March 1, 2010
by David Chong Yen, CFP, CA
The Harmonized Sales Tax (HST) (i.e. combining the Ontario provincial sales tax with the Federal Goods and Services Tax) is scheduled to be implemented July 3, 2010.
What does it mean to a dental professional?
The sales tax on certain expenses will now be 13% rather than 5%. These expenses may include but are not limited to dental supplies/equipment, office renovation, rent, utilities, postage, professional development, legal and accounting fees. If the total of these expenses is say $100,000 before taxes per year, then your additional cost will be $8,000. This translates to about $4,290 of additional costs net of personal taxes if you are a sole proprietor or $6,680 of additional costs net of corporate taxes if you have a corporation (i.e. professional or hygiene or technical). This also means less in your pocket.
There is no effect if you were to acquire/sell shares of a corporation as there is no sales tax on these transactions; however, you will incur higher professional fees (i.e. legal, accounting and brokerage fees).
If you were to acquire dental assets, you might face a higher price as your sales taxes will increase. Your accountant may be able to reduce your sales taxes by changing the asset price allocation. In general, purchasers are responsible for all sales taxes and therefore this should have little or no effect on the vendor except HST on the professional fees.
Consider finalizing any major purchase prior to the implementation of the HST. i.e. buy before July 2010.
Now is the time to review if it is beneficial for you/your professional/hygiene/technical corporation to register for GST/HST. By registering, you/your corporation may be able to recover some of the GST/HST paid; however, you are also obligated to collect HST on any cosmetic dentistry work. A cost/benefit analysis will review your situation.
Very often, an entity (i.e. separate corporation, dentist, or his/her family members or a family trust) other than a professional/technical/hygiene corporation becomes the owner of a dental building/office because of the following benefits:
• No sales tax payable on closing.
• Property would be creditor proofed from the dental practice.
• Other family members could become shareholders and therefore permit income splitting.
• PC could fund the purchase via low/interest free intercompany loan.
• Property could form part of the retirement nest egg.
• Provide more flexibility at time of practice sale i.e. property may or may not be sold along with the practice.
Basically, the Holdco becomes the landlord and charges rent to its tenants (e.g. sole proprietor dentists and professional/hygiene/technical corporations). With the introduction of the HST, the rent will be subjected to a 13% sales tax. If you have acquired the building prior to the implementation date (July 2010), you will end up paying more sales taxes in about 5 years if the annual rent is equivalent to about 10% of the value of the dental building. If you acquired the building subsequent to the implementation date, you will end up paying more sales taxes in about 11.5 years if the annual rent is about 10% of the value of the dental building.
Your decision to use a separate entity to own the dental office/building should not be entirely influenced by the HST. Your retirement plan and finance costs should be considered as well. Discuss this with your accountant before you sign on the dotted line.
For those who already own a dental office/building in a separate entity, they should also revisit the ownership structure and evaluate the effect of the sales tax change. If you do decide to have your professional/hygiene/technical corporations own the building, you may do so on an income tax free basis. Consult your professional advisor before you transfer it; otherwise, it may cost you land transfer tax, HST and corporate or personal tax. Time is of essence as July 2010 is fast approaching. 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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