Chad Ball 00:12
Welcome to the Cold Steel surgical podcast with your hosts Ameer Farooq and Chad Ball. We’ve had the absolute privilege of chatting with some amazing Canadian as well as international guests over the past year. While the topics have been broad in range, whether clinical, social or political, our aims for the podcast continue to remain the same. We hope to inspire discussion, creativity, scholarly research, and career development in all Canadian surgeons. We hope you enjoy our second season as we continue to highlight some incredible guests, deliver detailed masterclass sessions on a myriad of clinical topics and introduce some fresh new features such as debate and companion formats. We hope you relish the podcast as much as we do.
Ameer Farooq 00:55
In 1993, the famous hip hop group, the Wu Tang clan released a song called C.R.E.A.M., which stands for Cash Rules Everything Around Me. While one might quibble with that premise philosophically, learning how to manage your finances is no question an important part of any physician’s career. In this episode, we interview Shane DiNapoli, a chartered accountant based in Calgary, Alberta. We talked to him about some of the common mistakes he sees physicians make with their finances, physician corporations, and the financial advice that he has for physicians starting out in your practice. Mr. DiNapoli, thank you so much for joining us on Cold Steel. Can you tell us a bit about your background and where you grew up and your pathway to your current profession and business?
Shane DiNapoli 01:59
So my background is: I’m born and raised in Calgary. I think I was born in the Children’s Hospital. But yeah, so one place where my mom told me I was born. I was born here in Calgary, went to high school here, then University of Calgary. Actually graduated from the University of Calgary back in, just trying to read my degree, what’s it say, 1992. And then after I graduated from the university, I wanted to go into finance, quite frankly. I mean, that was my first choice. But in 92, there weren’t any jobs in finance. I think Goldman Sachs hired one person from the University of Calgary, and it wasn’t me. So you know, my second choice was to get my CA back then. And so I ended up articling with a national firm for a few years, and had no desire to do tax. If I’d known I was gonna have to work this hard, I think I would have chosen a different, you maybe chosen to be a teacher or something. So I have my summers off. But it was too late at that point in time. I’d worked at a national accounting firm in public companies, actually. So it was as close to finance as I could have got. And during my time working with these public companies, particularly back then, when the Alberta Securities Commission was a little fast and loose, and there were a lot of startup oil and gas companies, I got to see some exciting things happen. But companies would come and go, they would start and fail. And I found that environment just a little too distressing. And decided to go into tax. And back then, it was a two year tax program, where, you know, you would get your in-depth tax program without any exam. So it was certainly a certification process. But it was actually quite a nice easy path, relatively speaking, because it didn’t have the stress of exams or some sort of oral process. And through the tax program, ended up finding, you know, my calling, I guess, is what I would call it today, which is I found it fascinating. There’s nothing more fun than helping somebody that could afford my fee with a problem that I could solve, you know, somewhat creatively or certainly with a number of options available. And you know, and then from there, it just sort of led to the last 20 years of my practice.
Chad Ball 04:46
You know, in full disclosure, you and I have known each other for a long time and you’ve certainly been a savior for everything financial for me, and I thank you publicly for that, as well as privately. But, you know, I’m hoping maybe that we can be super honest here, at least I can. It’s clear that physicians in general are notoriously poor with finances, and the financial world in general. And we can, I think both throw out many, many caveats of scenarios that we’ve seen, you know, friends and colleagues and in your business. Having done that, how do you sort of frame the financial side of things for a physician, whether it’s spending or saving? Or how do you approach that? Because I don’t think it’s intuitive to us. And I certainly don’t, I know, it’s not intuitive when you’re starting out your career in medicine.
Shane DiNapoli 05:41
Well, that’s a great question. Yeah. I mean, certainly, in terms of the context of framework, you know, I find it fascinating, right, that, you know, dealing with physicians and other professionals, that there’s this massive investment of time and energy in a career, part of which has, you know, significant financial rewards. So, you know, this is a huge effort. And yet, at this exact same time, there’s almost willful blindness to the management of the wealth that comes with it, which is no different than any other life skill, that I just find, whether it’s, whether it’s a function of the profession, or the nature of the person, that the education of the wealth management that, you know, becomes part and parcel with any successful profession, particularly with physicians, it seems to be, you know, left until after residency is completed.
Chad Ball 06:50
Totally, I mean, it’s completely missing. We might get one three hour session in a five year residency and never think or talk about it again. You’re totally right.
Shane DiNapoli 06:59
You know, and I think what’s fascinating about that is, you know, we were just talking about this before we started recording, which is this blind faith, or this conversation, where I’ll trust a colleague, right, you know, and it’s only over the last 20 years where I make this this covenant, I guess, with clients, which is: I promise not to practice medicine, if you promise not to practice tax, right? Like, let me, you know, explain it yo you. Don’t take advice from friends. Certainly you can use friends, or colleagues as sounding boards. But when it comes to, say, wealth management, you know, everybody’s a bit different, and their circumstances are so specific. And the rules now are so nuanced, that being educated on that process generally requires talking to a professional. You know, there are very few textbooks today, I think, that are well structured for someone that’s not already versed in tax. So the best way to become aware or the best, you know, context for that framework, is: why wouldn’t you talk to a professional about your wealth management, and at the front of that would be tax. I mean, it’s the largest bill any professional will incur in their lifetime. That, you know, after $200,000 a year, you’re in partnership with the government. They’re taking half.
Chad Ball 08:29
It makes me think back to my experience in grad school. And I think I’ve told you the story before, but I lived with a roommate who was moving through UBC to try and essentially become a trader. And I watched him and lived obviously in close proximity with him for two years, 18 hours to 20 hours a day. That’s all he slept, ate and breathed. He had multiple monitors. He was learning his craft. And I remember at that time thinking, oh yeah, right. It’s sort of like me. You know, he’s out there, learning at the same intensity that I’m trying to learn my craft at. I can never compete with that, nor nor should I ever try.
Shane DiNapoli 09:11
Well, I mean, I guess that takes us to the, you know, like, the biggest common trend that I’m seeing today. It’s just that – where people are, certainly the next generation, and a lot of residents that I’ve met over the last couple of years, are astutely aware of that actually. And they’re starting to come and get the advice before they get surprised by either some sort of financial commitment or tax bill. And you know, so that trend that gives me hope that, you know, whatever mentorships happening, that at least that message is getting through today. Right, it’s that, you know, first and foremost, you want a good advisor, you want a few good advisors, quite frankly, great, you want to get somebody on that, well, thematically, you know, on the finance or investing side, on the banking side, on the tax side. You know, and collectively you want a team. But each person will bring something a little bit different to the table. But if those conversations are being had post residency, you’ve already missed out on two or three years. And certainly we’ve had those conversations while you were doing your fellowship. Right, where, you know, had we not had those conversations, there would have been some surprises, I suspect.
Ameer Farooq 10:32
I kind of have a two parter question for you. And the first is sort of a comment. That, you know, I think part of the the reluctance to learn more about the finance side of things is just that you almost feel a bit guilty as a resident or as a newly minted surgeon about making money off of what has been your sort of craft and your art for the last, you know, however many years. And so, there’s almost like a guilt factor associated with that. I wonder if you see any trends like that among surgeons in particular? And are there any differences in the way? Let’s say, how surgeons manage their money versus other physicians?
Shane DiNapoli 11:19
Well, yeah, I mean, unless you’re talking to the wrong person, there’s no such thing as making too much money. As far as I’m concerned, you know, in the sense of, you know, if the market dictates. But absolutely, there’s an element of making all this money, but I don’t know whether I’m managing it responsibly, or whether or not, you know, I should even be asking these questions. And, you know, I think that goes back to, certainly the the evolution of the career or the progression, where there’s very, very little spoken about wealth management during, you know, the early phases of a career. I think it’s more so it is, I think it certainly, is highlighted with surgeons, I can think of one instance, this would have been years ago, where I had a resident surgeon, and his accounting records consisted of a literal Nike shoe box. And so, you know, part of that, I think, certainly with time, or with experience, I’ve come to realize was a very difficult decision, I think, as most professionals do, which is: where do you spend your time, right? So if you can work at additional shift, or you can make, you know, maybe somewhere between, now we’re going to make a number between five and $10,000, versus spending a day organizing your finances, quite often, or realizing your finances will take a backseat to that decision. And so from that perspective, I think surgeons certainly top the list in that regard. Or more so than perhaps some of the other professions, the other specialties that I deal with. All of your, you know, time and effort is best utilized, generating revenue, relative to the return on the wealth management. The long term consequences of that, obviously, as you may not have a good wealth management strategy, which really can harm you later in your career or later in your life. But it’s such a difficult, I think, conflict, that that does arise amongst surgeons, but in particular, where, you know, yeah, it’s not at all surprising for me to have a surgeon client, who’s either late and filing, simply because they’ve been too busy, so busy with work, or they’re not able to retain the details that were covered in, say, their year-end meeting where we’ve discussed some of these planning considerations. And by the time they’ve left the office, they’ve completely forgot, because they’ve gone back to work.
Ameer Farooq 14:13
So let me ask you this, you know, and I’m being selfish here as someone who’s just starting out my career: what are some of the concrete things that you tell all young physicians or young surgeons when they’re starting out that they need to do from a financial health perspective to avoid the problems that you’ve highlighted? And I’m thinking even like, you know, what, in the lead up to this podcast, I was asking some of my friends who just graduated residency and are out working in community practice. And one of them, Misha Horkoff asked, are there any apps that you’d recommend that physicians use, or that you recommend to your clients? So can you give us some some concrete tips and tricks for any young physician starting out in their practice?
Shane DiNapoli 15:00
Yeah, absolutely. So the first thing would be, you want to develop a relationship with a professional accountant that’s a tax filer right away. Right? You know, so that’d be the first thing, and you really want that person to fit your personality, right. And so you know, there’s zero harm in interviewing two or three accountants, my feelings are never hurt, when it’s not the right fit, or vice versa. Someone will come and see me after. So that’d be first and foremost, right? The second thing would be to keep things as simple as possible in the context of managing your finances. So you really want to be able to track or be aware of how much money, what your earnings are, what your expenses are. And the easiest way to do that wouldn’t necessarily be an app, it will be, you know, a strategy that you’re personally familiar with. So if you like using Excel, you want to track an XML, if you want to just use your bank account to track what your bank account activity is, that’s how you would do it. But it would be a matter of, you know, if you don’t know how much money you make, you can’t necessarily expect anyone else to know, And knowing how much money you make, then from there, lead all other answers. Right? So if you know how much you’ve made this year, for example, I’m going to make a number up: $600,000. And you have $200,000 left. Well, then, you know you’ve spent $400,000. And it doesn’t have to be any more complicated than that. You can certainly then go, okay, what did I spend the $400,000 on? And you can track that in either you know, an app, or you can do it on that Excel spreadsheet, or you can just keep it as simple as look at your bank statement. And you know, by doing that, you start to become familiar with your own patterns. And so, you know, the difficulty with some of these apps that are out there is they’re designed by accountants for accountants. And the problem with that is it’s going to either result in a bunch of data, that’s not going to make sense to you, or it’s going to mislead you. So, you know, from that perspective, you know, I think that the simplest approach would be to use your actual bank statement on your credit card activity. Right, you know, to sort of have a good snapshot, and it should be done at a minimum, monthly. Right, you know, most bills are monthly, most activities are monthly, you know, in terms of how people will view their budgeting. And so that’d be the front and centre, hands down.
Chad Ball 17:43
That’s such wise, you know, advice. And it’s shocking, I think, at least in particular, for me as the son of an accountant, in terms of looking around and seeing how rarely that happens with physicians and surgeons, even well into their careers. Like there seems to be confusion when they’re honest enough to share what’s coming in what’s going out, which I guess can happen. But it is interesting. You know, Shane, one of the things that you’re well known for, obviously, is professional corporations, and how to leverage them and utilize them and construct them. I was wondering if you could, for our surgeon listeners, talk a little bit about that world and how you frame that world? And maybe even, what your sense is, in terms of a crystal ball? How’s that world going to be changed with our current federal government? In the future?
Shane DiNapoli 18:38
Oh, well, let’s unpack that. There’s a few things in there that I find, you know, I think worth merit. First thing, professional corporations are a relatively new concept in terms of taxation in general. So taxes have been around for over 100 years, at least here in Canada, you know, with corporations and individuals. And it’s really only since 1984, that professional corporations have become a thing. So that’s not really that long ago in the big scheme of things. And historically, and I would say this is only since geez, maybe 2005, a professional corporation would have been created for only one of two reasons. Reason number one is deferral, right? And all I mean by deferrals, if you understand the concept of an RRSP, then you understand the concept of deferral. You put money away or you hold it in a certain legal entity, and as a result of doing so, you avoid paying tax to one extent or another. And so, for an RSP, you just don’t pay any tax on the amount you’ve contributed to the RSP until you withdraw with a professional corporation. The same is true to the extent that you don’t pay any tax on having received that income personally. And so at the corporate level, you know, either pay lease here in Alberta right now 11% or 25 and a half percent, depending on how much income is earned in the corporation. And so the difference is the difference between the tax rate paid at the corporate level and the tax avoided, that would have been incurred personally. Right. So if we assume that you’re the subject of the highest marginal tax rate of 48%, on the first $500,000, presuming there’s no impairment, a small business deduction limit, pay 11%. So there’s a deferral of 37%, $500,000, so no small sum. And then in excess of the 500,000, that’s retained in the court. There’s a tax rate and effective tax rate. It’s been indexed right now, because Albert is dropping that. But for ease of simplicity, we’ll say 25%. And so the difference there, between 48 and 25%, is 23%. So still no small sum. Right. And so by using a professional Corporation and retaining the money in the corporation, right, you can realize this benefit of tax deferral, which theoretically would be realized when you take the money out of the corporation at some later point in time. The other reason to incorporate with the income split. And so that reason survived between 2010 and 2000. Sorry, 2005, or there abouts and 2015. And in 2015, there was, well, sorry, 2017, there were some changes to income splitting, and so that reason has gone away. So, you know, one last year over age 65, or you’re no longer practicing, the income splitting benefit is postponed or no longer available. But the deferral benefit, stays there. Now, this deferral concept has been around for the last 100 years. Right, John A. MacDonald debated this, when they introduced the Income Tax Act, originally, and they had a different tax rate for corporations and individuals. And the argument was, why should you be able to use a corporation to avoid tax that would otherwise be paid personally. And in response to that, they said, you won’t be able to avoid tax indefinitely, you have to pay taxes and take the money out. Now I’m paraphrasing, for you know, for the point of not boring everyone to tears. But the idea of this deferral has survived. Now, there’s been a number of changes with this current government. They don’t like professionals, and they particularly don’t seem to like physicians from a tax rate cessation perspective. If it feels personal, I think it is. Because a lot of the legislation has been designed to make the use of professional corporations appear unfavorable. The advantage of these new changes or I think one of the good things, given the complex of the Income Tax Act, is that it’s only the appearance that exists. In fact, professional corporations are more advantageous today than they’ve ever been. And you know, that’s the irony of what’s happened over these last three years. The federal government has increased the highest marginal tax rate for individuals, and they’ve reduced the tax rate for corporations. They’ve made the reason to use a professional Corporation greater than ever before. Right, you know, historically, here in Alberta, the highest marginal rate, even just four years ago was 39%. And, you know, by increasing it to 48%, they’ve increased the benefit of deferral. In the same timeline, they’ve reduced the tax rate of corporations, at least, you know, in the first 500 Small Business deduction limit, they’ve reduced that rate by 3%. And so they’ve actually made the use of professional corporations more advantageous. So where do I see that going? I think that the federal government historically, has wanted to discourage behavior that trends as an erosion to the government’s tax base. Now, I’m just guessing. I don’t know anybody at finance anymore, and obviously wouldn’t be privy to those conversations. But what they’ve done is they’ve created this perception that professional corporations are bad, or investment income and professional corporations is bad. And I think the perception was all they were actually trying to achieve. And so you know, where do I see things going in the future? I don’t see them blowing up professional corporations anytime soon without having to rethink taxation as a whole. And d the use of corporations. So, you know, every time I’ve made a prediction, I’ve been wrong. So I don’t want to jinx it for every professional. But I just don’t see them dismantling this structure, given all the pushback they had three years ago.
Chad Ball 25:29
You mentioned a little bit in terms of Alberta versus maybe other places, is there a lot of variability either in concept or in actual numbers when you move from province to province?
Shane DiNapoli 25:41
No. No, the the utility of the professional Corporation survives everywhere in this country. I actually had somebody in Iqualuit. I’m not sure if I’m saying that right. And we had to create a professional corporation that, we couldn’t find a lawyer to create a professional Corporation for Iqualuit, because they don’t have a corporation. So we had to do it federally, actually. But even there, this deferral structure, produced the same benefit.
Chad Ball 26:15
Oh, that’s interesting, huh? I had no idea. I figured it was quite different from province to province. That’s fascinating. Can you give us your sense of, you know, you said initially, ideally, as a team, when you’re starting out with being a financial advisor, a tax expert, you know, with an accounting background and so on. How do you sort of frame or how do you look at the financial advisor world? Because I also think, you know, that’s an area where we struggle significantly, you know, personally that I’ve struggled in. My sense, always, in meeting with, quote unquote, “bankers”, and these financial folks attached to large banks, is that they see that world very differently from us, and they, without being impolite, don’t have the viewpoint that I really want to be around so much.
Shane DiNapoli 27:18
Ah, you know, you I’ve got some very good friends in finance, actually. And one of the challenges I find with the industry is that the model is based on you leaving the money with them. Like, there isn’t an end point. And I find that fascinating, because as an account, like, you know, over my career like that, a corporation is just a tool, right? So at some point, its utility will either expire, but there is still a function of its utility. Whereas, you know, wealth in general, right? Well, it’s your wealth. So when it’s with an advisor, the difficulty I find in those instances, the relationship is based on giving them more, you know? And so there’s this direct conflict, right, with the advisor where you end up working for them. The one caution I would give every resident and certainly anyone early in their career is (and we’ve had this discussion even before), there’s nothing wrong with cash right at the beginning. You know, rushing into one of those relationships where putting your money in the market or having it tied up with an investor. Well, that’s only useful if there’s a game plan as to how much you’re going to get back. Right, at retirement or at some future point in time. And if there isn’t that frank conversation, right, it’s usually based on the assumption of, Oh, well tell us how much money you want for retirement. And we’ll tell you how much money you have to give us now. Well, what if, you know, what if those assumptions aren’t actually valid? Why are you agreeing to give somebody you know, one million, two million, three million dollars of your money today on the promise that you’re never going to get it back and all you’re going to do is get a return, but that that return is a function of the market, which the advisor doesn’t have any control over? And that’s a very difficult proposition to, I think, deal with in the context of what are you giving them your money for? You know, whether you invest in the stock market, you invest in savings, invest in real property as a tax advisor, right? It doesn’t matter what you do with their money in your professional Corporation. You can buy lawn gnomes for all I care if they can appreciate, right? Have a collection of lawn gnomes. but it’s right there. Now you can convert that back into cash at some later point in time. And I don’t think those conversations are had often enough. As to why you would give the advisor money? And then what is your expectation to getting it back? I think that’s one of the aspects of the industry, that I think is a challenge. It’s a challenge for the client, and then it’s a challenge for the industry, because clearly, they don’t make any money if you don’t have any money with them. You know, that’s very difficult one, and everyone falls differently on the spectrum on that one.
Chad Ball 30:38
Well, I think that highlights what you’ve always taught me and told me, and I’ve certainly taken it to heart, which is that you probably have to figure yourself out before you can walk into those those rooms or those meetings and move forward in a productive way, to your point. Are you trying to build some vault of money for when you die, or you’re trying to, you know, return to zero, you know, as you die, or, or what does that look like? And I think, again, we probably don’t do ourselves any service by not sitting down and thinking about that at a deep level, intermittently. And then, you know, refreshing that thought as well as we go.
Shane DiNapoli 31:15
And it all may also change. And I think that’s the other part of it. If it does change, if your needs do change, you know, because it’s just in terms of what wealth management looks like, there’s two aspects. There’s the security, right, which is what happens if you can’t work tomorrow, can you access your money? And then there’s the return on your wealth, right, or the return on capital. And I find that part fascinating, because people will end up all over the spectrum of, some people believe that their capital has to generate a return. And I don’t understand that. Right. And the concept of no it doesn’t, right, the market doesn’t have to do anything, you could lose it. And certainly, that was not an uncommon thing in the in the 90s. Right. You know, there were a number of that – I think that was at the root of what MD Management was trying to do, was to try and ensure that physicians don’t overextend themselves in ventures, and with no money.
Chad Ball 32:18
Yeah, it makes total sense. You know, one of the things you highlight there, again, is that things change over time, in a long career. And you know, one of those things that’s common to society in general, but physicians in particular, and I would argue that the numbers bear it out, is surgeons, even more so, is the reality of divorce. How do you frame that event? I’m sure you see that a lot with regard to financial stability and financial outlook and maybe even reverse engineering or splitting or however, you know, that would work for a professional corporation?
Shane DiNapoli 33:01
You know, it’s funny, every year, unfortunately there’s one or two divorces come through this office. This year seems to be a particularly busy year, I think there’s been five in the last six months. The issues always seems to be the same in a divorce, from the accountants involvement, or the conversation, right? It’s a function of two things. One, the division of property, right? So if there’s a professional Corporation, and it has wealth, half of it is going to be going to a spouse, if at all, when accumulated was considered marital property or whatever that number is. So that’s part one. What does that look like? We’ll revisit that. And then part two is, what about support? So how much income has been earned? And you know, for all intents and purposes, the professional corporation is just a vehicle by which the professional earns income. So the support payments are really just a function of earnings. And the professional Corporation just provides that data to the lawyers to sort out based on whatever case law says, x incomer equals y support. So that second part is really pretty easy. The professional Corporation doesn’t change that outcome. On the first part, on the division of property, that’s complex. And the reason it’s complex is you know, income and professional Corporation isn’t the same as savings in an RSP or equity in the house. So you can’t really compare apples and apples, there’s apples and oranges and pears, and where things can get messy, or where clients are best advised is so long as the value of the professional corporation is properly discounted for the purpose of the divorce, or for the after tax value. Or alternatively, the value of the professional corporation is cut in half, and half of the assets of the corporation are transferred into, you know, the spouses newly formed Corporation, there’s, you know, there’s more than one way to solve that problem. I can tell you all five conversations this year have been to use a second corporation to cut the property in half in the PC. That that type of structure or that type of planning, requires a qualified tax advisor and a qualified lawyer. Right, you know, it’s an area of expertise or a specialty that, you know, you either know how to do butterfly or you don’t. And so you know, someone who’s getting divorced or going through a divorce, you would want a lawyer, a divorce lawyer that’s familiar with that structure so that whether or not you go one way or the other, you’re still advised. Right, you know, and certainly, I think that’s the biggest challenge in the divorce today. It’s just that. Having both the lawyer and the accountant advise both parties, here, what your options are, doesn’t matter which one you pick, but you do have options. And that each one has a consequence, you know, and it’s with today’s tax rates at what they’re at. I had a conversation with a physician a couple of weeks ago, which was, we discussed the butterfly, you know, cutting the PC in half. And then when they talked to the lawyer, they got sidetracked, said it was too complicated, didn’t want to go with that. And I’m like, that’s cool. All right. But even on the small amount of wealth that we’re talking about, not butterflying, your tax consequences, six figures, you know, and I could explain that to them, after which the conversation was, well, maybe we should bother with the complication, and not pay this, you know, $100,000, in additional tax that could be avoided. You know, and so from a divorce perspective, taxes are probably the biggest expense in a divorce if not properly structured.
Ameer Farooq 37:20
I think one of the things that I am taking away from this conversation is just how important it is to just realize, for everybody that, you know, these things happen and paying attention to these things, which maybe aren’t the most exciting things, you know, everyone wants to talk about handsewn versus stapedon anastomosis, or some other technical things in surgery. But you know, these are the kinds of things that will really, potentially make you suffer in the long term. And so I’m curious, you know, just going back to sort of my personal situation. I’m new in my career. I’m curious if you have any suggestions specifically for residents, who don’t typically think about residents financial planning, because, you know, they have a relatively low salary, I guess, from if you compare it to a fully trained physician or surgeon. But I wonder if you have any thoughts or suggestions or advice for residents in terms of financial planning?
Shane DiNapoli 38:22
Yeah, absolutely. So, you know, the first thought would be this. We, as the resident, you’re responsible, only you know, how much money you make, and only you know what you want to do with that money, right? Or whether you want to spend it, whether you want to save it, whether you want to buy a house, whether you want to just live comfortably, it doesn’t really matter. As you figure that out, as you understand what you want to do with the money, then the next conversation would be finding advisors, right? Certainly, you know, financial advisor and tax account, and then tell them what it is you want to accomplish. That’s generally what happens. Normally, every relationship that I have that turns out to be successful, the conversation is, what do you want to do? Let’s talk about the lay of the land. Let’s talk about, do you have a lot of student debt? Do you want to get rid of that quickly? Well, there’s ways you can do that. Do you have no debt and you want to buy a big house right away, or you want to live conservatively, or you want to travel, whatever it is, it doesn’t really matter what it is. But be clear on what it is that you want to accomplish. And then from there, the right structure follows. The advisor will then tell you how you can do that, how you can accomplish that, or what the consequence of that decision is, and then you can make the decision informed. And the reason that’s so important today, is after the first $200,000 of earnings, you’re in partnership with the government. They’re getting half if you do nothing, and you can always do nothing. Right? You know, no one has to be tax efficient. It’s not an obligation. I remember lecturing a couple years ago at the Doctor’s Lounge at the Foothills, and during the conversation, somebody had asked it rather sheepishly, she said, “Am I being foolish by not incorporating? I haven’t incorporated for the last 10 years.” And I’m like, well, not necessarily, what have you done with the money that you’re making? And her response was, well, I’ve paid off my mortgage. And so from that perspective, that was her goal. She accomplished that goal, there was no inefficiency, there’s nothing wrong with that strategy. She’ll incorporate eventually. Every physician, especially every surgeon that makes anything more than $500,000 a year will incorporate in your lifetime, you don’t have to do it right away. If your goal is to achieve some other use financially or some other financial outcome, then so long as your structure matches that, then you’ll end up with the right plan. But if the goal is to save wealth in the first couple of years, then nothing beats a corporation. But it’s being clear on what it is that you want to do with the wealth that you’re making. And I think that that’s probably the number one shortcoming of you know, any resident that I’ve talked to, in terms of that first year. A lot of them haven’t even thought at length about what do you want to do with all this money that they’re making.
Ameer Farooq 41:40
Again, it’s really sage advice. And I’m glad I’m talking to you now, as opposed to hearing this later. Another question that I got from one of my friends who just started community practice is, he wanted to know: what are the top reasons why physicians get audited when they submit their accounting at the end of the year? And how can we avoid that?
Shane DiNapoli 42:06
Well, that’s a very good question. There are four generally different areas that will trigger an audit. One of them is random, your number just comes up. In 25 years, I’ve seen that happen twice. So that one’s pretty rare. So there’s the random, then there’s what’s called the selective audit. A selective audit would be where CRA proceeds in abuse, certainly for professionals, what they’ve chosen for selective audits, over the last four years, has been travel, tourism fees, and professional fees. And so what they’ll do is, once again, there’s nothing you can do to avoid that. Statistically, x percentage of all professionals are going to get a letter in the mail, asking for the supporting receipts for say, their travel for the year. Once again, this can’t be avoided. And there’s nothing you can do about that other than keep good records. The third one is somebody actually contacts the CRA to suggest that you’re doing something inappropriate. That one’s more common in a divorce, right? Or, you know, very uncommon for professionals. It’s more common if you’re a mechanic or something like that. So there’s that one. And then the fourth one is statistical variance. That’s the one that you can actually control. And so an example of statistical variance would be meals and entertainment, for example, that exceeds your revenue by more than 5%. And so in that instance, you know, it’s easy enough to measure, or just an absolute dollar figure. Now for the most common one would be meals and entertainment. Certainly not a problem for this year, but maybe in the past, if you had say, season’s tickets to the Calgary Flames, that would be no small sum. And that amount would trigger an audit, and certainly has for a couple of my clients where they do have season tickets. there’s nothing to be fearful of in an audit of that nature. In that type of audit, what you would want is records to survive the audit. And so if your goal is to avoid an audit, the consequence of avoiding the audit would be forfeiting expenses that you may be entitled to. And so you can certainly take that perspective. But if you are know that you’re probably leaving something on the table, a better standard would be to go, what can I do to survive on it? And what you can do to survive audit is to simply keep the appropriate records. And so from that perspective, you just need evidence that the expense was incurred. So for meals and entertainment, you don’t actually need the receipt from Earl’s if you go to Earl’s. If you have the expense for Earl’s on your credit card, it’s self evident that you went to a restaurant. Where you are abreast is if you decide to host a function within your department. When you go to Costco and you spend $1,000 on food and alcohol, in that instance, you would want to keep the receipt and then simply be prepared for the audit. Right? But statistically, in terms of audit I would say, it’s a rarity. Every professional will be audited maybe once or twice in their career, right? Within their professional Corporation. But it will be a function of these other components, such as selective audits that you don’t have any control over.
Chad Ball 45:38
The last question I wanted to ask you on the way out is if you have any advice or any sort of viewpoint of the concept of insurance, whether that’s maybe mortality insurance, or whether that’s disability insurance? As a Financial Group in general, how do you o you view those two elements?
Shane DiNapoli 46:03
Well, I mean, there’s different kinds of insurance, certainly, that you’ve touched on, right. So there’s the Disability Insurance, and to the extent you have disability insurance, I can’t imagine anyone that wouldn’t, but I do have some clients, physicians that have had to make long term disability claims. It’s paid for, and it was money well spent. And to the extent that disability insurance is purchased, you have two options. You can do through the corporation, or you can do a personally. If you do it through the corporation, then any benefits that are received are taxable. And most disability plans payout at 60%, on the presumption that you’re not running it through the corporation. And so you bear in mind that if you do run through the court, you have to pay tax on the benefit. And there’s no one doing that outcome, you can’t change your mind later, at some later point in time. Then there’s critical illness, and critical illness can be purchased either personally, or through the corporation as well. The advantage of purchasing through the corporation is that the company gets to expense it. The disadvantage is if you do get benefits, then they’re taxable, but critical illness is usually a lump sum as a result of some of that. And I look at it in the context of it’s really like short term insurance, so it’s better suited for the corporation. Also, if you don’t make a claim, lots of critical illness plans will actually refund your premiums. And so from that perspective, there are a couple of good reasons to run it through the corporation. But once again, it’s a personal choice. For Life Insurance, there’s different kinds. For term insurance, for example, you’re really just ensuring that there’s going to be a payout on death. It’s zero benefit to you because you’re dead, so it’s really about providing for your estate. And from that perspective, the term insurance is quite useful, to the extent that you don’t already have enough wealth to self insure, right? You know, if you’ve already got two or three million worth of wealth, then the term insurance is really just enriching your estate after you’re gone and all the power to you. But it’s no longer a utility. It’s not serving its purpose, at least in my mind. On the other types of plans, it’s just whole life, or I forget what the other one’s called. The other types of life insurance that have a savings component, I’m not a fan of those plans. And so I’m probably going to offend anyone in the insurance industry by saying that, but I’m not a flat fan of them on the basis that their key benefit is the tax deferral on the investment income realized in the plan. But that’s only useful to the extent that you need to shelter that income. Now, with the way tax rules currently exist on investment income, and professional corporations, if properly managed, you don’t need the deferral. And so from that perspective, they’re really selling a product that’s going to give you a significant return 15 or 20 years down the road, but that the value of that plan in the short term being less than 10 years is zero, because there’s no cash surrender value in the first 10 years of those plans. And I find that those plans are oversold to residents or young professionals that don’t actually need it. They don’t need to shelter their investment income because they don’t have enough to need sheltering. And so, you know, from that perspective, my advice would be when you are talking to an insurance advisor is the caveat that you’ll make your decision after you’ve talked to your tax advisor. So that if you do decide to purchase one of these types of policies, it’s in alignment with your broader wealth management strategy. At least that’s the “throw me under the bus” as opposed to trying to battle your way, all by yourself.
Ameer Farooq 50:35
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