Often dentists are busy caring for patients’ dental health and neglect to review their own financial health.
Here is a case of how improvements, tax savings in particular, could be achieved by making some appropriate maneuvers.
– Dr. David (age 38), a general practitioner, owns his dental practice outside the GTA;
– His wife Betty (35) stays home and looks after two children aged 3 and 5;
– Their home is in Dr.’s name only and worth about $950,000 with a mortgage of $450,000;
– His dental practice makes $320,000 net after paying Betty $100,000 salary annually plus CPP/EI of $3,209;
– David’s dental practice owes $300,000 to the bank, interest @ prime with monthly principal repayment of $5,000;
– David’s practice is worth about $800,000;
– Employment Insurance (costing about $1,800 for Betty and the dental practice) is deducted from Betty’s salary. Betty does some office administrative work (about 16 hrs per week);
– Dr’s parents, both Canadian residents, are over 65 and each receives Old Age Security and CPP totaling $20,000 per year. They do not receive Guaranteed Income supplements (GIS);
– Betty and David do not have a will or a power of attorney;
– David and Betty contribute the maximum to their RRSP’s;
– David subsidizes his parents’ income by gifting them some $29,000 (after tax dollars) per year;
– David and Betty need all the money from the practice to sustain their personal lifestyle;
– Dr. David does not have a professional corporation.
– Save $1,800 per year of Employment Insurance;
– Save annually $ 38,000 in the family tax bill by income splitting;
– Creditor proof their matrimonial home;
– Save $11,500 of potential probate fees;
– Receive $10,000 death benefit tax free in cash on death;
– Reduce the risk of being double taxed;
– Repay practice loan with cheap tax dollars, increasing cash flow by $26,000 per year.
– Apply for Employment Insurance exemption; Dr. could recover up to three years of Employment Insurance paid in respect of wife’s salary;
– Setup a professional corporation (PC) and include spouse and parents as shareholders;
– Share structure should permit income splitting;
– Dr and spouse could become equity shareholders enabling them to claim up to $1,500,000 of life time capital gains exemption when PC shares are sold. This could save $348,000 of taxes;
– Pay $35,000 dividend to each of the parents. Their total income should be under the clawback threshold i.e. avoids paying back part of the Old Age Security. The personal tax on the $35,000 should be no more than $6,000. This becomes a tax effective way of gifting money to parents;
– Change home ownership to spouse’s name; since the home is a matrimonial home, Dr should still be entitled to 50% of the house value even if they get divorced. Please check with your family lawyer;
– Reduce wife’s salary to $21,000. By doing so, you have avoided the potential double taxation. The tax department could disallow the excess salary of $79,000 ($100,000 – $21,000) in Dr’s practice (i.e. pay back tax on $79,000) while spouse’s tax return would not be revised (i.e. taxed at full $100,000 salary);
– The $21,000 salary would create room for wife to deduct $14,000 of child care expenses;
– Dr could receive a salary of $130,000 in order to create the maximum RRSP contribution room;
– Dr and wife could each receive dividends from the remaining funds from PC, which could be used to pay down home mortgage;
– Employment contract – when setting up a PC, a lawyer could draft up an employment contract which include a death benefit of $10,000. This is a tax deductible expense to the PC while a tax free receipt to the beneficiary;
– By using a PC to repay practice loan with cheap tax dollars, less money is needed. How much? $26,000 per year;
– Have your lawyer prepare double wills. This will save you probate fees; in Ontario, this is about 1 ½ % of the value of your PC shares.
Have you had your financial check up recently?