There has been much interest in having an in-house laboratory using computer-aided design and computer-aided manufacture (CAD-CAM) units. This may help you to better serve your patients’ needs and at the same time improves the efficiency of your office. Once you have decided on the machine you want, what other tax issues should you consider prior to signing on the dotted line?
Purchase vs. lease
There is no obvious answer to the question of whether one should purchase or lease; it all depends on your own situation. The lease payment is fully tax deductible. You should also determine the repayment term and what penalties exist if you prepay the lease in the future. Prepaying the lease may become an issue if you decide to sell your practice. Also determine the hidden interest rate within the lease. Often times, the lease interest rate is significantly more than the interest rate that is offered to a dentist had they borrowed the money.
On the other hand, if you were to purchase the equipment, the interest on the loan repayment is tax deductible but not the principal repayment. However, you will be entitled to tax deductions relating to the equipment purchased, etc. in the form of a tax depreciation or capital cost allowance. See below.
Tax Deduction -Classification
When you purchase an item, determine if there are various components involved, e. g. computer hardware, software, equipment, supplies and training. Be sure the supplier’s invoice clearly identifies the various components. By doing so, you will save taxes.
The following outlines common items purchased by a dentist and their corresponding deduction rates permitted by the tax department (Table 1).
Timing
In the year of the acquisition, the tax-write off is only 50% of the posted rate (i. e. for equipment, the 1st year deduction would be 10% rather than 20%), therefore you get the same tax break if you were to acquire the equipment at the beginning or the end of the fiscal year. Hence, we suggest buying the equipment shortly before your year end, if you select the buying option. Otherwise, if it is right after your year end, leasing may be suitable, subject to comments made under previous section– “Purchase vs. lease”.
Cost vs. Benefits
There is a variety of equipment available in the market; consider acquiring those that provide the best bang for the buck. Compare the cost of the equipment to the extra revenues which will be generated from them.
When evaluating equipment, please ensure that all costs, including the maintenance costs, are taken into account. Don’t just review the purchase price.
GS TImplications
Before you acquire the machine, you should consult your accountant to address any GST issue. There may be a chance you could recover the GST paid (likely over $5,000) whether via a lease or a purchase. If you have already acquired the machine but you did not request a GST refund, you might still have a chance to recover the GST. Once registered for GST, you will have the obligation to charge patients GST on certain goods such as the sale of toothbrushes, take home tooth whitening, etc.
Prior to getting new technology, perform a cost/benefit analysis; focus your spending on what benefits you and your patients taking the following into account:
1) the revenues generated from the expenditure,
2) the after tax cost of the expenditure,
3) the clinical aspects of the purchase.
Who is the purchaser/lessee ?
Your options include you — the sole proprietor or partnership, your professional corporation, your hygiene/technical services corporation, and your management corporation. There are pluses and minuses associated with each of these issues. Consider these issues:
Management Company
A management company (MC) usually pays for various expenses and then a 15% profit or markup is added to those expenses. In addition, GST is added. The MC then charges the dentist. The purpose of this structure is to get the 15% profit or markup taxed at a lower rate of 16.5% (Ontario). The benefit to the dentist is that an additional “expense” or tax deduction is created.
With the existence of GST, in most cases, a management corporation is not suitable as GST must be added to the management fee; if the dentist pays this GST then this is an additional cost which must be absorbed by the dentist which would not have arisen had there been no management corporation. Consider a hygiene services corporation as an alternative.
Hygiene/Technical Services Corporation (HSC/TSC)
A hygiene services corporation captures hygiene and possibly technical service revenues. No GST is added on the hygiene/ technical revenue unlike the MC option. Hence, this is better for the dentist. The HSC could buy the E4D or Cerec 3D and operate the lab business. HSC’s are taxed at 16.5% in Ontario on the first $400,000 ($500,000 as per the 2009 proposed Federal Budget) of taxable income (revenue minus expenses). Unlike a professional corporation (PC) which has ownership restrictions in Ontario, HSC’s do not have ownership restrictions. The Income Tax Act imposes some tax traps related to the ownership of corporation, which extend to HSC and PC. Consult your accountant.
Professional Corporations (PC)
PC’s are taxed at 16.5% on the first $400,000 ($500,000 as per the 2009 proposed Federal Budget) of taxable income. A PC could buy or lease the Cerec or E4D. PC’s have ownership restrictions in Ontario. These restrictions limit who can own the PC. If you had a poor in-law and wanted to channel profits into their hands, which would be taxed at the low tax rates, this would not be possible in Ontario. That is where a hygiene/technical services corporation (HSC/ TSC) applies, as an HSC could be owned by your in-laws, grandparents, etc.
Proprietorship or Partnership
The top tax rate, which applies to income earned from your proprietorship or partnership, is 46.4% vs 16.5% if you incorporated. Incorporation is not for everyone as there is a cost to set it up and to maintain it. If one’s taxable income is less than $120,000 per year, then the cost of having a PC may exceed the benefits. In the real world, I have not encountered a dentist who has an E4D or Cerec 3D and earns less than $120,000 of taxable income. oh
David Chong Yen, CFP, CA. has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, e-maildavid@dcy.ca.www.dcy.ca.This article is intended to present tax saving and tax planning ideas and is not intended to replace professional advice.
Oral Health welcomes this original article.
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The lease interest rate is significantly more than the interest rate that is offered to a dentist had they borrowed the money
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I have not encountered a dentist who has an E4D or Cerec 3D and earns less than $120,000 of taxable income
