So you’ve heard that it might be a good idea to incorporate your dental practice. What are the pros and cons, you ask?
Pro: 15.5% small business tax rate on the first $500k of active business income
Wow! That’s a mouthful. But that’s exactly the benefit that you get—15.5% small business tax rate.
Pro: Income Splitting through Dividend
If you incorporate, you can have your spouse, parents and children own shares of your professional corporation and receive dividends. In some situations, if they are not earning any other type of income, they can pay $0 federal tax on up to $40k of dividends. You can’t do this without a professional corporation!
Pro: Repaying a Loan Faster
If your dentistry professional corporation only pays 15.5% income tax on the first $500k of “active business income”, then it can repay a loan much faster than you could with after-tax dollars (note: you may be paying closer or above 40% tax!).
Pro: Increased liability Protection
You can insulate your personal assets by having a corporation (since shareholders’ liability is generally limited). You cannot do this for professional matters, but you can do this for commercial liabilities such as those that arise under a lease, accounts payable, bank loans, etc. (assuming you’re not personally guaranteeing anything).
Pro: Individual Pension Plan
You should speak with a wealth advisor about this. The bottom line is that you can contribute more to your IPP (individual pension plan) through a dentistry professional corporation than you can on your own. You may be able to accumulate more wealth in your IPP than in your RRSP with the added protection of creditor protection.
Pro: Lifetime Capital Gains Exemption
You can read all about this here.
Pro: Dual Wills
If your professional corporation is worth $1-million when you die, you can save $14,500 in estate administration taxes by having multiple (often called “dual” or “primary and secondary” Wills).
Pro: Employment Agreement with $10,000 death benefits
If you have an employment agreement between yourself and your professional corporation that says, upon your death, the corporation is to pay up to $10,000 to your beneficiaries, then that amount is considered a deduction to net income (so the corporation ends up paying less tax) and the beneficiary or beneficiaries receive those amounts tax-free.
Con: Startup Costs
There are costs involved in setting up your dentistry professional corporation. Lawyers’ fees, accountants’ fees, government fees, and RCDSO fees are a few.
Con: Maintenance Costs
You have to keep your corporation’s minute book in order every year. You have to prepare and file corporate income taxes, annual meeting minutes for directors and shareholders, and file annual returns with the Ontario government. You also need to renew your Certificate of Authorization from the RCDSO. You may, depending on your accountant’s advice, need to re-organize the shares of your corporation – perhaps to do an estate freeze or qualify later on for the lifetime capital gains exemption. There are costs involved with all of these things.
Con: Liability for Professional Negligence
Your dentistry professional corporation cannot shield your personal assets from professional negligence claims.
Con: Restriction of Share Ownership
Only certain persons can own shares of your dentistry professional corporation – namely, your spouse, your children, your parents, or you or your spouse in trust for your minor children.
Con: Restrictions on Business
This corporation can only be involved in the practice of dentistry and things related or ancillary thereto. Investing in speculative real estate in Uganda, for example, may be offside if it has nothing to do with your dental practice!