A comprehensive approach to dentistry and tax planning yields better results. I will address the comprehensive approach to tax planning in order to generate tax savings.
Five Main Principles of Creating a Comprehensive Holistic tax savings plan is as follows:
- Ensuring that you claim all the possible tax deductions or credits to which you are entitled
- Paying taxes later vs. sooner where possible. This is known as “Tax Deferral”
- Income Splitting. This involves dispersing income into as many “poor” hands as possible
- Choosing one type of income over another
- Avoiding taxes all-together
Here are some specific strategies that you may consider implementing today in order to save taxes in the future.
Personal tax credits which may save tax dollars:
- Public transit amount
- Children’s fitness amount (children 16 and under)
- Children’s arts amount (children 16 and under)
- Home buyers’ amount (must be your first home)
- Adoption expenses
- Tuition, education and textbook amounts (full time/part time)
- Examination fees
Tax saving deductions:
- Interest: Rearrange your debts; pay down your home mortgage as quickly as possible using practice profits while slowly paying down practice loan. You will have, in essence achieved tax deduction of your home mortgage interest.
- Trigger capital losses to offset capital gains
Why pay now if you don’t have to when the government permits you to do so. There are various ways you may defer tax, for example, contribute to your RRSP or incorporate your practice. If you are at the top tax bracket of 46.4 per cent, you have successfully deferred $0.464 on every dollar you contribute to your RRSP, i.e., $10,000 RRSP contribution will cut your current tax bill by $4,640. Taxes will be payable when you withdraw the funds out of your RRSP. All income earned inside your RRSP will be taxed at the same rate at your withdrawal. You must have “earned income”, including salary, business and rental income in the previous years to generate RRSP room. Dividend income does not generate RRSP room. The maximum RRSP deduction for 2013 is $23,820 which means you must have $132,333 of earned income in 2012. Incorporating your practice, will not only defer taxes, it saves taxes too, even if you withdraw all profits from the corporation. In addition, you have more flexibility in planning your remuneration mix i.e., salary vs. dividend, income splitting with your family, tax deferral and enjoy/multiply the life time capital gains exemption.
The chart below illustrates the tax savings on incorporating with and without “no” income family members. If you have two no income family members (for example parents or children attending university), you could save as much as $48,000.
|DDS /DMD||Professional Corporation *without familymembers||Professional Corporation withTwo no income family members >18|
|*Profit (revenue minus expenses) before salary to DDS/DMD||400,000||400,000||400,000|
|Salary to DDS/DMD (including CPP and EHT)||N/A||-137,000||-137,000|
|Corporate taxes (including CPP and EHT)||N/A||46,000||46,000|
|Total corporate and personal taxes||169,000||162,000||121,000|
Income splitting to the extent possible will reduce your family’s tax bill. The basic idea is to shift income from a high tax bracket person to a low income person. Income splitting may be in the form of paying a reasonable salary to family members, paying dividends to poor family members or loaning dollars to poor family members/minors to invest.
Equivalent Personal Net Return after tax investment yields
|Interest or Ordinary Income||Capital Gains||Canadian Dividends(non eligible)||CanadianDividends (eligible)|
You are in the same position, receiving 69.79 in capital gains versus 100 in interest. The above does not include the newly proposed Ontario two per cent surtax (i.e., additional Ontario income tax on incomes over $500,000).