2020
  • John Wiley and Sons Ltd
  • ID: 5837378

A detailed look at financial planning strategies surrounding professional corporations for doctors, dentists, lawyers, business owners and other Canadian professionals.

If you're a doctor, a dentist, a lawyer, or a business owner - virtually any type of professional in Canada - you strongly need to consider how incorporating fits into your financial plan.

A good financial planner should acknowledge they have absolutely no control of the markets. However, taxes are completely controllable, and having a corporation is a powerful tool that allows professionals to control their tax bill. Using a mix of personal observations, real-life examples, and strategy evaluations, this book guides the professional along their path to using their corporation in the most efficient way.

Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is your practical guide to controlling your tax bill and taking advantage of all that a Professional Corporation has to offer. Drawing upon decades of hands-on experience in wealth management, author Andrew Feindel provides clear and accurate advice on making the incorporation decision, setting up and investing inside your corporation, optimizing your salary and dividend compensation mix, valuing permanent insurance on your corporate balance sheet, using prudent leverage, weighing the pros and cons of active or passive investment management, using alternative strategies like a Capital Gains Strip, Individual Pension Plans and Retirement Compensation Arrangements, and much more. This must-have book:

  • Provides Canadian professionals with an accurate and straightforward investment and financial planning guide to incorporation
  • Covers the basics of incorporating for the professional and business owner, including a review of the process and the costs to incorporate, and the likely benefits
  • Analyzes the best financial strategy for various situations
  • Offers real-world advice on structuring compensation, risk management, borrowing to invest, and the role of trusts in professionals’ financial plans
  • Written by a senior vice president at an independent leading-edge wealth management firm

Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is essential reading for any professional who has incorporated and is looking to maximize benefits, and those wanting to incorporate for the first time with expert guidance.

Table of Contents

Acknowledgments xvii

About the Author xix

Introduction: The Value of a Coach xxi

Chapter 1: Incorporation 101 1

Why Incorporate? 2

What Does It Cost to Incorporate? 2

What’s the Process to Incorporate? 3

Written Consent 4

Articles of Incorporation 4

Payroll Remittances 4

Employment Contracts 5

Transferring Assets 5

Real Estate 6

Insurance Policies 6

Choosing Your Corporation’s Year-End and Maintaining Your Corporate Records 7

When Does It Not Make Sense to Incorporate? 8

What If You Have No Small Business Deduction? 10

How Does Purchasing a Home Fit into My Incorporation Timeline? 11

Saving for a Down Payment: Incorporated and Non-Incorporated Options 11

Can I Purchase My Principal Residence through My Corporation? 12

What about Shareholder Loans? 14

Does a Professional Corporation Give Me Creditor Protection? 15

How Could I “Supercharge” My Charitable Donation? 16

What is the Lifetime Capital Gains Exemption (LCGE)? 17

Now That I Have Incorporated, Can I Deduct My Golf Membership Fees? 20

What Do I Do with My Corporation When I Retire? 20

Real-Life Case Example of Restructuring Shares 21

Chapter 2: The Compensation Decision: Salary or Dividends? 25

Understanding the Roots of the Compensation Question 26

Salary as Compensation 27

Dividends as Compensation 27

Dividend-Splitting with Family Members 28

The Old Rules: Pre-2018 28

The New Rules: Tax on Split Income - 2019 and Afterwards 29

Tax Integration 33

Salary versus Dividend Examples 33

Do You Want to Put Your Savings in an RRSP or in Your Corporation? 35

The Value in the RRSP/Corporation Today 36

The Tax Characteristics of Growth on the Investments 37

Will We Pass Away with Funds in Our RRSP or Corporation? 40

Other Factors 41

Increased Financial Control 41

Psychological Factors 41

Creditor Protection 42

Future Tax Law Changes 42

Do We Want to Participate in the Canadian Pension Plan (CPP)? 42

Beware the Overpayment Trap 44

CPP Trends to Watch 44

Bottom-Line Considerations 45

Do We Have Investments Inside the Corporation? 45

What Are Some Exceptions to these Rules? 46

Small Business Deduction (SBD) 46

Child Care Deduction 47

SR&ED 47

Other Specific Considerations 47

Chapter 3: Investing Inside Your Corporation 51

Can I Invest through My Corporation? 52

What the Income Tax Act Says about Investing through a Corporation 52

Structuring Investments Inside the Corporation 53

Example 54

RDTOH (Refundable Dividend Tax On Hand) 55

Capital Dividend Account (CDA) 55

Example 56

New Passive Income Tax Rules 57

Reminder: Asset Allocation Still Matters 58

What Are Corporate-Class Investments? 60

The Power of Tax-Deferred Compounding 62

Working through the Example 63

Working through the Example 65

Rule Changes from Federal Budget 2016 66

Considerations with Corporate Class 67

Fees 67

Loss of Control 68

Little Fixed Income Exposure 69

Future Potential Rule Changes 70

What If I Want to Try Investing on My Own? 70

What If They Increase Capital Gains Taxes? 70

Chapter 4: Valuing Permanent Insurance on the Holistic Corporate Balance Sheet 73

A Review of the Basics - Permanent Life Insurance as Tax Arbitrage 74

The Benefits of Corporate-Owned Permanent Life Insurance 75

Pay Premiums with Corporate Dollars 75

Avoid New Passive Income Rules 76

Creating Cash Flow 76

Provide a Tax-Efficient Financial Legacy 77

A Real-World Example: My Plan in Action 78

Funding the Plan 78

The Growth of Funds in the Plan 79

Assumptions in the Projections 79

Rates of Return Assumptions 80

Beyond the First 10 Years 81

The Plan as an Investment 81

Understanding the Criticisms of Corporate-Held Permanent Life Insurance 83

Risk Review: Economic and Tax Considerations 83

Tax Policy Risk: “What if tax rates change?” 83

Economic Risk: “What if dividend rates or interest rates change?” 84

Appropriateness Review: Concerns about the Sales Process 85

“This strategy is designed to maximize advisor sales commissions - if it’s so good, why do so many people oppose it?” 85

“Shouldn’t I help my kids today, instead of building an estate?” 86

This strategy is “an expensive way to buy insurance, and I can get

higher investment returns elsewhere” - shouldn’t I just “buy term and invest the difference?” 86

The True Cost of Term Insurance 86

Buying Term and Investing the Difference: A Review of the Facts

and Assumptions 87

“What if something changes and I can’t afford the premiums?” 89

Comparing U.S. and Canadian Scenarios 89

Chapter 5: Risk Management 93

A Careful Examination 93

The Way We Think About Insurance 94

Wealth Insurance 95

Wealth Insurance on Parents 95

When You Pay the Premiums 95

Example 96

When an Estate Bond Pays the Premiums 98

Example 99

Risk Insurance (Life and Disability Insurance) 100

Risk Insurance 100

Example 100

Life Insurance 101

How much life insurance do we need? 101

Example 102

Association Plan or Individual Plan Life Insurance? 103

Disability Insurance 105

Disability Insurance: Do We Need the Ferrari Disability Package? 106

The Good Insurance Rider 106

The Situational/Dynamic Insurance Riders 107

The Don’t Always Recommend Riders 108

Example 109

Other Common Questions 109

Should we own insurance corporately? 109

I’m young and invincible; should I have disability insurance? 110

Should I get a lump-sum payout instead? 110

Critical Illness Insurance 110

Long-Term Care Insurance 112

Chapter 6: Borrowing to Invest 115

What is Leverage? 115

Who Are Good Candidates for Using Leverage? 119

Enhancing Returns in the Corporation with Leverage 119

Strategic Prudent Leverage: Timing 123

Some Basic Assumptions 123

Building a Non-Registered Portfolio 124

Example 125

Migrating Efficiently to a Non-Registered Portfolio 126

Withdrawing from the RRSP with the Use of an Offsetting Deduction 127

Make Your Mortgage Interest Tax-Deductible 128

Debt Swap Scenario 1: Making Your Mortgage Interest Tax-Deductible 128

Example 129

Debt Swap Scenario 2: Parents Helping Kids HelpThemselves 129

Example 130

Investments That Use Leverage 132

Leveraged and Inverse ETFs 132

Example 132

Risk Parity Funds 133

When Does Leveraging Go Bad? 134

Some Built-In Conflicts of Interest 134

Examples 134

Chapter 7: Investing: Active or Passive? 139

What is Active Investing and What is Passive Investing? 140

Understanding Investment Trends 141

A Deep Dive into Passive Management 142

Fees - Passive Management 142

The Impact of Fees 143

Performance 144

What about Outside Canada? 148

Diving into Active Management 149

The Behavioral Gap 149

Better Risk Management 150

Fees - Active Management 150

Flexibility to Manage After-Tax Returns 151

Allowing Pursuit of Expressive Objectives 151

Market Return Does Not Equal Average Investor Return 151

Performance 152

Is Your Fund “Truly Active”? 152

The Growth of Passive Investments May Sow the Seeds of Their Underperformance 153

Access to IPOs May Become More of a Differentiating Factor 153

Wrapping Up the Debate 154

Fees 154

Performance 155

Behavior 157

Chapter 8: The Role of Trusts in Your Financial Plan 163

Speaking the Language of Trusts 164

Trust Concepts 165

Residency of Trusts 165

Taxation of Trusts 165

The 21-Year Rule 166

Probate 167

Privacy 167

Inter Vivos Trusts 167

Example 169

Example 169

Discretionary Investment Trust for Grandchildren 170

Example 171

Bearer Trusts 171

Inter Vivos Cottage Trust 172

Testamentary Trusts 173

Establishment of Testamentary Trusts 173

Asset Protection 173

Tax Savings 174

Other Factors to Consider 177

Probate 177

Costs 177

Minor Children 178

For Family Members with Special Needs 179

Spousal Trust 179

Use of Spousal Trust 180

When a Testamentary Trust Loses Its Status 181

Chapter 9: Alternative Investment Strategies 183

Capital Gains Strip 184

Suitability for Capital Gains Strip 186

Overall Bottom Line 187

Individual Pension Plans (IPP and PPP) 188

Why an IPP? 188

Considerations 190

Suitability 191

Next Steps 191

What’s the Difference between an IPP and a PPP? 192

Overall Bottom Line 193

Retirement Compensation Arrangements 194

Steps to Implement an RCA 195

Advantages of the RCA 195

Disadvantages of the RCA 197

Investment Account 197

Withdrawals 198

Overall Bottom Line 198

Investing in Watches: Can I Buy My Rolex through the Corporation? 198

Overall Bottom Line 200

Art: Can I Buy My Pablo Picasso Painting through the Corporation? 200

Buying Art 200

Transferring Art 200

Selling/Donating Art 201

Overall Bottom Line 203

Private Health Services Plans 203

Health Spending Accounts 204

Chapter 10: Pulling It All Together: Your Financial Plan 209

The Value of a Financial Plan 213

Example 214

Plan Analysis Synopsis 215

Client Information 215

Family Member Information 215

Advisor Information 215

Plan Assumptions 215

Estate Assumptions 216

Income Information 216

CPP/QPP & OAS Information 216

Expense Information 217

Regular Expenses 217

Lump-Sum Expenses 217

Insurance Scenario Lump-Sum Expenses 218

Lifestyle Asset Information 218

Portfolio Assets 218

Liabilities 219

Life Insurance Policies 220

Disability Insurance Policies 220

Critical Illness Insurance Policies 220

Education Goals 220

Savings Strategies 221

Surplus Savings Strategies 221

RRSP Maximizer Savings Strategies 222

Transfer Strategies 222

Deficit Coverage Order During Pre-Retirement 222

Liquidation Order During Retirement 223

Private Corporation Synopsis 223

Dr. Michael Jones Corp. - Current Plan 223

Summary 223

Share Ownership 224

Preferred Ownership 224

Historical Data 224

Investment Accounts 225

Real Estate Assets 225

Contributions - Inter-Company Dividends Received 225

Withdrawals - Manual Dividend Distributions 225

Estate 225

Net Worth Statement 227

Current Plan 227

Net Worth Timeline 227

Current Plan 227

Net Worth Outlook 228

Current Plan 228

Cash Flow Outlook 230

Current Plan 230

Retirement Cash Flow Timeline 231

Current Plan 231

Retirement Need and Investable Assets 232

Current Plan 232

Detailed Estate Analysis 235

Current Plan 235

Utilizing Tax-Efficient Strategies 237

Recommendations 238

Net Worth 238

Proposed Recommendations - Utilizing Tax Efficient Strategies Available for Corporations 238

Cash Flow Outlook 239

Proposed Plan 239

Net Worth Timeline 242

Proposed Plan 242

Net Worth Outlook 242

Proposed Plan 242

Retirement Cash Flow Timeline 244

Proposed Plan 244

Retirement Need and Investable Assets 246

Proposed Plan 246

Detailed Estate Analysis 249

Proposed Plan 249

Closing Thoughts: Your Next Steps 251

Index 255

Authors

Andrew Feindel