With several hundred dentists as clients, I have watched dental practices evolve through its many stages, and although each practice has its unique qualities, a common element exists in all dental practices. From the start of a dental career, through its growth and expansion and into retirement, a dentist will be constantly inundated with information and suggestions from family, friends, colleagues and other “advisors.”
Although well intentioned, such advice often results in confusion. For the most part, the dentist is divided by multiple, yet conflicting suggestions. As a result, my clients have often asked me to discern good business advice from bad advice. So, my contributions to the Professional Advisory will address both frequently asked, as well as unusual questions that I have encountered.
The prevailing (A significant or an outstanding or an important?) issue is the proposal by the Ontario government to allow professionals such as dentists, to incorporate. In anticipation of the approval of this legislation, the following tax planning issues should be considered.
For many dentists, the opportunity to incorporate their dental practice will save taxes, since income will be taxed at a lower rate. As well, professional corporations provide further tax deferral techniques, which will save the dentist from paying taxes sooner than necessary. In general, if a dentist is established and in a profitable practice, incorporation may be a good idea.
To understand how incorporation will save taxes, it is important to understand the concept of tax deferral. Simply speaking, a delay from paying the full amount of taxes occurs when the corporation “holds” the practice’s earnings until the dentist requires it for personal use. The amount of tax and the length of the delay will depend on how long the funds remain in the corporation. A corporation will be taxed on the practice’s income at a lower tax rate until the funds are paid out as dividends to the dentist.
Currently, a dentist is able to incorporate the hygiene portion of their dental practice through the use of a Technical Service or Hygiene Service Corporation (TSC/HSC). By using a TSC, a dentist is able to take advantage of the lower tax rates of an incorporated company and also facilitate income splitting (and therefore tax savings) with those who are in a lower income tax bracket. Moreover, unlike a professional corporation, non-dentists may own Technical Service or Hygiene Service corporations. Additional tax savings may be realized when the dentist sells shares of the TSC by realizing their $500,000 Capital Gains exemption. There are some limitations to the TSC/HSC and a cost/benefit analysis should be done before a dentist implements a TSC/HSC. It is advised that the dentist consult a lawyer and an accountant to determine the benefits and feasibility of a TSC/HSC.