A Dental practice provides a wide array of services, including professional services, technical services and hygiene services.

Professional services are comprised of diagnosis, treatment planning and intra-oral services;

Technical services are all those services that:
•    Are ancillary to the provision of professional services
•    Surround the provisions of professional services
•    Are performed by technical or para-professional staff
•    Examples of technical services – X-ray services, laboratory services, hygiene, treatment co-ordination and practice management;

Hygiene services are those services provided by a hygienist and regulated by the College of Dental Hygienists of Ontario.

Each of these components can be a business in its own right.  Several options are available to a Dentist to save tax through the incorporation of all or a portion of their practice.  The options include incorporating a Professional Corporation (“PC”), a Technical Service Corporation (“TSC”), a Hygiene Service Corporation (“HSC”) or a combination of these entities.

Dental PC

A Dental PC is an entity regulated by the Royal College of Dental Surgeons of Ontario (“RCDSO”).  Incorporation of a PC will provide access to the low corporate tax rate of 15.5% on the first $500,000 of active business income.  Significant restrictions are imposed by the RCDSO on the setup and operation of a Dental PC.  In many instances these restrictions are not a deterrent to incorporation.  The PC can provide all services formerly provided by an integrated dental practice.

Technical Services Corporation and Hygiene Service Corporations

All dentists earn both professional and technical service income.  A TSC/HSC allows a dentist to provide the technical services and/or hygiene services of the practice through a corporation rather than as a sole proprietor.  The technical service income and/or hygiene income is earned and taxed at the corporate level instead of being immediately taxed directly to the practitioner.  The corporation is not regulated by the RCDSO and consequently is not subject to the restrictions imposed on a PC.  The corporation cannot provide professional services.  The professional services of the practice could be provided through a PC or by an unincorporated professional.  Incorporation of a TSC or HSC will provide access to the low corporate tax rate of 15.5% on the first $500,000 of active business income.  If properly setup a TSC or HSC can in some situations be used to access the low corporate tax rate of 15.5% on income in excess of $500,000.

An analysis of the types of services and the proportion that each type of service is of the total services provided by the practice will guide the choice of what combination of entities are right for you.  Common structures include the following combinations:
•    an unincorporated practice and a TSC or HSC,
•    a PC with a TSC or HSC, and
•    an unincorporated practice with a TSC and an HSC.

Your professional advisor will help you to choose the right combination for you.

WHY INCORPORATE?

Tax Rates

The highest personal tax rate in Ontario is 46.4% on taxable income above $132,000.  A PC’s tax rate is 15.5% on taxable income up to $500,000 annually (the “Small Business Limit”).  Compared to the personal rate of 46.4%, this produces 57% more after-tax capital for the PC.  This capital is essentially an interest free loan from the government that can be invested by the PC until such time as the shareholder wishes to extract the funds for personal use.

Tax Rate Over-Integration

Canadian corporate taxation is based on the theory of integration – i.e. the total tax should be the same whether the income is earned directly by an individual, or the income is earned by a company which pays tax and distributes the balance as a dividend to the shareholder.  In fact, corporate and personal tax rates vary from the theoretical model.  The corporate and personal tax rates in Ontario are currently over- integrated, with an effective combined tax rate of 43% on income flowing through a corporation.  As a result you currently save 3.4% on income earned through a corporation that is paid to a shareholder who is taxable at the highest marginal tax rate.  As a result, if all of the income earned in a practice is paid out each year there will still be a minimum savings of 3.4% based on current tax rates.

Investment Income

Investment income (i.e. interest, rental income, capital gains) is initially taxed at approximately 46% in a corporation.  26.67% of this tax is refunded when the corporation pays dividends.  The effective tax rate on investment income is reduced by this tax refund when dividends are paid to family members who are in lower tax brackets.

Income Splitting

Enhanced income splitting became available to Ontario dentists and doctors on January 1, 2006 related to income of a PC.  The changes allow family members to own non-voting shares of a PC and receive dividends.  Creative share structures can be used to accommodate flexibility with different family members.  Dividends are subject to lower personal tax rates than ordinary income – a tax credit is given for tax paid by the PC.  In 2012, an individual with no other income can receive dividends of approximately $40,000 with nominal income tax.  Income splitting can produce a tax saving of up to $20,000 per year per person where the income being split is significant.

Salary or Dividend

With a corporation you introduce the option of withdrawing funds from the corporation in the form of a salary payable to an employee of the corporation (including family members who work in the business) or a dividend payable to a shareholder of the corporation.

The tax considerations in this decision include the following:
•    Salaries are considered active income while dividends are passive income.  Consequently salaries generate Registered Retirement Savings Plan (“RRSP”) contribution room while dividends do not.
•    Salaries are deductible to the corporation, dividends are not.
•    The personal tax rate on dividends is much lower than the tax rate on salaries.
•    Salaries are subject to source deductions including CPP and EI, dividends are not.
•    Salaries can only be paid to employees of the corporation.
•    Restrictions exist on the payment of dividends to minor children.

Family Trusts

A family trust can be used to facilitate income splitting with family members.  A family trust allows a business owner to introduce family members as potential beneficial interest shareholders in the corporation while retaining control of the corporation and the ultimate distribution of income and capital of the business.

A trust is a legal arrangement by which a person (the settlor) transfers property to trustees, to be held for the benefit of specified beneficiaries.  The terms and conditions under which the trustees hold the trust property are spelled out in the trust document.  The beneficial interests in the trust can be split between an income interest and a capital interest.

Income Tax Deferral

A corporation (PC, TSC or HSC) provides the opportunity and flexibility to defer most of one year’s tax until retirement.

Funding Non-deductible Expenses (“NDE”)

Certain expenses incurred for business or investment purposes are not tax deductible (e.g. 50% of meals, beverages, entertainment and sporting events; 100% of life insurance premiums; club dues; excess automobile expenses).  A professional with $10,000 of NDE requires $18,660 of pre-tax income to generate enough cash to pay the NDE and the tax on the NDE.  If a PC incurs $10,000 of NDE, the pre-tax income required is $11,834.  The difference is $6,826, equivalent to a 57% increase in pre-tax income.

Cash Extraction

Most professionals have after-tax capital invested in business assets, e.g. accounts receivable, computer and office equipment, leasehold improvements, real estate, etc.  These assets can be transferred to a corporation and the professional can extract cash up to the tax cost of the assets transferred tax free.  For large practices or practices that own real estate this amount can be significant.
Individual Pension Plans (“IPPs”)
An IPP is an alternative to an RRSP.  IPPs are a lesser known way to build retirement assets outside of the corporation but with tax deductible corporate dollars.  An IPP allows greater contributions than an RRSP, all of which are funded by the corporation.  Contributions to the IPP are tax deductible by the corporation.  The funds in the IPP are creditor proof; however, the funds in an IPP are also locked in, providing reduced flexibility compared to an RRSP.

CONCLUSIONS

If you currently spend all of the net income of your practice there are significant advantages to incorporating including the tax savings from over-integration, the tax savings from income splitting, the benefit associated with non-deductible expenses, the extraction of funds from the corporation related to capital transferred to the corporation and the availability of an Individual Pension Plan.  If you save a portion of your income each year, in addition to the above, there is a tax deferral equal to 31% of the amount retained in the corporation.

For further advice or assistance with these or any other financial issues, please contact a Millards representative at (519) 759-3511.