June 1, 2010
by David Chong Yen, CFP, CA
When your patients don’t come to you for their regular check ups, this can result in poor dental hygiene. Similarly, you should consider regular tax check ups. i.e., reviewing your tax situation to ensure that your tax bill is minimized. Tax planning is a year round exercise. Here are some pointers for you to consider.
Incorporation — dentistry/hygiene/technical corporations enjoy the low corporate tax rate of 16.5% on the first $500,000 of taxable income (dental revenues minus expenses) (to be reduced to 15.5% effective July 1, 2010). Compare this with your top personal tax rate of 46.4%.
Consider a Professional Corporation (PC) if any or all of the following circumstances exist:
• Your dental practice has a loan
• You have parents/spouse and/or adult children 18 years and older who live in Canada and don’t make very much income.
• Your income (net of expenses) exceeds the top tax bracket which, in Ontario, is about $127,000.
Even if you need all of the practice’s profits to repay personal debt, it still could make sense to set up a PC if you have parents who make little or no income and live in Canada. The reason is that these parents or adult children who make no income can receive approximately $35,000 of dividends, each from the PC, and pay approximately $450 in taxes. These parents and adult children, if they so choose can subsequently gift the money to anyone, at anytime, including the dentist. The gifts received by the dentist will not be taxable. There is no limit on the amount one can gift. Hence, poor family members can be used as tax savings vehicles and serve as a conduit for extracting money from the PC at very low tax rates. When one has a practice loan, it must be repaid with after tax dollars regardless of whether a PC exists or not. When there is no PC, and one is at the top tax bracket ($127,000), the practice loan will be repaid with expensive tax dollars i.e. dollars taxed at the highest personal marginal tax rate of approximately 46.4%. Hence, where no PC exists, approximately $186,000 of pre-tax income must be earned to repay approximately $100,000 of practice loans. Where a PC exists, approximately $118,000 of pre-tax income must be earned to repay the same $100,000 practice loan. When adult children are attending university, the amount of dividends they can receive while paying virtually no tax increases significantly due to the tuition, education, and textbook tax credits arising from attending any local/foreign university. For example, a child 18 and older living in Ontario and attending university on a full time basis for 9 months of the year and whose tuition is $10,000 will pay about $1,600 taxes on $60,000 of dividend income.
One can have several professional corporations, or they may choose to have a technical/hygiene corporation in addition to their professional corporation. Having additional corporations may enable more income to be taxed at the low corporate tax rate of 15.5% starting July 1, 2010 for Ontario corporations. Care must be exercised to ensure the two or more corporations are not associated for tax purposes. If the tax department deems them to be associated, then the tax benefits of having additional corporations will likely disappear.
Adding shareholders to your corporation — these new shareholders who are in the low/lower tax brackets could receive dividends and thereby reduce your family’s tax bill. The potential shareholders would include parents, spouse or adult children for those who have professional corporations. But if you have a hygiene/technical corporation, you could include anyone, including close relatives whom you trust. Individuals with little or low income could receive $35,000 as dividends and pay $450 of taxes while you, in the top tax bracket, would pay $11,400.
Private health plan — for those who are self employed, you could obtain a full tax deduction (i.e. not a medical tax credit) if you paid for your health plan (personal health, vision, medical and dental). If you are at the top tax bracket, you will save $464 for every $1,000 of health premiums paid. For those who only have family member employees, you may deduct, subject to certain other limits, health premiums of $1,500 for each of you, your spouse and other adult dependents living with you and $750 for each of your minor children. For those with non family members employees and you pay 100% of these other employees health premiums as well, you may claim more than the limit; however, if you pay less than 100%, your deduction could be limited.
Tax free dividend — if your corporation has sold some assets at a profit (e.g. equipment/goodwill/investments) and has realized capital gains, you may be entitled to some tax free money. You can pay a capital dividend from your PC which you will receive tax free. As special tax forms are required, consult your professional advisor first.
Update your office — Buy equipment, computers, and software or renovate your office before your fiscal year end. Ensure that your supplier invoices you and installs or delivers the above items before the end of your fiscal year. You still have time to enjoy the special tax write off (100% deduction) on computer hardware and software purchased prior to February 1, 2011. Don’t forget to have the invoice list these specific components.
Keeping good records — of your business income and expenses, donations, child care, medical etc. will provide support for your deductions when the tax guys come knocking.
Six meals — Did you only deduct 50% of the meals and entertainment, when you invited all of your staff? You are entitled to deduct 100% on six meals where all staff was invited.
EI — Did you hire your spouse/children? Ensure they qualify for NO EI premiums to be deducted from their salaries. If EI was deducted then consider an appeal to get a refund of EI. Consult your professional advisor.DPM
David Chong Yen, CFP, CA of DCY Professional Corporation Chartered Accountants, 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, or e-mail firstname.lastname@example.org. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
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