As such, many dentists have ordered their affairs in a manner that isolates and distinguishes hygiene revenues from dental revenues — often to give family members and others the ability to own hygiene operations with the aim of saving tax and/or creating ownership opportunities for profit sharing purposes.
In many Canadian jurisdictions there have been significant developments in corporate law and in the regulation of hygienists — developments that should cause dentists to re-examine their arrangements in this area.
Hello professional corporations — bye-bye hygiene corporations?
First, it is important to explain why hygiene corporations have been an important planning tool (then we can explain why they are becoming less important).
The ancillary corporation
Ancillary Corporations, which includes hygiene corporations, technical services corporations and management corporations, were preferred structures for accessing tax and other benefits of incorporation which were not (at the time) directly available to dental professionals. Prior to dentists being able to flow their dental incomes through corporations, the dentist was not (and is still not) precluded from incorporating the non-dental elements of the practice, including hygiene (hygiene corporations), radiography and lab work (technical services corporations) and certain management and administration functions (management companies), all of which could be delivered directly to the patients (or in the case of the management company, to the dentisti) and the fees for services rendered by the Ancillary Corporation would flow to the Ancillary Corporation.
If you have incorporated an Ancillary Corporation, you have done so for one or more of the following reasons:
1. The Corporation would be taxed at a much lower rate and personal taxes would be deferred on retained earnings until paid out from the Corporation in dividends, salaries or bonuses.
2. Persons other than the dentist (usually family members and/or a family trust) are not prohibited from owning shares of corporations that deliver non-dental services. Therefore, the income could be taxed in the hands of persons other than the dentist, often resulting in substantial reductions in overall taxes (i. e. income splitting).
3. Selling shares of a small business corporation may qualify for taxfree treatment whereas the sale of an unincorporated business does not. Ancillary corporations could allow a dentist to lower the total tax paid on the sale of a practice.
4. Estate planning can be facilitated, leading to probate fee savings.
Enter the professional corporation
With professional corporations now a reality in most provinces and further, with family members (and in some provinces non-family members as well) being permitted to hold non-voting shares in professional corporations, there are fewer cases where hygiene (and technical services) corporations are justified, as many of the benefits of these corporations can be attained through professional corporations.
The issuance of appropriate classes of shares can allow both splitting of current practice income with family members and flexibility to allocate future growth in value of the practice among the dentist and family members, each of whom may access their lifetime capital gains exemption, which is currently $750,000.00.
Splitting the gain on the sale of a practice will be of most interest when dentists have already used some or all of their exemption elsewhere or when practice value is expected to exceed $750,000.
With the ability to incorporate your entire practice in a single corporation, it is unlikely that an Ancillary Corporation will provide much, if any, incremental benefit in most situations. Benefits from Ancillary Corporations may still be derived in a few narrow situations; for example, if you wish to extend income splitting to family members who are not eligible to own shares of a dental corporation (mothersin-law, fathers-in-law, aunts, uncles, nieces and nephews are not eligible to own dental corporation shares in most provinces) or if you are considering ownership participation with persons other than family members (e. g. practice personnel or others), you may wish to explore the Ancillary Corporations described above.
The self-regulated (and self employed) hygienist
Another significant change in the landscape is the growing trend towards self-regulation of dental hygienists.
At the time of writing this article, hygienists self-regulate in seven of 10 provinces. While in all cases self-regulation transfers the responsibility for accrediting and disciplining hygienists from the dental governing body to one controlled by hygienists, other details vary provincially. One area of variation is whether hygienists can practice without the supervision of a dentist. At present, only Alberta, British Columbia, Ontario and Nova Scotia permit hygienists to offer independent services to the public (several other provinces allow independent practice in restricted settings like nursing homes).
While there are many other consequences of self-regulation and independent practice, we will focus largely on the business implications to dentists and hygienists.
For hygienists working in a dentist’s office, the ability to practice without dentist oversight should allow the parties to structure the relationship between dentist and hygienist as one of self-employment rather that of employment (which is referred to in the arcane legal phraseology as “master and servant”).
The self-employed hygienist — issues for the dentist
No source deductions are payable on behalf of selfemployed hygienists, so the dentist will no longer be responsible for the employer’s portion of Canada Pension Plan, Employment Insurance and provincial source deductions (e. g. health premium taxes and worker’s compensation programs). The dentist is also not required to deduct and remit income tax on behalf of the self-employed hygienist.
Self-employed hygienists also relinquish being covered under provincial employment law. Things like notice period for termination are not mandated, but instead become a matter of contract between the parties.
Issues for a self-employed hygienist
For a self-employed hygienist, the advantages include the ability to claim tax deductions that are not available to employees. Unreimbursed costs including continuing education costs, computer purchases, cellular phones, specialized clothing, internet connection and certain use of motor vehicles may all constitute valid tax deductions to a selfemployed hygienist.
While this may not provide benefit in all situations, there is also the potential to have the hygienist’s compensation paid to a corporation in which shares may be issued to persons other than the hygienist. This opens the possibility of income splitting (usually with family members) to hygienists as well as dentists.
There are also disadvantages to being a self-employed hygienist. Self-employed individuals are not covered by Employment Insurance. While not paying EI premiums increases the hygienist’s take-home pay, it also represents the loss of a safety net that covers both unemployment and parental leave. Also, while for employees the cost of Canada Pension Plan contributions is split equally between employer and employee, self-employed individuals must make the entire contribution themselves.
Should we or shouldn’t we? Are we or aren’t we?
One misunderstood area is that it isn’t as simple as leaving other terms unchanged and declaring a relationship as one of self-employment; the arrangement must truly reflect one between two independent contractors and must satisfy certain criteria established by the Courts, including: (1) Degree of control and supervision; (2) Ownership of tools and equipment; (3) Chance of profit; and (4) Risk of loss.
In cases dealing specifically with dental hygienistsii, the followin
g factors contributed to a finding that hygienists were in fact independent contractors:
1. The hygienists’ income depended on how many hours were worked and what expenses he or she decided to incur;
2. A written agreement expressly described the hygienist as an independent contractor; 3. In one case, the hygienist was paid a daily rate and 25 per cent of billings, while also being responsible for 25 per cent of bad debts;
4. In another case, the hygienist received 50 per cent of billings;
5. The hygienist set up his / her own appointments, decided on treatments and arranged for his /her own replacement in the event of absence;
6. The hygienist purchased his / her own liability insurance;
7. The hygienist was free to work at other locations;
8. The hygienist determined his / her own hours and how many patients he or she wished to serve.
The decision to create a self-employment relationship may have far-reaching implications to both parties and should only be undertaken with knowledgeable advice.
The independent dental hygiene centre
As dental hygienists are now permitted to provide services without the oversight of a dentist, the concept of the independent dental hygiene centre has emerged, which has implications for all stakeholders. For the dentist with a sizable dental hygiene component, it is important to be aware of the internal and external risks that arise from this development — internal risks being the former hygienist who may attempt to attract patients to an independent dental hygiene centre — external risks being the anticipated growth in the number of independent dental hygiene centres competing directly with the dentist (and possibly owned by non-hygienist opportunists).
Given the movement away from the implied contract terms provided under employment law and the likely growth in the number of independent dental hygiene centres, it is vital to have a proper written agreement between the dentist and the independent contractor hygienist and for such agreements to clearly set out, among other things, termination rights and the parties’ rights and interests in the patient charts in the event that a hygienist is terminated, moves to a different office or opts to practice independently. A properly prepared written agreement can go a long way to protect the dentist from unexpected losses and to protect the value of the goodwill of the practice, which is often heavily reliant upon retention of hygiene patients.
Now is the time to examine your current arrangements and to determine if you have adapted to the changes that have taken place, and if you are prepared to adapt to the further changes on the horizon.
REFERENCES
i The introduction of the Goods and Services Tax severely limited the benefits of management companies, as dentists are not GST registrants and therefore would be unable to recover GST paid to the management company.
ii Bradford v. M. N. R [1988] T. C. J. No. 818 (QL) (T. C. C.); Arthurs v. M. N. R [1995] T. C. J. No. 947 (QL) (T. C. C.); Tsimerman v. M. N. R. [1998] T. C. J. No. 1132 (QL)(T. C. C.); Witherell v. M. N. R. [2000] T. C. J. No. 782 (QL) (T. C. C.)
John McMillan is a Toronto business lawyer serving dental professionals. He may be reached at 416 364 4771 or johnmcmillan@bellnet.ca
David Harris, MBA, CMA, TEP, is President of prosperident — advisors to the dental profession, a Halifax based dental advisory firm. He may be reached at 902-421-1533 or david@hbmco.com
