If I need all the money from my professional corporation (PC) for personal use, setting up a PC will not save me any money.
If you must take out all of the cash from the PC, you may save taxes up to 2.28%. Also, if you have a practice loan, and you are at the top tax bracket i.e., have a taxable income in excess of $118,000, you will save about $62,000 for every $100,000 of practice loan by setting up a PC.
The dentist must own all of the shares of a PC.
Effective January 1, 2006, non-dentist family members are allowed to own non-voting shares of a PC. Non-dentist family members are parents, spouse/common law partner and children of the dentist.
The non-dentist family members must own less than 50% of the PC or the dentist must own more than 50% of the PC.
Non-dentist family members are only allowed to own non-voting shares. These non-voting shares may represent any percentage of the total PC depending on the goals of the dentist.
Only the dentist can claim the $500,000 capital gains exemption on the sale of the PC shares.
Any shareholder of the PC, if certain requirements are met and if the shares they own have increased in value, may claim the $500,000 capital gains exemption to shelter the capital gains arising from the sale of the PC shares.
If I transfer my practice into a PC, then I must wait two years before selling the PC shares before I will qualify for the $500,000 capital gains exemption.
If properly structured, you can transfer your practice into a PC today, sell the shares of the PC soon thereafter and be able to claim the $500,000 capital gains exemption when you sell the shares.
Now that I can include my children as shareholders of my PC, I would not do so if the children are under 18.
It may save you taxes when you sell your practice later to include your children as shareholders now regardless if they are under 18. Why? They enjoy the growth (if any) of your practice starting now rather than later. Your children may also qualify for the $500,000 capital gains exemption, when the shares of the PC are sold.
Although I can include my spouse and children as shareholders of my PC, I am concerned about a divorce and my children becoming wayward or themselves getting divorced.
The shares can be designed to address these issues.
Setting up my PC is all I need to do.
When setting up your PC, you should also consider:
|a.||Double wills – as this will save probate fees upon death which amount to about 1.5% of the value of the PC shares|
|b.||Employment contract – which includes a death benefit provision enabling your loved one to receive money tax free upon your death and your PC will actually still get a tax deduction|
If my PC pays 18.62% tax and I pay 31.33% tax on dividends that I receive from the PC, then the total tax rate is 18.62 + 31.33% = 49.95%. This is more than the top personal tax rate of 46.4% if I did not have a PC.
Using a PC saves at least 2.28%.