This is the second of a two-part article addressing issues surrounding the incorporation of a dental practice.
(Tax and other benefits of incorporating was addressed in the previous issue)
2. Restrictions, traps and disadvantages
1. PREREQUISITES TO INCORPORATION
Professional governing body
A professional corporation requires certification by the RCDS.
At what income level should I consider incorporation?
In general, if you earn more than $120,000 of taxable income (revenue minus expenses), then you should consider incorporation.
If I need all the income I earn to pay for personal expenses (such as home mortgage), does it still make sense to incorporate?
In general, no, since the costs of incorporation exceeds the benefits.
If I am an associate, should I incorporate?
In general, no. Most times the cost is greater than any potential benefit. Additionally, Personal Service Business rules could serve as a deterrent in this regard.
Obtain a valuation of your practice, as this will be used in connection with the notional sale of your practice to the newly formed professional corporation. Any gain on the notional sale may be deferred, through a tax maneuver, which should be done with assistance from someone with specialized tax knowledge.
Do not embark on incorporating your practice without advice from your lawyer.
2. RESTRICTIONS, TRAPS & DISADVANTAGES
Who can own a Professional Corporation?
Only dentists can be shareholders of the professional corporation. Since the professional corporation is a separate legal entity from the dentist, the professional corporation must file its separate corporate tax returns (federal and provincial) in addition to the dentist who files their own personal tax return on an annual basis.
The name of the professional corporation must include “Professional Corporation”.
Restricted activities of the Professional Corporation
The professional corporation’s surplus funds are to be invested only temporarily, although at the time of writing this article, there is a change in legislation being contemplated, namely, deletion of the word “temporary”. Through the passage of time, this definition will be more fully explained. Currently, this appears to be a “gray” area.
A professional corporation must not be associated with any other corporation. Otherwise, the $200,000 threshold at which income is taxed at the low rate of 18.62% must be shared by the associated companies. Where a dentist currently has a technical or hygiene service corporation, caution must be exercised. Contact your accountant before establishing a professional corporation.
Costs to Incorporate and Maintain
There are legal and accounting costs to establish a professional corporation. There are annual fees to maintain the professional corporation.
Employer Health Tax (EHT)
Self-employed individuals are not subject to EHT. A professional corporation must pay EHT of 1.95% on annual salaries in excess of $400,000.
Taking money from the professional corporation
Money can be taken from the professional corporation in
the following ways:
b. Salaries or bonus
c. Loan to shareholder
The optimum mixture of salaries and dividends can be calculated and varies depending on circumstances. Taking money from the professional corporation via a shareholder loan should be done with caution and your accountant’s advice.
Reserve for non-calendar year ends
This issue only applies to professionals who had or have a non-December 31 year-end and who have been in practice since before 1995. Professionals who are affected and who incorporate in 2003 should anticipate a larger tax bill for 2004 due to the reserve taken in 2003.
The new legislation enabling Ontario dentists to incorporate have many tax and other advantages. Consult your lawyer and accountant to determine whether the advantages of incorporation outweigh the costs.