Who Should Consider Incorporating?
By now, you’ve all heard that dentists can incorporate i.e. convert their dental practice into a professional corporation (PC). However, a common question that arises is: Which dentists should incorporate? Dentists who earn in excess of $115,000 in taxable income and who have a practice loan (loan used to finance the dental practice) should consider incorporating regardless of whether they need all of the money for their personal use. Why? Because they stand to save $62,000 for every $100,000 of practice loan.
Dentists who have no practice loan and who earn in excess of $115,000 in taxable income and can afford to leave money inside the corporation should also consider incorporating. Why? Because each year, the PC’s tax rate is only 18.6% vs. 46% on the first $300,000 of taxable income (revenues minus expenses) saving significant tax dollars. The money saved could be invested in the PC’s name. This savings inside the PC serves as a tax effective way to save for your retirement. Yes, the PC serves as a super sized pension plan. Also, when selling your practice, consider selling the shares of your PC as each shareholder may be able to shelter the first $500,000 of capital gains from any taxes.
Who Can be Shareholders of Your PC?
Effective January 1, 2006, the dentist, spouse, children and parents of the dentist are permitted to be shareholders of the PC. However, in-laws, cousins, nephews, brothers, sisters, grandparents and grandchildren of the dentist are not permitted to be shareholders in the PC. Why make additional family members shareholders of the PC? If these family members are low income earners, then dividends can be paid to them. Such dividends will be taxed at a much lower tax rate. Approximately $31,750 may be received virtually tax free by an individual 18 years of age or older who has no other source of income. This is also a very tax efficient way for paying for your children’s university education.
Tips and Traps?
When adding family members, consider the following issues and ensure these issues have been addressed with your accountant and lawyer:
|2.||Children becoming wayward.|
|3.||Death of shareholder.|
|4.||Dispute between the tax department and yourself involving the valuation of your practice.|
|5.||Ability to pay dividends to one or more shareholders without having to pay to other shareholders.|
Traps associated with a PC include:
|1.||If you are currently in a partnership, the tax savings outlined above will be reduced.|
|2.||Where more money than profit is drawn from the practice, thereby resulting in a deficit in their capital account, they may not be a good candidate for a PC. Dentists who pay their RRSP, personal taxes, disability and critical illness insurance from their practice are often in this position.|
|3.||Shareholders must be Canadian residents.|
The legislation permitting family members of a dentist to be shareholders of a PC has created tax saving opportunities for many dentists. Dentists who previously had a PC should consider adding permitted family members to be shareholders of their PC. Dentists who do not have a PC should request their advisors perform a cost/benefit analysis of setting up a PC.