Is it time to open your own practice or revise the structure of your existing dental practice?
As with other professions, opening a dental practice can be done through three main structures. Sole Proprietorship, Partnership, or Professional Corporation (PC). From an accounting perspective, the recommendation would be to consider incorporating as a Professional Corporation (PC) for the numerous tax advantages and flexibility it permits in managing revenue, income and tax planning. The best time to incorporate would be from inception, however, incorporating can occur with a more mature practice as well. Here we review tax considerations for incorporating your dental practice.
Incorporating your dental practice offers the opportunity for tax deferral. Revenue can be kept within the corporation as retained earnings allowing the shareholders to have more control over their personal income tax planning. Shareholders have the ability to defer the payment of some income tax or can adjust the amount of tax by receiving dividends rather than a salary or a combination of dividends and salary. New dental practice owners may also choose to wait until the business is cash-flow positive before taking any compensation, thus deferring personal taxes. The small business rate is 12.2% on the first $500,000 taxable active business income for a CCPC and 26.5% after that.
Net income generated of $200,000
Personal taxes payable – $70,000
Corporate taxes $nil
TOTAL TAXES $70,000
Assume you only require $100,000 to live on:
Personal taxes payable of $25,000
Corporate taxes $12,500
TOTAL TAXES $37,500
TAX DEFERRAL/SAVING $32,500
Tax compliance is an important piece of a corporation’s financial management. Failure to comply can lead to costly and time-consuming audits and fines. Working with a trusted professional chartered accountant to help navigate the tax laws and systems will allow owners of dental practices to spend more time focusing on their clients. A professional chartered accountant can provide payroll support, produce year end T4 and T5 slips, complete corporate tax returns, and provide guidance on when to pay installments. These not only save the business owner time but offers a degree of assurance that the professional corporation is meeting its obligations.
In 2001, when the government introduced incorporating as an option to professionals, an amendment was made that permitted doctors and dentists to allow family members to be non-voting shareholders. There are some limitations on how much can be distributed. However, the benefits of being able to issue salaries or dividends to family members in lower tax brackets offer some tax planning advantages that are worth considering.
Compensation – Salary vs. Dividends
With a professional corporation, there are three options for receiving compensation from the dental practice: salary, dividends, or a combination of both. For comparison:
A big benefit of your dental practice being incorporated is the ability to invest your tax savings in the corporation in various assets such as equities or even real estate. Further to the example above, annual tax deferred savings of $32,500 generating an 8% per annum return on investment, can compound to $600K in only 10 years and $1.8M in 20 years. Several strategies are available to extract these funds out of the corporation tax effectively which may include refundable taxes to the corporation or tax free capital dividends to the owners.
Selling Your Practice
When it is time to sell your practice, you will have the ability to claim the $900,000 capital gains exemption on the sale. What that means is, where the shares qualify, the owner can sell them and the first $900,000 of capital gains are exempt from tax. More information on succession planning or selling your dental practice can be found in this article. (add link)
There are a few other items to consider when looking at incorporating your dental practice. It may be tempting to purchase assets for personal use, such as a car or house, through the corporation. Keep in mind that a corporation is subject to strict rules governing the taxation of shareholder benefits such as shareholder loans or the use of company assets.
Life insurance is also much cheaper to purchase when funded using corporate dollars. In this case, the policy will be held by the professional corporation, and upon death, the insurance will be paid out to the company. Consequently, there are additional considerations when it comes to transferring the insurance money from the corporation, including the possibility of extracting the funds tax-free as a capital dividend.
Incorporating your dental practice offers many benefits to the owner(s), shareholders, and their families. There are many tax implications at every stage of the life cycle of the professional corporation from inception to growth to sale. Our team works with dentists and professionals like doctors, chiropractors, physiotherapists, etc. considering a professional corporation to provide a comprehensive review of the benefits, factors to be considered, tax planning, compliance, and valuations.