Save Taxes When You Incorporate Your Practice
A dentistry professional corporation lets dentists save taxes in a number of ways.
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 setting up a dentistry professional corporation, contact me (Michael Carabash), David Mayzel or Ljubica Durlovska.