Incorporating your dental practice?
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.
If you’re thinking about incorporating your dental practice, you’ll need to think about the following:
Look, you can’t backdate a dentistry professional corporation (i.e. want it to come into existence some time last year). You need to create a corporation and then apply for a Certificate of Authorization from the Royal College of Dental Surgeons of Ontario ("RCDSO"). When RCDSO receives the application, and assuming it’s approved, they will issue a Certificate of Authorization to you and it will be dated on the date they received the application. So the bottom line is that, because these things take time (incorporate and obtain Certificate of Authorization), you’ll need to plan ahead if you want to get them done. Allow a few weeks to meet with lawyers, accountants, appraisers, etc. to get the process done.
Transferring your Assets
If you’re presently conducting your dental practice as an unincorporated business (e.g. as a sole practitioner or through a partnership) and you incorporate your dentistry professional corporation, the next step will involve transferring your personal assets related to the dental practice to your dentistry professional corporation. Fortunately, aside from some minimal HST that may need to get paid, no immediate taxes are paid on the transfer of the assets to your corporation. This is a tax free rollover. Keep in mind that a special election must be filed with the tax department if you want to use this tax free rollover. If you file late, you could be slammed with a heft penalty. If you never file, you could end up getting a heft tax bill when the Canada Revenue Agency looks at the transaction.
Buying a Practice?
Typically, a dentist looking to purchase a dental practice will do so through a dentistry professional corporation. That corporation will purchase the shares of another dentistry professional corporation (i.e. the seller) and then the two corporations will amalgamate into one new corporation.
Selling your practice? Use the Lifetime Capital Gains Exemption
If you’re thinking about selling your practice, you will likely be selling the shares of the dentistry professional corporation which you own. There are significant tax advantages to doing it like this: you may get to use any lifetime capital gains exemption available on the sale of shares of a small business corporation. This means that you’ll pay little or no capital gains tax when you sell your shares. I’ve previously blogged about this quite extensively.
You may even be able to multiply the lifetime capital gains exemption by having your family members own shares of the dentistry professional corporation. Only certain family members can do this. And they can only own certain shares. Consult a lawyer and an accountant for more information about the ideal share structure.
Please keep in mind that to qualify for the lifetime capital gains exemption on the sale of shares of your dentistry professional corporation, a professional corporation should exist at least 24 months before the intended sale of the dental practice. There are exceptions to this rule and you should contact an accountant for information about this.
Double Wills: Save $$$
I’ve blogged extensively about this too. The bottom line is that the value of your dentistry professional corporation’s shares can be excluded from probate by having 2 wills: one for the corporation and one for everything else. This could end up saving you about $14,500 if your shares are worth $1-million.
Employment Agreement with Death Benefit: $10,000 TAX FREE
When you set up your corporation, you’ll need to have some kind of relationship with the corporation in order to conduct business on its behalf. Most likely, the dentist will be an officer, director, and employee of the corporation (unlikely to be an independent contractor). Well, it’s a good idea to have the corporation enter into an employment agreement with you that provides for your dentistry professional corporation paying out up to $10,000 to your beneficiary of tax-free money at the time of your death. Here’s how it works:
When a dentist dies, designated recipients can receive a $10,000 tax-free death benefit. Here‘s how it works. Assume that a dentist has a professional corporation. In recognition of the dentist‘s service as an officer, director, or employee, the professional corporation agrees to pay the dentist‘s surviving spouse $15,000 on or after the dentist‘s death. This is called a "death benefit". Now, section 56(1)(a)(iii) of the Income Tax Act says that the surviving spouse must include, for the purposes of calculating their taxable income, any "death benefit" they receive (i.e. $15,000) minus $10,000 (this is how "death benefit" is defined in section 248(1) of the Income Tax Act). As such, the surviving spouse ends up paying no tax on the first $10,000 they received from the dentistry professional corporation as a death benefit. They would only be taxed on the remaining $5,000 death benefit.
If the death benefit is not paid to the dentist‘s surviving spouse or common law partner, then the first $10,000, net of the death benefits received by the surviving spouse or common law partner, is not included in the recipient‘s income. For example, if a deceased dentist‘s surviving spouse received a death benefit of $6,000 and a surviving child received a death benefit of $6,000, then the entire $6,000 received by the surviving spouse would be tax-free whereas only $4,000 of the $6,000 received by the child would be tax-free. The idea is that the recipients of the death benefit must evenly split the $10,000 exemption which the employee‘s surviving spouse or common law partner have not used.
Worth mentioning is that any payment made out of a superannuation or pension fund or plan cannot qualify as a death benefit; furthermore, "death benefits" received under the Canada Pension Plan do not qualify as death benefits for income tax purposes.