Dentists running a business may deduct all reasonable business costs. However, this is often harder to decide than it appears. Some common issues are:
• Is an outlay an “expense” or “capital”?
• Is the expense really a “business expense” at all?
• What are some common deductions you might be missing?
• Which expenses are most likely to attract Canada Revenue Agency (CRA) attention?
If you buy something with continuing value beyond one year, it is usually considered “capital”. For example, a $50,000 piece of equipment cannot be expensed in the year of purchase because you expect to get many years’ service from it. The tax system allocates the cost to each of these future years rather than give a big deduction in year one; this annual “depreciation” is a deductible expense. So it matters how you characterize the asset involved, since the various asset-types have different depreciation rates, determining how fast you can write it off. For example, software can be written off over two years, but dental equipment has a much slower write off, so if you can separate out the software value in a large equipment purchase, you get a faster write-off, and thus save taxes faster. It’s worth money to you by speeding up your return on the equipment investment.
Often, you will face difficult decisions such as whether an outlay is a repair (needed just to keep the item at the same level of quality) or an improvement. For example, patching the carpet in your office is fully deductible if you are keeping the same quality flooring and just ensuring its serviceability is not degraded. But if you replace your carpet with ceramic tiles, you have upgraded the value of the building, so that improvement is usually capitalized as an additional building asset (only eligible for a slow write-off ). These decisions are often in the ‘grey’ area, so only make such outlays after asking your advisers how you can be as tax-effective as possible. Large equipment purchases such as a CEREC or E4D are always capital, but small items are often written off the same year, since they will be used up in only a year or so, and the amounts are too small to warrant separate tracking. CRA permits dental instruments below $500 to be written off as expenses.
There are many ‘grey’ area decisions as to whether an expense is really a ‘business’ expense at all. For example, the CRA can decide that salaries paid to related persons are not needed to earn business income. So while the related person still pays personal tax on their salary, the dentist or the Dentistry Professional Corporation (DPC) does not get a deduction, since the relative’s services were not actually needed for it to earn income. Therefore, be careful not to deduct salaries to related persons which are higher than what you pay non related persons for similar work. Another difficult area is travel. Deductible travel for continuing education includes hotel costs and meals incurred during your stay, and travel to/from the site. Be careful not to include costs for non-professional family members. Many continuing education promoters claim that travel costs for education-themed tropical cruises are deductible, but CRA only allows a deduction for reasonable costs of attending a comparable course in North America, so you should try in such cases to remove excess costs which are really just vacation expense. Flagrant abuse of these rules is a popular CRA audit target.
Many dentists do not realize that they can expense travel done for true business purposes. For example, if you use your personal car for business (such as to visit your banker or lawyer, or to buy supplies) you can expense each kilometer to the business. At present, you can recover 54 cents tax-free (for the first 5,000 km driven in the year) and 48 cents tax-free (for each additional km driven in the year) from your DPC for each business-related kilometer driven, and that cost is tax-deductible inside the DPC. Be sure to keep a careful record in a log book of the date, length and purpose of each business trip. Also, normally, if you spend $100 on meals and entertainment for clients, the tax rules only allow you to deduct $50. However, if the payment was for a meal intended for your staff, it is 100 per cent deductible (to a yearly maximum of six). So staff parties, dinners and other outings are still 100 per cent deductible up to the maximum of six per year, where all staff have been invited.
The CRA is always looking for deductions taken as practice expenses which they consider to be personal. Some expenses often scrutinized by CRA include: unreasonable salaries for family members; unreasonable travel expenses for continuing education and conferences, especially for family members; and personal meals and entertainment expenses. Deciding which items to deduct is often difficult, since excess caution may mean paying too much tax, but being too aggressive can result in CRA scrutiny, and a bill for taxes plus interest, and sometimes, penalties. Therefore, this area requires careful thought, and often, checking out your ideas with professional advisers first.