During the past 7 + years since dentistry Professional Corporations (PC) have been around, we have encountered omissions and errors being made during the setup of a PC.
Listed below are the top five errors and/or omissions encountered with a PC setup and the corresponding lessons we can learn:
|1.||No RCDSO authorization
One must apply and obtain approval from the RCDSO to carry on a dental business under a PC.
No application filed with the RCDSO or operating your dental practice without the RCDSO approval could result in potential tax problems in addition to problems with the RCDSO.
Lesson learned: Always make sure your professional advisor submits the application to the RCDSO and obtains the approval prior to operating your PC
|2.||No flexibility in dividend payments
Since January 1, 2006, certain family members of DDS may become shareholders of PC. This way, the DDS could save taxes by paying dividends to low income family members.
Unfortunately, we have seen cases where all shareholders including non DDS family members own the same number and class of shares. What is bad about this? This means that all shareholders, including the dentist must receive the same amount of dividends. The dentist, who is usually richer, does not want this dividend as often times they are already in the highest tax bracket.
For example, your parents who are recipients of Old Age Security (OAS) and have investment income of $20,000 each, and your child who is in his/her second year of university, own the same class and number of shares. Since your parents receive OAS, the maximum dividend they each can receive is about $31,000 before the ‘clawback’ (i.e. part of the OAS will have to be repaid) applies. That means your child will be limited to a $31,000 dividend. However, your children >18 who attend university full time for 8 months and with tuition of say $5,000, pay only $1,000 in taxes, when they receive a dividend of $50,000.
Lesson learned: Each shareholder should have a separate class of shares; this facilitates flexibility and could yield tax savings.
|3.||No Rollover form prepared/filed
What is a rollover? It is a tax deferred/free transfer of assets from your personal hands into your PC. To qualify for this, one must file a form with Canada Revenue Agency (CRA) within a time limit.
The CRA can levy a penalty if the form is filed late of as much as $8,000 and such penalty is not tax deductible.
If you did not file the form, then CRA could make the transfer a taxable event i.e. you are deemed to have sold your assets (including your goodwill) at the fair market value. You could be liable for as much as $116,000 in personal taxes if your practice is worth $500,000. CRA also charges interest on any late tax payment.
Lesson learned: Always make sure your professional advisors file this form within the time limit. Also, proper documentation is important to support your assets transferred.
|4.||No Double Will
At your death, the government charges your estate a probate fee which is 1.5% for assets >$50,000. That means probate fees of >$7,000 may be payable for a dental practice that is worth $500,000.
To save probate fees, you could have a second will which pertains to shares of your PC only. All your other assets are covered in a separate will.
Lesson learned: consider having 2 wills; one for your PC shares and one for all of your other assets. A separate will saves money when you die, i.e. more money for your love ones.
|5.||No employment contract
Once you set up your PC, you become an employee (i.e. no different from your receptionist or chairside assistant) of your PC. You will receive a salary and proper payroll deductions must be withheld and submitted to CRA on a timely basis.
Your lawyer should also prepare an employment contract which outlines the terms of your employment and more importantly provides a $10,000 death benefit. Such benefit is tax free in the hands of the recipient while tax deductible to your PC.
Lesson learned: Obtain an employment contract which should include a death benefit provision. Your PC will get a tax deduction. Your loved one will receive $10,000 tax free.