Have you incorporated your practice?

What You Need to Know to Begin Making Informed Decisions

This is a common topic among dentists. Many have wrestled with the question of incorporation. This is especially true given the 2017 tax proposals with respect to the taxation of private corporations. Determining whether or not you will benefit from incorporation is a complicated matter and coming up with the wrong answer can be costly.

To determine if incorporation is suitable for you, you should consider the following questions:

• Do you spend your entire income or are you able to save some money?
• Do you have a spouse in a lower tax bracket?
• Do you have business debts?
• Are you thinking of selling your practice?

If you answered yes to any of these questions, then you should consider incorporation.

Things to know about incorporation

Many people choose to incorporate because they believe that incorporation protects them. This is not always the case. While you may have limited liability when it comes to some of the practice’s debts, you will still be on the hook for anything that you have to provide a personal guarantee for. This often includes bank financing and leasehold agreements.

Further, incorporation does not protect you from malpractice. Malpractice insurance is the only protection you have in such cases.

What incorporation will do for you is provide flexibility in tax, remuneration and retirement planning. As a shareholder and a person who works for the corporation, you can take money out of the corporation through dividends, salary or a combination of the two.

Dividends are taxed at a lower rate and you don’t have to make CPP contributions on them. Salaries have their own benefits in terms of your ability to make RRSP and CPP contributions. The flexibility to choose which method works best for you is one of the many benefits of incorporation.

Excess funds

If you are already saving money, you may be better off incorporating and leaving the money in the corporation until retirement. The tax rate in a corporation is only 13.5% in Ontario for the first $500,000 of taxable net income, much lower than the top marginal tax rate for an individual, which is now 53.53%.

If you incorporate, you can defer taxes to the extent that you do not withdraw the funds from the company.

Note that as a result of the 2017 tax proposals, you will only be able to enjoy this benefit if your corporation earns less than $50,000/year in investment income. This still provides a significant opportunity for savings; however, the benefit is now less than it once was.

Practice debt

Similar to the ability to save in a corporation, you can pay off debt much faster if the debt belongs to the corporation due to the lower tax rate. Incorporating gives you $0.86 on each dollar earned to use for debt reduction versus the $0.46 of each dollar you can use if you are not incorporated.

Practice debt may typically be transferred into a corporation. There are some limitations so be sure to speak to your advisor.

Ready to sell

There are two primary ways of selling your practice: you can sell assets or shares. Selling shares is generally preferable because you can use the one-time $848,252 capital gains exemption, which allows you to receive $848,252 tax-free.

Be aware that there are strict rules to be able to use the exemption and it can take up to two years to ensure your corporation is eligible for the capital gains exemption, depending on your unique situation.

Family members eligible for income splitting

The ability to reduce your family tax burden by income splitting with your spouse and adult children has been significantly reduced as a result off the 2017 tax proposals; however, it may still be an option in many situations. To the extent that income splitting is available to you, significant tax savings can be realized by reducing your draw out of your corporation, and paying either salaries or dividends to family members, as appropriate. The new rules surrounding income sprinkling can be quite complex, therefore we recommend that you speak with your tax advisor to determine whether this is a viable option given your specific facts and circumstances.

Conclusion

There is no black and white answer on incorporation your practice. But there may be significant advantages to you if the right conditions are met.

To find out what MNP can do for you, contact Nick Korhonen, CPA, CA, Senior Manager, Taxation Services, Professional Services at 613-691-4245, or [email protected]