Roughly half of all Ontario dentists do not have a professional corporation. But many accountants will advise that dentists should incorporate to take advantage of various tax rules. For example, when a dentist has used up all of their personal tuition tax credits, is making over roughly $130,000, has a spouse/children/parents with little or no income, then it might make sense for them to incorporate. The costs to incorporate and the ongoing costs to maintain a corporation (both legal and accounting) need to be taken into consideration.
Tax and Money Saving Benefits
But there are many tax and money-saving benefits to incorporating, such as:
1. Small Business Tax rate of 15.5% on the first $500,000 of active business income.
2. Taking advantage of the lifetime capital gains exemption on the sale of shares and paying little or no capital gains tax.
3. Taking a tax-free loan from your corporation.
4. Income splitting with family members through reasonable salaries and paying out dividends to non-voting family shareholders.
5. Setting up an employment agreement with $10,000 tax free death benefits.
6. Saving on estate administration taxes by having dual Wills (one is dealing with all your property except for your corporation’s shares and the other one only dealing with your corporation’s shares).
7. Taking out tax-free money by selling certain types of life insurance to your corporation.
8. Setting up an individual pension plan (IPP).
Liability and Loans
But in addition to using a corporation as a tax and money-saving mechanism, a corporation also affords limited liability protection against trade creditors (not for professional negligence) AND also can be used to repay a loan faster than you would if you had taken out that loan personally (recall that loans are paid out of after-tax dollars, and a dentistry professional corporation would pay less than than you personally).
The Process of Incorporating
So now that you have a better sense of what the benefits are of incorporating, you’ll probably want to know what the process is. Well, it goes something like this:
- Obtain NUANS Name Report for the name of the dentistry professional corporation (the name must include a dentist shareholder’s last name and also include the words “Dentistry Professional Corporation.” There are other requirements concerning the name, and it’s best to speak with a dental lawyer about this.
- Prepare and file Articles of Incorporation (these should have the appropriate restrictions on the business, as well as a detailed and comprehensive and flexible share class structure – in other words, don’t get your accountant or consultant to do this, because chances are they will screw this up!).
- Order corporate minute book.
- Organize corporate minute book (this is a compendium of corporate documents related to the corporation and includes things like the Certificate and Articles of Incorporation, Bylaws, Director and Shareholders Meeting Minute Resolutions, Director Consents, Director / Officer / Shareholder Registry and Ledgers, Securities Transfer Register, Share Certificates, and documents filed with the government).
- Prepare and submit application for a Certificate of Authorization from the Royal College of Dental Surgeons of Ontario.
- Obtain approval from the RCDSO for use of a practice name other than the corporation’s actual name.
- Prepare and negotiate a shareholders agreement (if there are multiple shareholders involved) and/or a marriage contract (if spouses are shareholders).
- File Form 1 Initial Return with the Government of Ontario and keep a copy in the minute book.
Transferring your Existing Dental Practice
Once you have your corporation, the final step may be to transfer over your existing dental practice assets to your corporation (e.g. administrative and clinical assets, equipment, furniture, tools, supplies, leasehold improvements, goodwill, etc.). This would generally be the case if the dentist already had a practice and owned the assets personally. This so-called rollover would be done on a tax-deferred basis. There would need to be an asset purchase agreement, and all appropriate resolutions, confirmations, etc., would need to be prepared and signed off on (and included in the corporation’s minute book).