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Discussion Starter #1
Greetings fantastic financially frugal friends of the forum. I have been trying to get my financial house in order after recently coming to the realization that paying zero attention to my finances has been a poor strategy for the past decade or so. Of course to plan ahead I must know where I am and where I want to be in the future.

My issue is that I am having difficulty calaculating my current net worth. I am an incorporated professional (doctor/lawyer/dentist/etc) so pay myself out of my professional corporation. From my personal accounts I invest in TFSA/RRSP, pay the mortgage, etc. So that part is easy to calculate as portion of net worth. But I don't know how to value the money left in the professional corporation. I still have to pay pay corporate taxes on it throughout the year and also at the end of the year. I also must pay personal taxes when I take money out.

Anybody else in the same boat or have advise on how to calculate net worth for incorporated professionals?
 

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Strictly speaking, your corporation is a separate legal entity with its own net worth. However, it is a closely controlled private corporation. In all probability, the only people who have shares in it are you, your spouse if you have one, and your children if they exist. Effectively, it will be providing you and your family with income, and you control how it invests and spends its funds. So from a practical point of view, what I do is to include the corporation in my overall net worth. There is a future tax liability attached to the corporation, but the same can be said of an RRSP.
 

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I agree. One can get really 'cute' and try to incorporate tax effects to come up with a pseudo after tax number but it is pretty much a useless exercise given different tax treatments, marginal tax brackets, etc. It is different for everyone given their personal situation, i.e. DB pensions, RRSP, CCPC, etc., and is only an approximation at a point in time. It is an "amoeba" in the ocean currents.
 

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Yeah, that is a tough one. Two ways that I would consider. If you are merely using the Corp to run your income through, and you are not accumulating investments therein, then you may not want to assign any value.(unless it holds assets that are convertable to cash like equipment or real estate)
If there are assets and investments, some owners simply use the equity figure from their balance sheet on their financial statements.

A net worth is just a snapshot in time and IMHO should simply be used as as a metric to compare progress over time. Everyone has a different opinion as to just what should be included/excluded.
I think as long as you are consistent from year to year and are realistic. Don't include furniture, jewelry or your beanie baby collection etc that may have value to you but would be questionable on the open market and there is no real way of determining value.
 

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I am just impressed by the fact that I have never met anyone who was a doctor, dentist and a lawyer. WOW. That sure must have been a lot of University years for all that. lol.
 

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Agree I don't bother with calculating after tax when considering net worth. Really not that different from whats in your RRSP (notwithstanding whatever Morneau has in store for us)
 

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I would go with equity as well. If you were to sell it today, how much money would you net for it? I use this rule for illiquid assets as well like house and car.
 

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I would go with equity as well. If you were to sell it today, how much money would you net for it? I use this rule for illiquid assets as well like house and car.
Professional corporations usually have very few material assets to sell. Their principal business assets are the expertise and experience of their principals. Yes, a dentist might have a dental chair to sell. And there’s probably an old computer or two. But a family physician cannot sell his or her corporation on retirement, because a new family physician must set up a new corporation in his or her own name. So the equity in a professional corporation is basically the sum of its financial assets.
 

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While I’ve been out of the public accounting business for almost 40 years, I have some comments on this issue
- physicians - liitle value for goodwill - value primarily financial assets
- dentists - value for goodwill based on annual billings and net profit plus value of financial assets and equipment
- public accountants - value for goodwill based on annual billings and net profit plus value of financial assets
- lawyers - little value for goodwill - value primarily financial assets

The reason I don’t see much value for goodwill for a physician is that there is a shortage of physicians and a new doctor can establish a new practice quite easily. Dentists and public accountants, on the other hand, can sell their clentelle - the only question is determining the multiple.
 

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Medical corporations have no resale value due to regulation. Let’s say Dr. John Smith sets up a medical corporation in Manitoba. He already has a licence to practice medicine in Manitoba, but now he must also apply to the College of Physicians and Surgeons of Manitoba (CPSM) for a corporate medical licence. The articles of incorporation and CPSM require that he practice under the name Dr. John Smith Medical Corporation. When he retires, this corporate name has no value, unless he can find another suitably qualified Dr. John Smith to buy it. I’m not sure whether it would work if his son were also called Dr. John Smith, but obviously that situation would be exceedingly rare. Essentially the corporate name has no value beyond the career of the physician who established it. When Dr. Smith retires, if he wants to keep the corporation going, he has to continue to keep paying the licence fee. Otherwise, he must convert the corporation to a numbered holding company.
 

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Discussion Starter #12
So from a practical point of view, what I do is to include the corporation in my overall net worth. There is a future tax liability attached to the corporation, but the same can be said of an RRSP.
Agree I don't bother with calculating after tax when considering net worth. Really not that different from whats in your RRSP (notwithstanding whatever Morneau has in store for us)
Good points. This keeps things simple and makes me feel better about my finances lol. I basically just take out whatever I need to in order to max out RRSP contributions and then keep the rest in the corp. Since you two clearly also have PCs, may I ask if that your strategy as well?

A net worth is just a snapshot in time and IMHO should simply be used as a metric to compare progress over time.
Another good point. I never thought of it that way. I suppose I'm not competing against anybody anyway, except for less responsible versions of myself.

I am just impressed by the fact that I have never met anyone who was a doctor, dentist and a lawyer. WOW. That sure must have been a lot of University years for all that. lol.
Haha, well I haven't even brought up what else fits under "etc". lol
 

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Good points. This keeps things simple and makes me feel better about my finances lol. I basically just take out whatever I need to in order to max out RRSP contributions and then keep the rest in the corp. Since you two clearly also have PCs, may I ask if that your strategy as well?
Your strategy makes sense in the accumulation phase. However, I am already retired. I maxed out RRSP contributions earlier in my career when I had a salary, but after building up substantial assets in my corporation, I stopped contributing to my RRSP. My rationale is that my corporation’s financial assets are effectively a (somewhat) tax deferred account, and withdrawals are not subject to RMDs, so it is more flexible than an RRSP. I do take an annual dividend from my corporation (now a holding company), but I also withdraw from my RRSP/RRIF. My objective in doing so is to ensure that by the time I reach 71, the amount remaining in my RRSP will not be sufficient to force me into the top tax bracket.
 
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