Dental Incorporation: The Benefits…Need an Ontario lawyer? Call 647-680-9530
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
So what are the advantages to incorporating your dental practice? Well, as you can see by reading this blog, it all comes down to taxes. Typically, people generally create a corporation to minimize or defer their income taxes and also to minimize their personal liability. Shareholders of a corporation (i.e. the owners) are generally not personally exposed to the liabilities, debts, obligations, etc. of the corporation. But with a dentistry professional corporation, the shareholder dentists of the corporation cannot escape personal liability by creating a professional corporation. Just read on and you’ll see how it’s all about taxes!
Limited Liability for Shareholders? Nope
Now, with a normal corporation, the shareholders generally have LIMITED LIABILITY for the debts and obligations of the corporation. You need to keep in mind that a corporation is a separate legal entity from its owners (i.e. the shareholders) and managers (i.e. the officers and directors). So the corporation is capable of getting into trouble (i.e. by taking on debts, or being sued and subject to damage awards, etc.). What about the shareholders, though? Well, under the Business Corporations Act, the shareholders are generally not liable for any act, default, obligation or liability of the corporation: section 92(1). There are certain exceptions to this general rule. For example, courts have lifted the corporate veil to impose personal liability on shareholders in certain cases, which I have previously blogged about (e.g. fraud, lack of respect for corporate form, alter ego, thin capitalization, etc.). Furthermore, there may be statutory impositions of liability on shareholders under the Business Corporations Act.
So what about dentistry professional corporations? Does the same general rule of limited liability apply? Nope. Section 3.4(1) of the Business Corporations Act says very clearly that section 92(1) does not limit the professional liability of a shareholder of a professional corporation. The Act even goes on to say that the shareholder’s acts (and the acts of the employees, officers, and directors) are deemed to be the professional corporation’s for the purposes of professional liability (section 3.4(2)). No doubt, these provisions were put in place to protect the public from bad dentists who incorporated their practice to avoid liability for malpractice. Heck, even if the dentistry professional corporation is a member of a partnership, the shareholder of that corporation cannot escape professional liability. So the bottom line is: you can’t escape liability as a dentist shareholder of the corporation. Your best option is to be a good dentist and have insurance to cover errors and omissions, among other things.
Tax Benefits: Low Income Tax Rate
So now that we’ve dealt with shedding some light on the biggest misconception about dentistry professional corporations, what then are the biggest advantages to having one? Well, it’s the tax advantages! You see, with a corporation, the first $500,000 of active business income is taxed at a much lower rate than for individuals: it was (combined federal and provincial) only 16.50% for the first half of the year and then it dropped to 15.50% for the second half of 2010. The best part is: it seems like it’s going to continue to decrease over the next few years. So what does this mean for doctor shareholders? Well, instead of having to claim all their practice’s income in a given fiscal year, they can leave it in the corporation, pay less tax, and then either reinvest it or dividend it out to shareholders – particularly those who are in lower income tax brackets. This all ends up deferring or saving taxes altogether!
Tax Benefits: Pay $0 Federal Taxes
There’s also that whole thing about not paying ANY federal taxes altogether: if a shareholder has no other income and receives up to a certain amount of dividend income from the corporation, then they will pay $0 federal taxes. Previously, this amount was about $40,000 but it changes every year (so be mindful and talk with an accountant!). Don’t believe me? Just go to this website (http://www.taxtips.ca/calculators/taxcalculator.htm) and type in $40,847 under the heading “Cdn dividends eligible for small business div tax credit (CCPCs)” and check out the total tax payable $0. Mind you, there will still be some provincial tax payable, but it’s less than $1,000. This strategy could be used by a dentist’s stay-at-home husband or wife to receive dividends from the professional corporation with no other source of income and pay $0 federal taxes as a result of the dividend gross up and tax credit mechanism. If you want to see how this thing came to be, check out my other older blog about this whole thing here.
Tax Benefits: Lifetime Capital Gains Exemption
Finally, because a dentistry professional corporation can qualify as a small business corporation, when it comes time for a dentist shareholder to sell his or her shares of that corporation, they can use their LIFETIME CAPITAL GAINS EXEMPTION to pay $0 capital tax up to a certain amount.
Now, notwithstanding all these wonderful tax benefits, the reality is that when you are responsible for having a dentistry professional corporation, or any corporation for that matter, you need to address several ongoing administrative issues – e.g. employment, payroll, taxes, annual returns, etc. If you’re planning on getting married, having children, or preparing your Will, there will also be SIGNIFICANT legal implications on your dentistry professional corporation – which I will be discussing next. You should consult with a lawyer and an experienced accountant to talk you through these things…