OK. Buckle up. Things are about to get complicated, but hopefully after you read this and the next 2 blog articles I’m writing, it will make some sense. Trust me, this stuff is hard enough for accountants and lawyers to get a grasp of. Bottom line: if you’re thinking of selling anytime in the next 5 years, contact me NOW or else you’ll end up paying more in capital gains tax when you ARE selling.
As usual: what I’m writing about isn’t intended to be taken as legal advice; if you need to purify your corporation prior to selling it, contact me.
Lifetime Capital Gains Exemption
Yes, you’ve heard me talk / write about this before. In order to qualify for the lifetime capital gains exemption (and hopefully save a whole bunch of capital gains taxes), there are a number of tests that must be met. For more on that, read this article I wrote HERE and these blog posts I wrote HERE, HERE and HERE.
Now, here’s the situation: leading up to the sale, it’s sometimes the case that one or both of the two tests that need to be met (namely, the 24 month leading up to the sale + 50% active business assets test OR the day of sale + 90% active business asset test) for the dentistry professional corporation needs to be purified.
Purification means: removing offending non-active business assets from the corporation in order for the corporation to be considered a “small business corporation” so that you (as a shareholder) can qualify for the lifetime capital gains exemption (see the 2 asset tests I mention above). Those non-active business assets may include excess cash, investments, securities, real estate in some cases (read this blog HERE and HERE to learn more about real estate and the lifetime capital gains exemption).
And these assets need to go somewhere. Sometimes, those assets will be transferred out directly to the dentist shareholder and / or their spouse, children and parents as a DIVIDEND. But taking a dividend will typically trigger taxes (only cash dividends up to a certain amount – like $33k in 2016 – paid to an adult child who has no other source of income will have $0 federal tax). And what if the dentist doesn’t want to take all that cash out and pay taxes? What then?
What a Typical Corporation Could Theoretically Do…
If we were talking about a typical corporation (other than a dentistry professional corporation), the shareholder would do something called a corporate re-organization in order to transfer assets out of their operating corporation and into a holding corporation. This would be done using steps that look like this: (1) shareholder transfers redeemable shares in operating corporation to a holding corporation and receives shares in the holding corporation as a result AND (2) operating corporation redeems its shares held by holding corporation and non-active business assets are used to satisfy the redemption (in other words: offending non-active business assets are moved out or cancelled, etc.).
Now, I know I used a lot of big words there. And I very much simplified what’s going on. But just bear with me. The key thing to realize is that: inter-corporate dividends made from a Canadian corporation from another Canadian Corporation are typically received TAX-FREE. The receiving Canadian corporation must report the dividends in income but may deduct the dividends in computing taxable income.
In theory, this structure would have been great for a seller to qualify for the lifetime capital gains exemption – because there’s no immediate tax implications! It would also help the seller convert what would have otherwise been a taxable capital gain (on the sale of the shares when they eventually go to sell the shares of the dentistry professional corporation) INTO an inter-corporate dividend that is tax-free.
Let me paint a picture for you: if the dentist had excess cash, the seller could choose to leave that cash in the corporation. Then the purchaser pays an amount equal to the agreed upon purchase price PLUS the excess cash. The seller, assuming they’ve used up their lifetime capital gains exemption, will need to record the proceeds of sale of their shares to INCLUDE the amount paid for the excess cash (because they left it in the corporation). And they’d then have to pay more capital gains tax on the sale of their shares.
Bottom line: removing the excess cash (or other non-active business assets) HELPS the selling shareholders qualify for the lifetime capital gains exemption by meeting the assets threshold tests mentioned above AND also helps them save taxes by converting an otherwise TAXABLE CAPITAL GAIN on the sale of the shares INTO a TAX-FREE DIVIDEND to a holding corporation. WOW! Remember: this is the theory…
BUT: 2 Nuances…
OK, now the bad news: with respect to a dentistry professional corporation, there are 2 nuances: (1) a dentistry professional corporation cannot have a holding corporation (i.e. a corporation that owns its shares), otherwise it would be in violation of the legislation that governs dentistry professional corporations (namely, the Certificates of Authorization regulations) AND (2) in the context of a sale, the Income Tax Act makes it harder to move money on a tax-free basis between two Canadian corporations (basically there are limits on the amount you can move now in the context of a sale). Lets discuss both of these things, shall we?
NO HOLDING CORPORATIONS for DPCs!
Section 2.2 of the Certificates of Authorization Regulations says WHO can be a shareholder in a dentistry professional corporation. And guess what? Another corporation isn’t one of them. Granted, the exact language of those Regulations say that a dentist or their spouse, child or parent may INDIRECTLY hold their shares in a professional corporation (which presumably means through another corporation), the RCDSO has taken the view that this doesn’t mean that. So where does that leave us?
Well, despite what the law and the RCDSO say, some dentists will, for a brief moment in time over a weekend or after hours, do a transfer of their shares in the dentistry professional corporation (operating corporation) to another corporation (holding corporation) in order to transfer non-active business assets out (and it happens in a split second with the redemption / retraction described above). They do it on a weekend or in the evening when the corporation isn’t practicing so that it seems like the corporation isn’t practicing. And in the morning the next day, the dentistry professional corporation is back to normal, having only dentists and their spouses, children and parents as shareholder. Keep in mind: as lawyers, we can only advise you of the risks of your actions; you’re the ones who accept the tax and legal risk(s) and instruct us to proceed.
LIMITATIONS: Section 55(2)
So even if a dentist proceeds to set up a holding company and uses the simple example outlined above to transfer assets out, they may NOT be transferred on a TAX-FREE basis.
Why? Because of section 55(2) of the Income Tax Act. That section is an anti-avoidance rule. When section 55(2) applies, it says that a dividend received by the holding corporation in the context of a share redemption (as was the case outlined above) WILL BE CONSIDERED proceeds of disposition of a share and trigger a capital gain for the holding corporation! Section 55(2) basically prevents the dentist from converting a higher sale price for their shares (for which more capital gains tax would have been paid) into a tax-free inter corporate dividend between two corporations they likely control. I hope this makes sense. But if it doesn’t, just read the example above about the dentist who leaves the excess cash in their corporation and would have had to theoretically pay more in capital gains tax.
To repeat: if section 55(2) applies, it would take aim at the cash or property that is being used to satisfy the redemption of the operating corporation’s shares by the holding corporation. More specifically, it would tax the operating corporation as if those assets were proceeds of disposition (capital gains tax would apply) on the redemption / retraction of those shares.
Are we done yet? No. We need to dig deeper into when section 55(2) applies – because (fortunately) there are exceptions which WOULD allow a dentist to transfer (on a tax-free basis) inter-corporate dividends from a dentistry professional corporation to a holding corporation. So in the next 2 blogs, we’ll dig deeper into when section 55(2) applies and what those exceptions are.
The bottom line is this: if you’re thinking about selling in the next 5 years, you need to immediately speak with us about purifying your corporation to hopefully avoid capital gains tax. If you wait until the last minute (when you’re in the process of selling), you’ll likely be unable to avoid paying those capital gains taxes when you transfer assets (e.g. dividends, etc.) out of your professional corporation and into a holding corporation.
Here’s the idea: you have a dental practice that you own PERSONALLY and you now want to transfer it to your new professional corporation. You don’t want to trigger any income or capital gains taxes on the sale of the assets (e.g. furniture, fixtures, goodwill, computer hardware / software, etc.). But you want to take full advantage of all the tax benefits from having a dentistry professional corporation, which I’ve blogged about HERE. So HOW and WHEN should you do the transfer so as not to trigger any capital gains taxes?
By way of background, a rollover occurs when there is a dentist who enters into a purchase and sale agreement with their professional corporation for the purchase of certain assets. In exchange for those assets, the corporation gives the dentist SHARES that are worth whatever the assets are worth. This way, there is no immediate income or capital gains taxes to pay: that’s because the dentist received in value (i.e. the value / cost of the shares at the time of the transfer) what they gave (i.e. the value of the assets at the time of the transfer).
So, in what follows, I’ll take a look at the two main examples of when dentists do rollovers:
First, if you’re just starting out as an associate, making money, and want to defer paying taxes, etc., it might make sense to have a dentistry professional corporation. Do you need a rollover? Perhaps. Some accountants are very cautious and want associates to transfer their “Associate Goodwill” and any hand instruments they own to their corporation pursuant to a rollover. Some accountants question whether there are any assets to “roll in” to the corporation and simply forgo this step entirely. I guess it comes down to this: what’s your specific situation and what’s your risk tolerance? If you are associating at multiple practices, have your own instruments, have your own patient records, etc. then a rollover of those assets to your professional corporation would definitely make sense. If you’re simply using a professional corporation to earn associate income and that’s it (you have no other assets related to the practice of dentistry, etc.), then it might not make all that sense.
Preparing to Sell
If you’re 2-5 years out from selling, you’ll have enough time to transfer the practice that you personally own to your professional corporation (on a tax-deferred basis) and then ultimately SELL the shares of your professional corporation and hopefully qualify for the lifetime capital gains exemption. Keep in mind that there’s a 24 month share ownership rule that a shareholder (e.g.a dentist) must meet in order to generally qualify for the lifetime capital gains exemption. If the dentist wishes / needs to sell their practice sooner than 24 months, then they should incorporate AND only do the rollover immediately before the sale to the new dentist; this is an exception to the general rule and will allow the dentist to still qualify for the lifetime capital gains exemption.
Is there really no tax consequences?
If done properly, there will be no immediate income or capital gains tax consequences to the dentist when he or she transfers their practice assets to their corporation and takes back shares in exchange. A section 85 election is then filed by the parties.
One thing that often comes up is this: what if the value attributed to the assets and shares? Well, sometimes accountants will do this, but they generally prefer to leave that to appraisers (like getting a letter of opinion from Matt Bladowski of Dental Strategy). What if they get the number wrong? What if the Canada Revenue Agency deems that the practice assets are, on a fair market value basis, actually different in value from what they’ve been represented as in the paperwork? That’s what a “price adjustment clause” is for. This is built into the asset purchase agreement and basically says that if the parties (dentist and professional corporation) get the value attributed to the assets WRONG and the CRA says OTHERWISE after the fact, then the amount will be retroactively adjusted (higher or lower) to reflect the CRA’s number.
That said, there may be HST payable on the value of any real estate or leaseholds. That’s because, in an asset sale, the parties can elect not to pay HST on the sale of assets but this doesn’t apply to real estate and leaseholds. Read this blog for more information.
After the Rollover
Once the rollover is completed, the dentistry professional corporation now owns the assets of the practice (not the dentist).
Please keep in mind that the information provided herein is not legal advice and is meant solely for educational purposes. If you require legal advice, please contact myself, David Mayzel or Ljubica Durlovska.
Over the next series of blogs, I’ll be discussing the importance of estate planning for dentists. In the first blog, I talked about wealth planning for the single, young, debt-laden dentist. In the second blog, I talked about wealth and estate planning for a young, engaged dentist. In this blog, I’ll be talking about wealth and estate planning for the married dentist.
So you’re Married…Now What?
Married couples have lots to think about. Particularly if they have children. Let’s start with some financial planning, shall we?
Shared bank and credit card accounts?
Assuming you trust each other, you may have shared accounts. In the event of death or disability, the other person still has access to these funds, which is great. If there’s a lack of trust when it comes to finances, married couples may want to have separate accounts and perhaps even one shared account that they contribute into (e.g. to pay the mortgage, utilities, etc.). Just remember to have at least 4 months’ worth of income saved up in case of an emergency (new car, new roof, etc.). It might even make sense to have a joint tax free savings account (remember: funds are withdrawn tax-free) for an emergency fund.
If the family home is owned by the married couple equally as “Joint Tenants”, then if one of the spouses dies, the other spouse AUTOMATICALLY INHERITS the other spouse’s interest in the property. This is called the law of survivorship. It applies to jointly held property, bank accounts, etc. It also means that these types of properties pass outside of a person’s estate and therefore won’t need to be probated (no estate administration tax will be paid on the value of the home).
Shares in a Professional Corporation
If a spouse is a dentist and has a professional corporation, thought should be given to whether the other spouse should have shares (and if so, what type of shares). If the objective is for both spouses to be able to take advantage of the lifetime capital gains exemption, then both spouses require to hold so-called “common” or “equity” or “growth” shares. If the married couple plans on having multiple practices and hence multiple corporations, then the amount of shares which one spouse owns in one corporation may be nil or up to 25%. This is because it helps prevent two corporations from being “Associated” and therefore having to share the 15.5% small business tax rate given to small business corporations on the first $500k worth of taxable income. If the two corporations (each owning its own practice) are NOT associated, then they both get the small business tax rate on the first $500k of net income and don’t have to share it!
If one spouse is not going to be using their lifetime capital gains exemption and does not end up getting “common” or “equity” or “growth” shares, then they can still receive so-called “dividend sprinkling” or “special” or “preferred” shares. This allows for income splitting during the course of the marriage. Think: you pay less tax when 2 people are each earning $40k versus 1 person earning $80k themselves. And a dentist who is a shareholder can do this with their parents and adult children. Interestingly enough, if a spouse, parent or adult child has no income from any other source, they can receive upwards of $40k and pay $0 federal tax (there’s a little bit of provincial tax)! Not too shabby. You’ll save a lot of tax that way.
And, as always, don’t forget to have each “common” shareholder have a Corporate and a Non-Corporate Will (to save on estate administration taxes, plus to make specific gifts and appointments), plus Powers of Attorney for Property / Finances and one for Personal Care. I can’t stress this enough!
Employment Agreement with $10,000 Death Benefits
If you have a professional corporation, you can have an employment agreement that stipulates that the corporation pays your beneficiary(ies) upwards of $10,000 upon your death. The corporation gets a $10,000 tax-deduction and the recipient receives it tax free!
Splitting Income By Paying Your Spouse a Salary
It has to be reasonable. There. I said it. You heard it. Now do it. If you don’t want to get into trouble with the Canada Revenue Agency, you have to pay your spouse a reasonable salary for administrative tasks. If they’re also a hygienist or office manager, pay them reasonably for that position. Make sure to have an employment agreement. And that agreement can also contain $10,000 tax-free death benefits (see above!). Again, the idea is that you want to split the income as best as you can to the lower income earner. This reduces the overall tax bill.
Family Tax Cut
The Progressive Conservatives introduced a new measure in 2015 that allows spouses to income split legally (something that can be tricky at times). Here’s how it works: a couple with at least one child who is 17 or younger will be able to split their income NOTIONALLY on their tax return in order to pay less tax as a family unit, up to a maximum savings of $2,000. It was supposed to allow for more tax savings (i.e. you get to offset up to $50k on your spouse who is staying at home and looking after children), but it got watered down at the end so it ended up being only $2,000 worth of savings.
Pension Income Splitting
Did you know that married couples can allocate a portion of certain types of their pension income to their spouse? This would help lower one person’s income tax bill – particularly if one of the spouses is in a higher income tax bracket vis-a-vis the other spouse.
Tax Free Savings Accounts
I’ve written about this here.
Inheritances and Gifts
Did you know that if you are married and receive an inheritance then your inheritance CAN form part of your Net Family Property (and therefore be divided equally with your spouse upon a breakdown of the marriage)? That might not be what you want. Is there anyway to prevent this? Yes. First, if you received the inheritance BEFORE you got married, then it won’t form part of your Net Family Property. Second, if you received the inheritance during the course of your marriage and the LAST WILL AND TESTAMENT of the person (from which you received the inheritance) specified that any inheritance you receive was to remain excluded from Net Family Property, then it won’t be included. Third, if you have a domestic contract (like a marriage contract, prenup or cohabitation agreement that survives marriage), that specifically excludes inheritances of the property or income that forms that inheritance, then it would be excluded from Net Family Property.
Over the next series of blogs, I’ll be discussing the importance of estate planning for dentists. In the first blog, I talked about wealth planning for the single, young, debt-laden dentist. In this blog, I’ll be talking about wealth and estate planning for a young, engaged dentist. They’re starting to pay back their school debts. They’ve bought their first car. And they’ve found the “love of their life” as my wife Paris would say. And there’s a wedding coming up 😉 It’s an exciting time with lots of changes.
But before you dive into this new world, you need to sit back and think long-term. How do I protect myself in case of disaster? What if the marriage doesn’t work? What if I get disabled or die? What if we can’t agree on our finances and where to save / spend / pay down debts? There’s typically a lot of tension when young adults start to discuss these things; but it’s an important conversation to have. So let’s try to structure some of the things that you should be thinking / talking about, shall we?
Couples who are engaged do not have any type of legal or tax benefits per se. They don’t qualify for the various income-splitting strategies available to married couples (e.g. splitting pension with your spouse, income splitting with spouse where you have minor children and one spouse is at home, etc.). Engaged couples who are not common law spouses under the Family Law Act don’t owe each other financial support. And if the couple breaks up, they don’t come under the Equilization of Net Family Property scheme outlined in the Family Law Act, which is discussed in greater detail here and in our eBook “Ontario Dental Law” (which you can download for free by simply clicking on the top right corner of this website).
Insurance Planning for Death and Disability
As with all stages of your life, when you’re engaged, you should have sufficient life and disability insurance. If you’re young and you get it, it should be relatively cheap (assuming you are in good health). If you’re in debt (student loans presumably), you should have enough life insurance to cover the cost of that debt, otherwise your estate won’t be worth much (and your beneficiaries will receive little or nothing). Also, if you’re about to get married, have car loans, have a mortgage, etc., it’s definitely worthwhile to have enough life and disability insurance to wipe out or manage those debts in the event of disaster. You don’t want to leave a loved one having to deal with your disability or death AND be financially struggling at the same time.
RRSP, RRIF, TFSA Designations
If you have registered retirement savings plans, registered retirement income funds, and /or a tax free savings account and you’ve designated a person to be the beneficiary of those assets, then keep in mind that marriage doesn’t automatically revoke those designations. You’ll likely want to update them from time to time. And you should always be thinking of layers and scenarios. In case your fiance / new spouse dies before you, who should receive the RRSP, RRIF, TFSA? Remember: taxes will be paid out of your estate on the value of your RRSP, but not on your TFSA. You may want to have life insurance in place to cover these taxes – particularly if you’re giving your RRSP to someone who is also not getting your life insurance. This helps ensure that your beneficiaries receive their inheritance in a fair / equitable manner (assuming that’s your plan).
Did you know that if you have a Will and then get married, the Will AUTOMATICALLY GETS REVOKED!!! So if you have a Will with specific gifts to people who are NOT your fiance, think about that! There is only one exception: that the Will (or an amendment made to the Will) contemplates that you are getting married and that you intend for the Will to survive the marriage and still be legal and valid. Also, you might want to add something in there to the effect that: if the marriage doesn’t happen, then the gifts to your fiance are null and void. In other words, the gifts to your fiance would be dependent on the marriage taking effect. You’ll likely want to update your Will after you get married so that you can make gifts to your spouse, include your children, make RRSP, RRIF, and TFSA designation, etc. And don’t forget to complete your Powers of Attorney for Property / Finances and one for Personal Care as well.
Prenup: Planning for Divorce
It’s the word a lot of people hate to hear… the word that makes us a little squeamish… but it’s important to say. That’s right: “Prenup”. A Prenuptial Agreement is a TYPE of marriage contract (cohabitation agreements for cohabiting couples and marriage contracts for married couples are other types of marriage contracts) for couples about to get married. The word “Prenuptial” means “Before Marriage”. You get the idea.
These Agreements deal with the parties’ respective rights and obligations during and after their marriage (or on death) and can deal with things like: ownership or division of property, support obligations,the right to direct the education and moral training of children, and any other matter in the settlement of their affairs (s. 53 of the Ontario Family Law Act).
Importantly, a Prenuptial Agreement CANNOT say who will have custody of, or access to, children if the relationship ends. Furthermore, a Prenuptial Agreement cannot prevent a spouse from being in possession of the matrimonial home – irrespective of who owns it! Finally worth mentioning is that a Prenuptial Agreement or Marriage Contract does not need to deal with all rights and obligations concerning the relationship: it can only be concerned with one asset (e.g. a house) or one obligation (e.g. support to one party on termination).
The legal requirements for a Prenuptial Agreement in Ontario include the following:
1.The parties must make full disclosure of their financial assets, liabilities, income and expenses;
2.The contract must be in writing and signed by each party before a witness; and
3.The contract must be entered into voluntarily (i.e. no duress, undue influence, unconscionability,etc.).
It is HIGHLY RECOMMENDED (though not legally required) for the parties to obtain independent legal advice prior to entering into a prenuptial agreement.
What the Courts Have Said About Prenups
The Supreme Court of Canada had this to say in the case of Hartshorne v. Hartshorne, 2004 SCC 22 about Prenups (a case that has been followed and cited with approval by Ontario Courts):
Over the next series of blogs, I’ll be discussing the importance of estate planning for dentists. In this particular blog, I’ll be talking about the single, young, debt-laden dentist. They just graduated and they have big dreams. But they’re probably got about $200k in debt. Why would they be thinking about wealth planning? Isn’t the primary objective to get out of debt and start / buy a practice? Yes, but that doesn’t mean that they should ignore wealth and succession planning. Specifically: they need to watch out for disasters that could render the financially disadvantaged when they are just starting out. Let’s get into it, shall we?
When should a new associate start to think retirement? The moment they start working! That’s right. Read that again. This way, you know where you’re heading, have set up goals for yourself (1 year, 5 year, 10 year, etc.). And you have a short-term strategy to achieve your long-term vision.
Be Prepared for Disaster…
First, save some money. How much? About 4 months worth of living off of. You need an emergency fund in case you need to: get a new car, pay for a new roof, fend off a lawsuit, etc.
Life insurance – especially when you’re young and healthy – is cheap. Get some. Make sure to designate a beneficiary of your life insurance policy (e.g. parent, girlfriend, fiance, etc.). Because dentistry is labour-intensive (I know this having seen dentists in action in Jamaica as part of our outreach program), make sure to have disability insurance. If you’re driving around in a clunker, try to upgrade your car. This was the advice an dental insurance guy (Ken Barth) told me. So I upgraded to the safest car in the world: a Tesla Model S. Make sure your insurance suits your needs. If you’re making $20k / month, then you’ll need to disclose your income to your insurance broker so that you get an equivalent in disability insurance should you need it. If you stay healthy – for example, for 7 years in my particular case – you’ll get back 50% of your premiums. Not too shabby! And if they offer to increase your disability insurance (because you make more money over time), taken them up on their offer. Also think about getting critical illness insurance too.
Wills and Powers of Attorney – a definite must have! Without a Will, you leave it up to your family / close friends to apply to be your estate trustee (a sometimes daunting task for the average person). And your property might end up going to someone less than ideal. It all comes down to a government formula, which you can read about here. A Power of Attorney is necessary if you’re still alive and incapacitated. Do you really want to force your family to apply to the court to become your guardian? That’s a time-consuming and expensive process. Why burden them when you could have (for a few extra bucks) prepared a Last Will and Testament AND Power of Attorney for Personal Care AND a Power of Attorney for Property on www.DentistLegalForms.com?
I’m Making Too MUCH MONEY!
If you’re making too much money, I don’t really feel bad for you. But there are some ways you can reduce your tax bill. For starters, you can contribute to an RRSP (registered retirement savings plan). The money that you contribute results in a tax deduction on your income tax return, but the money that you eventually pull out when you retire is taxed at your marginal tax rate (hopefully only when you’re not making that much and can pull it out and pay less marginal tax). You should also contribute to a TFSA (tax free savings account). The money that you put in must be after-tax dollars. You don’t get a deduction when you contribute to a TFSA. That part sucks. But here’s the great part: any income derived from your TFSA account (dividends, interest, capital gains, etc.) can accumulate in your TFSA tax-free and be pulled out tax-free! Totally awesome! If you’re over 18, you can contribute $5500 annually into a TFSA (from 2009-2012, the annual limit was $5,000) and each year that limit will increase by $500 as allowed. Any unusued contribution room can be carried forward indefinitely. In the 2015 Federal Budget, the limit for TFSAs is indexed and they were trying to get the annual limit up to $10,000, but that’s likely not going to happen now that the Liberals are in power).
Using a Corporation to Defer Taxes
Let’s also talk about deferring taxes through the use of a corporation. If you’re a young associate working at multiple practices OR if you have your own practice and you’re incorporated, then there are lots of ways to save money by having a professional corporation.
For starters, you can DEFER taxes by leaving money in the corporation – to be taxed at a lower rate. Currently, the top marginal tax in Ontario is 49.53 per cent for an individual; but for a dentistry professional corporation, the first $500,000 of active business income is taxed at only 15.5%. And keep in mind that the previous federal government promised to reduce the small business tax rate by 2% over a 4-year period. This will make it even more advantageous to leave taxable income in your dentistry professional corporation.
A dentist’s spouse, children and parents can receive dividends and, overall, the family can pay less tax than had the dentist collected the full amount of income alone. For example, an adult child with no income from any other source can receive just over $40,000 in dividend income from the corporation and pay no federal tax! That income would have only been taxed at the corporate level (i.e. 15.5%) and that child would only have to pay some Ontario employer health tax. Just keep in mind the kiddie tax rule (which attributes income back to the parent shareholder where the child is not an adult).
Employment Agreement with $10k Death Benefits
You, your spouse and your children can, if you are employees of the corporation, have an employment agreement with the corporation. That agreement can include a provision requiring the corporation to pay out $10,000 to a beneficiary upon the employee’s death (which is a tax deduction for the corporation and received tax free by the beneficiary). Make sure to have it properly worded in the agreement (i.e. have a lawyer prepare it!).
Corporate / Non-Corporate Will
By having a corporate Will (dealing only with your shares in a dentistry professional corporation upon your death) and a non-corporate Will (dealing with all of your other assets), you can avoid paying estate administration tax on the value of your shares when you die. If those shares are worth $3-million at the time of your death, you will have saved roughly $43,500 in estate administration tax, which can be passed down to your beneficiaries.
Lifetime Capital Gains Exemption
When you go to sell your practice, you can sell the shares of your dentistry professional corporation and take advantage of lifetime capital gains exemption. This could save you about $185,000 in capital gains tax if done properly. You can read this article I wrote about the topic and everything dentists need to know.
Please note that the information in this article is not meant for legal advice, but is provided for educational purposes only. If you require help with setting up a dentistry professional corporation or preparing Wills, Powers of Attorney and Employment Agreements with Death Benefits, contact me (Michael Carabash), David Mayzel or Ljubica Durlovska.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or email@example.com.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or firstname.lastname@example.org.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or email@example.com.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or firstname.lastname@example.org.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or email@example.com.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or firstname.lastname@example.org.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.