As the 2010 Federal Budget did not provide you with any additional personal or corporate tax breaks, it is more critical to review your tax situation to determine if you are paying too much taxes.
The following are twelve possible symptoms of poor tax planning. Discussing and addressing these issues with your accountant or financial advisor could yield tax savings, i.e. if you exhibit any of these symptoms, you could be paying more taxes than you need to.
1. You, the dentist, receive an excessive salary (a salary in excess of $130,000 per year) where you have a professional corporation (PC) and your PC’s taxable income is much less than the $500,000 threshold amount under which income is taxed at the lowest possible corporate tax rate, currently 16.5%. Any additional salary over and above $130,000 may be taxed at the top marginal rate of 46% while the top combined corporate and personal tax rate on dividends equates to less than 44%. Your advisor could provide you with the right salary/dividend mix to minimize your personal and corporate taxes. You could go to the extreme if you do not believe in a Registered Retirement Savings Plans or care much about the Canada Pension Plan when you retire by receiving no salary and all dividends from your PC. A salary of $122,223 is required to maximize your 2010 RRSP and the top personal tax bracket starts at $127,021 (2010).
2. Employment Insurance (EI) is deducted from salaries paid from your PC to you and/or other employed family members. The maximum employer and employee 2010 EI is about $1,800.
3. You are the only shareholder of your PC but you have poor parents, spouse and/or children 18 and older living in Canada and there is no other corporation. Since 2006, parents, spouse and children of dentists are now permitted to become non voting shareholders of the PC. There is no such restriction on the ownership of a hygiene or technical services corporation.
4. No dividends are paid to poor family members (spouse, parents, children 18 and older) even though they are shareholders of your PC, technical or hygiene services corporations. Do you know that an individual who makes little or no income pays virtually no tax on a dividend of $35,000 per year?
5. No reasonable salary is paid to poor salary members even though they perform services for your office.
6. You or your loved ones do not have double wills even though you/your loved ones own shares of PC/technical/hygiene services corporation. Also, you do not have a will if you have a proprietorship or a partnership or other assets and you also do not have a power of attorney.
7. You do not have child care expenses, even though you have poor parents living close by, adult children and children under 17.
8. You only deduct 50% of all business meals and entertainment expenses.
9. You do not have any deductible business automobile expenses.
10. You have not claimed your lifetime capital gains exemption (CGE) with respect to your PC shares. This also applies to your family members if they own a hygiene or technical services corporation. You can claim your CGE and still own your practice.
11. You pay for your medical expenses personally with expensive after tax dollars instead of having your PC pay them and receive a tax deduction for the medical expenses using cheap corporate tax dollars.
12. You are not aware of your ability to deduct 100% of software and hardware purchases before February 1, 2011.
Reducing your tax bill should be done on an ongoing basis, much like preventing cavities. If you are like some dentists looking to save taxes only in the month of April, close to the personal tax deadline, chances are it is too late and you are reacting to a problem rather than being proactive in finding tax savings opportunities.