Kickstart Your Corporation

Kickstart Your Corporation
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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.

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Andrew Feindel. Kickstart Your Corporation

Table of Contents

List of Tables

List of Illustrations

Guide

Pages

Kickstart Your Corporation. The Incorporated Professional’s Financial Planning Coach

Acknowledgments

About the Author

Introduction: The Value of a Coach

Chapter 1 Incorporation 101

What You'll Get Out of This Chapter

Why Incorporate?

What Does It Cost to Incorporate?

What's the Process to Incorporate?

Written Consent

Articles of Incorporation

Payroll Remittances

Employment Contracts

Transferring Assets

Real Estate

Insurance Policies

Choosing Your Corporation's Year-End and Maintaining Your Corporate Records

When Does It Not Make Sense to Incorporate?

What If You Have No Small Business Deduction?

How Does Purchasing a Home Fit into My Incorporation Timeline?

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

Can I Purchase My Principal Residence through My Corporation?

What about Shareholder Loans?

Does a Professional Corporation Give Me Creditor Protection?

How Could I “Supercharge” My Charitable Donation?

What Is the Lifetime Capital Gains Exemption (LCGE)?

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

What Do I Do with My Corporation When I Retire?

Real-Life Case Example of Restructuring Shares

Redemption of Preferred Shares Prior to December 31, 2015

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Notes

Chapter 2 The Compensation Decision: Salary or Dividends?

What You'll Get Out of This Chapter

Understanding the Roots of the Compensation Question

Salary as Compensation

Dividends as Compensation

Dividend-Splitting with Family Members. The Old Rules: Pre-2018

The New Rules: Tax on Split Income—2019 and Afterwards

Scenario 1: John and Jane with Salary

Scenario 2: John and Jane with Dividends

Tax Integration

Salary versus Dividend Examples. Scenario 1: John's After-Tax Cash Flow: With Salary

Scenario 2: John's After-Tax Cash Flow: With Dividends

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

The Value in the RRSP/Corporation Today

The Tax Characteristics of Growth on the Investments

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

Other Factors. Increased Financial Control

Psychological Factors

Creditor Protection

Future Tax Law Changes

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

Beware the Overpayment Trap

CPP Trends to Watch

Bottom-Line Considerations

Do We Have Investments Inside the Corporation?

What Are Some Exceptions to these Rules?

Small Business Deduction (SBD)

Child Care Deduction

SR&ED

Other Specific Considerations

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Notes

Chapter 3 Investing Inside Your Corporation

What You'll Get Out of This Chapter

Can I Invest through My Corporation?

What the Income Tax Act Says about Investing through a Corporation

Structuring Investments Inside the Corporation

Example

RDTOH (Refundable Dividend Tax On Hand)

Capital Dividend Account (CDA)

Example

New Passive Income Tax Rules

Reminder: Asset Allocation Still Matters

Scenario 1

Scenario 2

What Are Corporate-Class Investments?

The Power of Tax-Deferred Compounding

Working through the Example

Working through the Example

Rule Changes from Federal Budget 2016

Considerations with Corporate Class. Fees

Loss of Control

Little Fixed Income Exposure

Future Potential Rule Changes

What If I Want to Try Investing on My Own?

What If They Increase Capital Gains Taxes?

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Note

Chapter 4 Valuing Permanent Insurance on the Holistic Corporate Balance Sheet

What You'll Get Out of This Chapter

A Review of the Basics—Permanent Life Insurance as Tax Arbitrage

The Benefits of Corporate-Owned Permanent Life Insurance. Pay Premiums with Corporate Dollars

Avoid New Passive Income Rules

Creating Cash Flow

Provide a Tax-Efficient Financial Legacy

A Real-World Example: My Plan in Action

Funding the Plan

The Growth of Funds in the Plan

Assumptions in the Projections

Rates of Return Assumptions

Beyond the First 10 Years

The Plan as an Investment

Understanding the Criticisms of Corporate-Held Permanent Life Insurance

Risk Review: Economic and Tax Considerations

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

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

Appropriateness Review: Concerns about the Sales Process “This strategy is designed to maximize advisor sales commissions—if it's so good, why do so many people oppose it?”

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

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?”

The True Cost of Term Insurance

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

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

Comparing U.S. and Canadian Scenarios

Key Takeaways from This Chapter

Top Questions to Ask Your Advisor

Chapter 5 Risk Management. A Careful Examination

What You'll Get Out of This Chapter

The Way We Think About Insurance

Wealth Insurance

Wealth Insurance on Parents

When You Pay the Premiums

Example

When an Estate Bond Pays the Premiums

Example

Risk Insurance (Life and Disability Insurance) Risk Insurance

Example

Life Insurance

How much life insurance do we need?

Example

Association Plan or Individual Plan Life Insurance?

Disability Insurance

Disability Insurance: Do We Need the Ferrari Disability Package?

The Good Insurance Rider

The Situational/Dynamic Insurance Riders

The Don't Always Recommend Riders

Example

Other Common Questions. Should we own insurance corporately?

I'm young and invincible; should I have disability insurance?

Should I get a lump-sum payout instead?

Critical Illness Insurance

Long-Term Care Insurance

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Chapter 6 Borrowing to Invest. What Is Leverage?

What You'll Get Out of This Chapter

Who Are Good Candidates for Using Leverage?

Enhancing Returns in the Corporation with Leverage

Strategic Prudent Leverage: Timing

Some Basic Assumptions

Building a Non-Registered Portfolio

Example

Migrating Efficiently to a Non-Registered Portfolio

Withdrawing from the RRSP with the Use of an Offsetting Deduction

Make Your Mortgage Interest Tax-Deductible

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

Example

Debt Swap Scenario 2: Parents Helping Kids Help Themselves

Example

Investments That Use Leverage

Leveraged and Inverse ETFs

Example

Risk Parity Funds

When Does Leveraging Go Bad?

Some Built-In Conflicts of Interest

Examples

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Note

Chapter 7 Investing: Active or Passive?

What You'll Get Out of This Chapter

What Is Active Investing and What Is Passive Investing?

Understanding Investment Trends

A Deep Dive into Passive Management

Fees—Passive Management

The Impact of Fees

Performance

What about Outside Canada?

Diving into Active Management. The Behavioral Gap

Better Risk Management

Fees—Active Management

Flexibility to Manage After-Tax Returns

Allowing Pursuit of Expressive Objectives

Market Return Does Not Equal Average Investor Return

Performance

Is Your Fund “Truly Active”?

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

Access to IPOs May Become More of a Differentiating Factor

Wrapping Up the Debate

Fees

Performance

Behavior

Key Takeaways from This Chapter

Top Questions to Ask Your Financial Planner

Notes

Chapter 8 The Role of Trusts in Your Financial Plan

What You'll Get Out of This Chapter

Speaking the Language of Trusts

Trust Concepts

Residency of Trusts

Taxation of Trusts

The 21-Year Rule

Probate

Privacy

Inter Vivos Trusts

Example

Example

Discretionary Investment Trust for Grandchildren

Example

Bearer Trusts

Inter Vivos Cottage Trust

Testamentary Trusts

Establishment of Testamentary Trusts

Asset Protection

Tax Savings

Other Factors to Consider. Probate

Costs

Minor Children

For Family Members with Special Needs

Spousal Trust

Use of Spousal Trust

When a Testamentary Trust Loses Its Status

Key Takeaways from This Chapter

Questions to Ask Your Financial Planner

Chapter 9 Alternative Investment Strategies

What You'll Get Out of This Chapter

Capital Gains Strip

Suitability for Capital Gains Strip

Overall Bottom Line

Individual Pension Plans (IPP and PPP)

Why an IPP?

Considerations

Suitability

Next Steps

What's the Difference between an IPP and a PPP?

Overall Bottom Line

Retirement Compensation Arrangements

Steps to Implement an RCA

Advantages of the RCA

Disadvantages of the RCA

Investment Account

Withdrawals

Overall Bottom Line

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

Overall Bottom Line

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

Buying Art

Transferring Art

Selling/Donating Art

Overall Bottom Line

Private Health Services Plans

Health Spending Accounts

Key Takeaways from This Chapter

Questions to Ask Your Financial Planner

Notes

Chapter 10 Pulling It All Together: Your Financial Plan

What You'll Get Out of This Chapter

How long will your money last?

How much money do you need for a 30-year retirement?

The Value of a Financial Plan

Example

Plan Analysis Synopsis. Client Information

Family Member Information

Advisor Information

Plan Assumptions

Estate Assumptions

Income Information

CPP/QPP & OAS Information

Expense Information. Regular Expenses

Lump-Sum Expenses

Insurance Scenario Lump-Sum Expenses

Lifestyle Asset Information

Portfolio Assets

Liabilities

Life Insurance Policies

Disability Insurance Policies

Critical Illness Insurance Policies

Education Goals. Mark University Education: Expenses

Assets Allocated to Mark University Education

Chloe University Education: Expenses

Assets Allocated to Chloe University Education

Savings Strategies

Surplus Savings Strategies

RRSP Maximizer Savings Strategies

Transfer Strategies

Deficit Coverage Order During Pre-Retirement

Liquidation Order During Retirement

Private Corporation Synopsis. Dr. Michael Jones Corp.—Current Plan

Summary

Share Ownership

Preferred Ownership

Historical Data

Investment Accounts

Real Estate Assets

Contributions—Inter-Company Dividends Received

Withdrawals—Manual Dividend Distributions

Estate

Net Worth Statement. Current Plan

Net Worth Timeline. Current Plan

Net Worth Outlook. Current Plan

Cash Flow Outlook. Current Plan

Retirement Cash Flow Timeline. Current Plan

Retirement Need and Investable Assets. Current Plan

Detailed Estate Analysis. Current Plan

Utilizing Tax-Efficient Strategies

Recommendations. Net Worth. Proposed Recommendations—Utilizing Tax Efficient Strategies Available for Corporations

Cash Flow Outlook. Proposed Plan

Net Worth Timeline. Proposed Plan

Net Worth Outlook. Proposed Plan

Retirement Cash Flow Timeline. Proposed Plan

Retirement Need and Investable Assets. Proposed Plan

Detailed Estate Analysis. Proposed Plan

Closing Thoughts: Your Next Steps

Index

WILEY END USER LICENSE AGREEMENT

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Andrew Feindel

Thank you to all the clients we have worked with over the years for their support and validation; Alexandra Macqueen for her help with streamlining the writing and asking “Why don't you write another book?”; Paul Matthews and Alexander Herman for their help with this book's title; Volt Chan, James King, Frank Santelli, Dan Collison, Sue Neal, and Ermos Erotocritou for their leadership; Serena Dang and Harpreet Wadehra for their sound accounting advice; Martin Houser, Mark Fox and Alison Minard for their legal advice which always challenges; Ty Wehrenberg and Glen McCrum for all their opinions; Jeremy Enwright, Ryan Shoemaker, Rachelle Allen, Tara McCue, Rob Gray, Erin Blair, and Edwin Pavey for making work fun; Alex Loh, Lisa Johnson, Yola Guo, Jennifer Olvet, Dylan Biggs, Coby Tiffin, and all our administrative team—thank you for putting up with us; Jack Courtney, Blair Evans, and Christine Van Cauwenberghe for their always diligent insights; the welcoming teams at Richardson GMP, especially Craig Bassinger and his team; the Horwood sisters and Bakish brothers; and the supportive team at Wiley for their input and revisions. Lastly, thank you to my family and friends, especially James Obaji for his perspective on these financial issues and our late best friend Joe Magnotta, who always wanted people around him to succeed. It was Joe's idea to hold our first financial planning seminar titled “Wealth and Wine” at his parents' winery—the first step in our journey.

.....

This example assumes the following:

With no corporation, based on these assumptions John could save $124,000 in the first year, and it would take him a total of two years and almost three months to make up the 25% down payment on a property that may well appreciate during John's “waiting period” (meaning his $250,000 no longer represents a 25% down payment).

.....

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