How is My Investment Doing?

2018 was a significant year for our firm as we ended a 12-year relationship with our investment dealer and transitioned to a partnership with Wealthsimple.  It was a difficult decision but none-the-less it was a necessary move to adopt a smarter and more efficient way of investing for our clients.

Simple Return (great for comparing non-financial investments)
One of the feature at Wealthsimple we loved at first sight was the Real-time Performance Reporting.  It takes the guessing out of the equation, which is exactly what every investor wants to know when they log in to their investment account.  Most people understand what Simple Return, which represents the gain as a percentage of the amount invested.  If you made $10 from your $100 investment, your Simple Return would be 10/100 = 10%

Money-Weighted Return (great for financial planning purpose)
Wealthsimple took a step further to provide Real-time Money-weighted return and Time-weighted Return.  Money-weighted return represents the return of your portfolio taking into account when you deposit and withdraw money.  For example, if you plan on investing $1,200 this year, your Money-weighted Return will be different if you deposit a lump-sum of $1,200 in the beginning of the year as opposed to $100 per month over 12 months. 

Time-Weighted Return  (great for measuring portfolio performance)
Time-weighted return represents the performance of your portfolio without taking withdrawals and deposits into account.  This is strictly a measure of the portfolio performance.  This is also the industry standard for measuring investment performance so you have a fair comparison among your investment options.

Why is it nice to have all three? 
Simple return is useful when you have another non-financial investment you want to compare with (e.g. real estate or business).  Since there is no standard in how to measure the return in these other instruments, most people will just use Simple Return for comparison.  When we build financial plan for clients, the investment return used in projections would be Money-weighted because we need to take into account when the clients make deposits and withdrawals.  Lastly, Time-weighted is used when we want to measure clients’ portfolio performance relative to others.  If a portfolio is consistently under-performing, it would be time to find an alternative.

All three measurements may provide a similar result, but understanding the differences will help you decide which one to use for your own measurement and comparison.

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Finally, Something Positive for Being Incorporated! At least for Ontario...

The federal budget’s introduction of reducing professional corporation’s deduction limit due to passive income was definitely one of the most devastating change made to professional corporation since it was introduced.  Yesterday’s news from the Ontario government came with a real surprise.  In their Ontario Economic Outlook and Fiscal Review, the government has announced that Ontario will not parallel the new federal restriction for the small business deduction (SBD) based on passive income on CCPC (which includes professional corporation). Consequently, all eligible Ontario small businesses will continue to receive the Ontario small business deduction.
What does that mean to you?
We would use the maximum passive income of $150,000 as an example to illustrate the difference the announcement has made.  If your corporation is generating a $150,000 of passive income from your investment portfolio or rental income, your professional earned income will be taxed at a higher rate of 26.5% (15% federal and 13.5% Ontario) as opposed to the small business rate of 13.5% (10% federal and 3.5% Ontario).  If Ontario does not parallel the federal restriction on passive income, only the higher federal tax will be applied and as such, your professional earned income will only be taxed at 18% (15% federal and 3.5% Ontario), not 26.5%.
We were very excited about the news that could not wait to share this with you before we wrap up the week.  Please reach out to us if you have any further questions about the announcement.  Details of the Ontario Review can be found in the following article summarized by PWC.

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Rethinking the RESP

The restrictions on income splitting and passive investment in the corporation introduced in the last budget have forced most physicians to rethink their income distribution and saving strategies.  Issues such as paying out dividend vs salary, and saving in the corporation vs personally (RRSP, TFSA) would probably have come up in your last discussions with the accountant or advisor.  However, one often-overlooked area is funding your children’s education.
How it has been?
When it comes to saving for the children’s education, there has always been a debate between funding the RESP to take advantage of the 20% government grant and investing the savings in corporation.  The issue around RESP is that it isfunded with after-tax dollars.  In other words, you pay taxes to withdraw money from the corporation to fund the RESP and use the 20% grant to offset the tax you paid.  When we compared the two education funding options (corporation vs RESP), saving in corporation generally has a slight tax advantage but not by much.  For most physicians, funding the RESP is still the preferred strategy (myself including) because it has a more predictable trajectory and is less likely to be affected by future tax and political changes.  The tax change earlier this year is the evidence of this belief.
Although the RESP’s lifetime contribution limit is $50,000 per child, most physicians would only contribute up to the amount ($36,000) that qualifies for the$7,200 grant.  That is because, as previously mentioned, using after-tax dollars to fund the RESP without the matching grant is not as efficient as saving in the corporation and paying the dividends to the children when they turn eighteen.
How it should be going forward?
Without the ability to income split with children, one may wonder if it makes sense to fund the RESP to the $50,000 limit.  I still have a mixed feeling on this strategy because there is always a chance that income splitting may return in the future (at least that is what I hope) and paying unnecessary taxes today to fund a goal that happens 15 to 20 years from now is hard to swallow.  One thing for sure is that funding your children’s education will require a lot more financial planning, becausepaying them $40,000 almost tax-free when they turn eighteen is a thing of the past.  The following chart will give you an idea of the increase on tuition for varies programs in the past 10 years.

Average tuition change.jpg

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Friendly reminders:

  • The best time for tax planning is the last quarter of the year. Please reach out to us if you require any assistance to plan for your 2019 income distribution.

  • The OMA OPIP coverage's subsidized funding is significantly reduced for 2019. You should reevaluate your needs to see if change is necessary. 

New Budget on Passive Income – A bittersweet Outcome

As much as I disagree with Ottawa on their point of view of having “an unfair tax advantage” for small business, I am glad to see that they listened to the feedback and found a cleaner and simpler solution to close what they consider to be a loophole for small corporations, which include professional corporation (MPC).
What is?
Currently, most MPC are enjoying the small business tax rate of 15% (Ontario) by keeping the corporate income under $500,000.  This $500,000 is called the Small Business Deduction Limit.  Even if your corporation bills over $500,000, your accountant would use salary to reduce (called bonusing down) the corporate income to $500,000, so your MPC does not get bumped up to the regular business tax rate of 26.5% (Ontario).
What will be?
With the new budget, this Small Business Deduction Limit is reduced by $5 for every $1 of passive income over the $50,000 threshold.  Once your passive income reaches $150,000, your MPC will completely lose its small business deduction limit of $500,000 ($100,000 x 5).
In my experience, most MPC do not have a $500,000 income especially when most physicians are now on salary to accumulate RRSP contribution room.  For example, if you bill $400,000 per year and take $150,000 of salary, your MPC will only have a $250,000 of taxable income. That means your MPC will not be affected by this change until your passive income reaches $100,000 (or $2 mln in savings at 5% return).  Here is a table to illustrate the relationship between MPC income, Passive income and Small Business Deduction Limit.

2018-Budget_FINAL(2) - Copy.jpg

What to do?
Of the 23 financial plans we completed for clients in the past two months, only a couple of physician would accumulate over $3 mln  in the corporation within 10 years of practice.  Most will reach their passive income threshold after 20 years assuming that they would maximize their personal savings (RRSP TFSA RESP) and aggressively pay off their mortgage over that period. 
Until accountants and lawyers come up with other options to mitigate this tax impact, we continue to advise physicians to maximize their RRSP and TFSA so that less money would accumulate in the corporation.  Whole Life is also a Must in the corporation going forward to tax shelter investments as the growth within a Whole Life plan will not count towards passive income. 
Please feel free to reach out to us if you have any questions on the budget and how the change may affect you.

Friendly reminders:

  • Speak to your accountant about switching to salary if you are still on dividends
  • Contact us if you want to include Whole Life insurance in your Corporate investment portfolio. Whole Life insurance works better if you start at a younger age.

Revisiting Salary after the Tax Change

The income splitting tax change announcement made right before Christmas was a big surprise for most accountants and advisors.  Many had been burning the midnight oil throughout the holiday and into the New Year trying to help their clients prepare for the change that was made effective January 1st, 2018.   

Once incorporated, physicians would need to choose between salary and dividend when they take money out of the corporation.  In more recent years, more physicians opt for dividends over salary due to its simplicity of not having to remit taxes and CPP (Canada Pension Plan) every month.  The net after-tax dollar amount is also higher when you do not need to give the government $5,000 a year for storage until you retire.  (I used the word “storage” because you are only getting 1 to 2% return on your CPP contributions at best).  In my opinion, the real benefit of salary is to build your RRSP contribution room.

However, the scale definitely tips over to salary a lot more for 2018 for a couple of reasons:

1.       The dividend tax rate is higher for 2018.  Wait!  Didn’t the government lower the corporate tax rate for 2018?  Yes, they did but they also increased the dividend rate so you do not get to take advantage of drawing dividends.  In fact, you are paying slightly more taxes for 2018 than 2017 when withdrawing dividends.  Here is an article from PWC explaining this tax change.

2.       The last update from government on raising taxes on passive income inside corporations was introducing a $50,000 threshold.  So, instead of taxing all passive income at a higher rate, only passive income over $50,000 will be taxed at a higher rate.  Having more RRSP contribution room will allow you to shift more of your savings from the corporation to your RRSP so that your corporation will not reach the $50,000 passive threshold as quickly.  This change has not yet been put in place but we will probably hear more about this in the coming months.

It is worth having a discussion with your accountant and advisor to see if your dividend/salary composition should remain the same for 2018.  If you are switching to salary and RRSP, you should also learn more about the drawbacks of RRSP such as minimum withdrawals requirement at age 71 and taxation at death.



It is not too late to declare additional dividends for 2017.  Since 2017 is the last year you can distribute dividend a non-voting shareholder without justification, you should see if it makes sense to top up the dividend to a higher tax bracket for your spouse and/or parents.

Further to the last point, you may also increase the payout to your spouse so he/she can effectively use his/her RRSP contribution room at a higher tax bracket for 2017.

Rising Interest Rates - How should you prepare for it?

Rising Interest Rates - How should you prepare for it?

After years of historic low interest rate, Bank of Canada has finally raised the interest rates twice in three months and hinted that this is not the end of it.  If you are carrying a line of credit or variable mortgage, your monthly expense towards debt servicing has just increased by 18%.  To put this into different perspective, if your current cash-flow will allow you to pay off your debt in 15 years, it will now take 15 years and 8 months to be debt free.  Here are some steps to manage your debt:

Tax change is inevitable, how can you prepare for it?

Tax change is inevitable, how can you prepare for it?

On July 18th, the government proposed to make fundamental changes on income splitting and tax deferral for professional corporation.  You may have received emails from multiple sources regarding this change.  The purpose of this article is not to repeat what has been told.  We believe there are planning opportunities for some physicians and dentists so they can be better prepared for this change.

Canada Life Disability Insurance's Achilles Heel

Residual Benefits is a built-in feature for all disability plans.  It provides a partial benefit as the physician recovers from a disability and return to work on a modified (reduced) schedule.  Most disability claims begin with full benefits payout while the physician is unable to work in any capacity.  As she recovers, she would ease back to work on a modified schedule.  At that point, the disability benefit amount will be calculated as follows:

The Disability Insurance that pays forever…

There are four insurance companies offering disability insurance to physicians at the moment.  They are Canada Life, Great-West Life (GWL), Manulife and RBC.  Although the RBC plan is the most popular option for medical students due to its non medical underwriting requirement, some students wonder if they should consider other options given that they are healthy and should have no problem passing the medical.

What does tax deduction really mean to you?

Understanding how tax deductions and tax credits work would help guide many of your financial decisions.  When physicians come to me with a specific question, they usually come with a few options in mind and only require some clarifications.  More often than not, they would know the answers to these questions if they understand how tax deductions and tax credits work.