Article by: David Bluteau and Darren Caseley
Do you know the secret to financial success? Maximizing cash flow & reducing your debt as an incorporated professional. Getting there is within your reach if you know the steps to take.
You already know the golden rule of financial success – “spend below your level of income”. Easy enough to understand. The tough part can be putting it into practice as we all live our lives.
The really good news – Incorporated Professionals can get a Turbo Boost in this department, meaning more dollars stay in your pocket. And everyone’s situation is different, so you must first discuss these strategies with your own tax professional or Chartered Accountant to ensure they make sense for you and your family.
Most physicians see a similar path: finish residency, start your practice, incorporate, pay down student debt, pay down the mortgage, start saving – then retire wealthy, healthy and happy. Seems simple enough… so are you ready to do it?
You may know the book The Secret, by Rhonda Byrne. In a nutshell it discusses the process of focusing on the things you want in life to achieve success. The problem is: The Secret only gives you half the picture.
Yes, you have to establish goals and priorities however you also have to DO something to realize those goals: TAKE ACTION. The “doing” part may be unique for everyone, but know this: Inaction will yield few results.
Start with the end in mind. Look at the goals you want to reach. Thirty-something aged physicians often have two immediate goals – paying down debts, and keeping taxes low.
Let’s address these two important challenges:
- Goal: keep your taxes low. A good tip – keeping your taxes low is a no-brainer to keeping more cash in your own pocket. Earning income as a “company” rather than as an “individual” can go a long way to making this happen. The bottom line is this – your personal corporation is taxed at lower rates, and then gives you flexibility on how to withdraw your personal income from your company.
- Goal: reduce your debts fast. A good tip – there is a right way and a wrong way to eliminate your loans and your mortgage. It’s not always just about a low rate, and pre-payment options. Your advisor can compare all-in-one programs to see how you could benefit, and potentially supercharge your debt-elimination. Many have the potential to save tens of thousands. Only selected banks have true all-in-one programs.
The overall theme here: Maximizing cash flow comes down to reducing the amount of taxes you must pay. As a professional in Nova Scotia, this is one of the main challenges you face: How do you structure your practice income to minimize taxes?
Your tax accountant and investment advisor should always help guide you, and you should judge the caliber of their advice by how well your income is planned and implemented. All too often, professionals feel like they have been left on their own to manage this very important task.
Here are three effective strategies to move you toward your goals:
- The “No RRSP” Option
Consider drawing income from your Medical Company (Medco) only in the form of dividends. Do not take any salary. Dividends receive preferential tax treatment. Your average tax rate will be lower, your estate has the potential to save significant taxes, and both you and your Medco will not be required to pay into the CPP. Without salary income, all retirement savings are retained in your Medco, not RRSPs.
This strategy will not be for everyone: You must be a responsible saver, and your Family Trust must be structured for discretionary distributions. Call us for a cost/benefit analysis to see if this is a fit for you. There are variations on this strategy that could work as well.
- Income Splitting
Reduce taxes further with income splitting. Adult family members, such as your spouse or your children, can be made shareholders of your Medco and they can receive discretionary dividends. This could provide additional savings for your family. For example: your spouse or a child in university with little or no other income could receive dividends, and take advantage of a lower tax rate. As well, if a family member does bookkeeping or other work for your practice, then consider paying them a reasonable salary. Discuss what is “reasonable” with your accountant.
- Income Planning
As an incorporated professional you have choice in how you draw income: salary, dividends, or even withdrawals from personal investments. Properly structuring your cash flow is the key ingredient to tax efficiency. You should know the best method to take income from your Medco.
No matter what – remember this: Primum non nocere: First, Do No Harm … and do no financial harm to yourself!
A high income does not automatically lead to wealth!
All physicians have their own story of why they became a doctor, and most have the same common theme – a desire to help others or to give back to medicine.
It takes discipline and dedication to become a doctor. At some point you set this as a goal in your mind, and you followed the required steps to achieve that goal. You had a plan.
So, why do so most physicians not have a plan for their financial future?
Author and researcher Thomas J. Stanley in The Millionaire Next Door gives us the following facts about physicians:
- You dedicate huge amounts of time to serving patients (most work 10 hour days).
- You are generally unselfish, giving a higher percentage of your income to noble causes than other high-income earners.
- You do earn higher than average income.
- However, physicians in general do not tend to be wealth accumulators.
A high income does not automatically lead to wealth. This is a fact!
The problem is: Your focus is on medicine – as it should be. Taxes, wealth goals, investments, cash-flow, CRA, etc.; Delegate these tasks to an advisor you trust, with experience in working with incorporated professionals to assist you.
Take a look at your plan. Do you have a written plan? Do you have clearly established goals? What is your time-line? How are you measuring your financial progress? If your investment returns are poor, have you been shown how this will impact your investment plan and your goals?
If you hesitate in answering these questions, you can call or email to participate in a Private Cash-Flow Strategy Session; a personal session where you will:
- Uncover obstacles that are limiting cash-flow today.
- Identify key strategies to maximize cash-flow.
- Create an action plan to help you reduce your debt costs, minimize taxes, & increase your net-worth.
Maximize your cash flow by using these, and more, benefits of an incorporated practice.
The Bluteau DeVenney Caseley Wealth Management Group of National Bank Financial
is the Family-Office for Incorporated Physicians.
