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The Competitive Landscape
Fierce competition can come from all sides: general merchandise retailers, “big box” stores, consolidators and franchisors, the mysterious appeal (and low prices) of cross-border stores, and, of course, the Internet. And don’t overlook the ‘ultimate threat’: laser eye surgery.
Optometry is a profession in transition. Once, it looked very much like a medical practice – operating out of an upper-floor office, with a waiting room full of people.
But today, the business is characterized by ground-floor retail stores, whose highly decorated showrooms are filled with expensive (but high-margin) eyeglass frames and accessories.
An all-too-common experience: a shopper spends an hour in your shop, taking up sales clerk time, only to walk out without buying anything. You then hear that he or she purchased the exact same item, on the Internet, at a lower price! And perhaps from the same company that supplies you with inventory !
It takes a CPA firm with a lot of experience in this industry to fully appreciate the relevant issues – and Lohn Caulder’s got that, in spades.
The Challenges of Retailing
Traditionally, optometrists only did eye examinations. Their fees were paid by the public medical system, sometimes by private insurers as part of an employee group health plan, and then the rest was paid by the clients themselves.
This continues, of course, but nowadays most optometrists also sell eyeglasses – and this carries with it a host of issues, which can include:
- Sales taxes: provincial sales tax does not generally apply to examination fees, or prescription eyeglasses, but it does apply to sunglasses and accessories. The GST or PST (if you are in a province that harmonized its sales tax with the Federal system) has similar rules of application, but of course must be accounted for, and reported, separately in a non-PST province (such as BC is . . . again) ! Lohn Caulder is familiar with the preparation and filing your provincial and Federal sales tax returns – we in fact, have personnel dedicated to this particular tax specialty.
- Inventory must be financed. This could involve bank lending, which carries with it various criteria and, often, reporting requirements. Lohn Caulder is familiar with the (often quarterly) special reports required by banks in these circumstances.
- Inventory write-downs are almost always necessary, since it is virtually impossible to guess ahead of time what particular style or size of frames will sell well. Determining the appropriate level of write-downs can be a significant financial reporting issue, and of very much concern to your bank.
- Shopping malls can insist on a minimum design and quality of leasehold improvements, so as to match the general “tone” of your fellow merchants. Some “fashion streets” can also have very high rents, on a square-foot basis. It’s usually expensive to locate your business in a high-volume location, but there may be little choice, given the need for walk-by traffic.
- If located in a shopping mall, you likely must report sales to the property managers on a regular basis, so that they can calculate and charge you a rental surcharge, according to the terms of your lease. Such are the realities of modern retailing. Lohn Caulder is familiar with the format and nature of such reports.
Calculating and Claiming Input Tax Credits
GST or PST carries with it the additional complexity of calculating input tax credits, which can be a significant financial relief to your practice. Examination fees are “exempt”, while the sale of frames is either zero-rated (mostly) or fully taxable (e.g., sunglasses and accessories). You can claim back a portion of the GST/PST you are charged on general business expenses, but only on the reasonable portion that relates to zero-rated or taxable revenues (not the “exempt” exam fees). There are basically two approaches taken for pro-rating these costs: on a dollar-of-sales basis, or (more commonly) a ‘share of square footage’ basis. The latter approach is favoured because frame showrooms usually take up much more space in the shop. The actual examination room is that little dark closet, way in the back !
Tax planning opportunities with private corporations
Of course, the same opportunities for use of private corporations for capital accumulation and income splitting exists for optometrists as for any other profession or business, and the advantages of these structures are explored elsewhere in this area of our webpage.
Sale of the practice for tax-exempt capital gains
One big advantage that optometrists have over other professions is the potential for sale of the practice to a third party. Such sales are rare or impractical in many other professions. However, in conjunction with a private corporation structure, it is possible for optometrists to exploit the ‘capital gains exemption’, which makes it conceivable to sell the shares of your corporation for a capital gain as high as $813,600 without paying any income tax! And, often if the business is a multi-location operation with significant revenues, (fairly common these days), trusts and other structures can multiply that $800K across an entire family, leading to a potentially fantastic financial windfall.
On the buyers’ side, the tax effect of a share purchase is (slightly) less advantageous, but usually can be worked around. Lohn Caulder has advised in hundreds of transactions involving sales of shares of optometric corporations and other practices. We are familiar the many ‘due diligence’ issues that buyers of corporate shares must address, always with a view to ensure that the deal closes.
