March 18, 2020
by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA
Preparing yourself and your finances for this turbulent time, created by Coronavirus, tumbling oil prices and stock markets, will help allay your fears and anxiety. Here are tips and strategies to help you weather the hurricane:
1) Protect/Enhance Cashflow
During times of turmoil and crisis, it’s important to have cash. In these situations, you can expect postponements, cancellations and closures resulting in a short-term cash crunch. Consider a business line of credit equivalent to 2 to 3 months billings. Check to ensure the interest you are charged is prime minus ¼%. This will give you a financial cushion should your office be closed or quarantined.
Request an extension of the repayment term from your lender. Instead of say, repaying the loan over 10 years, request repayment of the loan over 12 years. This will reduce monthly cash out flows.
Secure a personal line of credit, even if it means using your home as collateral. Interest is only payable when you use the line of credit and it will provide you piece of mind during these times.
Ensure you submit your claims to insurance companies ASAP. Follow up on outstanding accounts receivables as this will accelerate collections.
Review your discretionary spending. Dentists often ask, “Can I afford to buy something?” In many cases the answer is yes; the follow up question you need to ask is “Even if I can afford something, should I buy it?” You’ll find in many cases, the answer to the second question is no. Defer discretionary spending on personal items such as car, home renovations, etc., where feasible.
Irrespective of a pandemic, consider practicing the following guidelines:
1) Spend less than you make. If your day to day living expenses requires you to dip into a line of credit or max out your credit card, then re-evaluate what expenses you really need in your life.
2) Avoid purchases which result in ongoing maintenance costs. Often times you can afford to purchase something, but you may not be able to afford to maintain it. Purchases of cottages, second or more homes, plane, boats and to a lesser extent a pool are purchases where one may be able to afford to buy but cannot afford to maintain it.
2) Prepare your practice
Infectious disease protocols are relevant. If you need to upgrade equipment to be in compliance with infectious disease protocol, now would be a good time to do so in order to protect your patients and your practice.
In light of covid-19 concerns, now might also be the time to make your office more digital friendly so that you are able to work and connect to the office from home. During times of office closure, it will allow you or your staff to communicate with patients for rescheduling and cancellations.
Changes to tax rules also means you can get accelerated tax breaks on these purchases. The additional costs of equipment, laptops, computers, networking hardware and software would result in faster tax breaks, i.e. lower after tax cost. For example, a $10,000 sterilizer provides a $3,000 write-off in the year of purchase where previously it would provide only $1,000. You would be able to write-off the remaining balance at a rate of 20% in subsequent years. The chart below illustrates the depreciation rates for various purchases.
3) Prepare your staff
Review and implement office policies with staff with regards to travel, closures and pay. Employees who are travelling or have travelled recently need to be aware of the possibility of having to self-quarantine to protect patients and other staff.
Office closures also need to be discussed with staff. Staff may be able to receive employment insurance benefits due to the work shortages at the clinic. A record of employment would need to be filed for each staff member. If eligible, employees may receive up to $573 per week. Speak with your employment lawyer to discuss potential legal ramifications and your legal obligations.
You may wish to enroll in the Supplemental Unemployment Benefit Program. This will allow you to top up your employee’s wages without affecting the employee’s EI benefits. It requires registration. https://www.canada.ca/en/employment-social-development/programs/ei/ei-list/eiemployers-supplemental-unemployment-benefit.html
4) Review your insurances
Review your insurance coverage to determine if monies would be paid should your office be closed or quarantined. Ask your insurance advisor, how much money would you receive? How soon would it be paid out? How long will payments last?
If you are not insured or covered, consider adding coverage that would protect you in pandemic situations like the one we are currently facing.
If you or your corporation own a whole life or universal life insurance, ask your insurance advisor, the terms on which you can borrow using the insurance policy as collateral. Depending on the situation, the interest charged may be tax deductible.
5) Opportunities during a Crisis
If you have accumulated cash or other investments, then consider buying your own dental building. It will secure your future and protect your dental practice’s value. The Coronavirus will not likely last for 2 years while you or your successor may be practicing for decades. Short term circumstances may create opportunities which enhance longer term values. Do not over-extend yourself to achieve this goal.
Interest rates are extremely low. If you have cash invested in a term deposit, GIC you may be getting virtually no interest income. Opportunities are waiting to be seized.
1) Lend to your spouse, if you are in a higher tax bracket than your spouse. Ensure the loan is properly documented and that interest at the prescribed rate (currently 2%) is paid by January 30 each year the loan is outstanding and is reported in your personal tax return.
For example, where one spouse who is in the highest tax bracket (53.53%) lends $100,000 to their spouse who is in the lowest tax bracket (20.05%) who invests it and earns 5%, tax savings of about $1,000 ((($5,000-2,000) X (53.53%-20.05%)) could be achieved.
2) Consider borrowing to invest in your RRSP and ensure you repay the loan in a timely manner. If you are in a high personal tax bracket as many dentists are, then borrowing at incredibly low rates may be beneficial. Note that the interest is not tax deductible if loans are used for RRSPs.
3) Refinance your debt Approach your lender to determine if refinancing at today’s lower interest rate more than offsets any penalty involved in refinancing existing debt (i.e. mortgage, loans etc.)
There will be a year after the year of the Coronavirus. Stay healthy and be safe.
About the Authors
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or email firstname.lastname@example.org / email@example.com / firstname.lastname@example.org /email@example.com. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.
Please visit www.dcy.ca for more information!