This article are relevant to you if you are a dentist, or a dental specialist, who operates their own practice or is practicing as an associate. KCPA is committed to helping you increase the efficiency of your accounting and tax affairs, saving you time and money.
Incorporating your practice is the first step in reducing your taxes and increasing the cash flow available to you personally, and to your practice for expansion. The primary tax benefits of a professional corporation (PC) that can be accessed are, the small business deduction, and the deferral of income tax until amounts are paid out to the professional.
There is a significant advantage of incorporating your practice depending upon your circumstances:
A tax deferral opportunity presents itself from the fact that a PC is treated as any other small business corporation carrying on active business in Canada – it will pay income tax in Alberta at the rate of 11% (2019 rate) on its first $500,000 of active business income. The highest personal marginal tax rate in Alberta is 48% and that applies to income in excess of $314,928 (as of 2019). That is a difference of 37 percent. This means for every dollar of taxable income you earn and leave in the corporation, there is a tax deferral of $0.37, assuming you are in the 48% tax bracket. To put it simply, if you can leave $100,000 taxable income in the corporation each year (and not draw it out for lifestyle or other purposes), you can realize a yearly tax deferral of $37,000.
See how a professional corporation can result in an annual tax deferral of over $35,000 for a dentist.
Dr. Natalie Gillis (the real name has been changed for confidentiality purposes) and I were discussing her accounting and tax matters at her clinic. Dr. Gillis is a dentist, and recently started her own practice. She is married, and recently became a mother to an adorable baby girl. Although Dr. Gillis is a new practice owner with a very busy personal life, she remains focused and committed to achieving her goals. “I really need to have a better understanding of my finances”, she said to me. “When I started practicing, I was told to incorporate right away, but I don’t completely understand the concept or how it relates to long-term planning”. This is where KCPA was able to offer some meaningful guidance to help Dr. Gillis understand her tax situation and its benefits over the long-term.
Dr. Gillis was aware of professional corporations, but had not been informed on how effective they could be at reducing her tax bill and creating future tax planning opportunities. It is important to note that tax planning is a process that not only provides cash flow benefits in the present, but continues into the future. A professional corporation is the vehicle for those future tax benefits. Whether you are an associate or have your own practice, incorporation can provide tax advantages at any stage of your career; as long as you do not require all the income you earn to meet your lifestyle.
In this case, Dr. Gillis did not require all of her professional income to meet her lifestyle needs. Therefore, she could immediately benefit from the tax deferral opportunity of keeping profits within the company. The top marginal tax rate for a person in Alberta is 48%, but profits within a professional corporation are taxed at the much lower rate of 11% (for taxable income under $500,000). The chart on the right illustrates how this strategy would work.
Tax Situation currently as a Sole Proprietorship
Tax Situation with a Professional Corporation
When we compare the situation of operating through a professional corporation versus a sole proprietorship, Dr. Natalie Gillis realizes the following benefits:
- Dr. Gillis would pay $100,000 in taxes (a) as a sole proprietor, whereas with a professional corporation she would have to pay only $63,950 (b+c), an annual benefit of approximately $36,050.
- How can this $36,050 tax deferral benefit Dr. Gillis’ future? Well, if this annual deferral is simply kept in the corporation as cash, in 20 years it will accumulate to $721,000. Dr. Gillis would able to generate $721,000 more for her retirement by simply incorporating.
- Alternatively, if the $36,050 tax deferral was to be invested annually for 20 years, assuming a 5% annual growth, and a 51% tax on investment income, it could grow to $916,000.
It is clear that incorporating delivers significant and meaningful results when used for practical purposes in your life. In summary, the cash flow benefits of Dr. Gillis incorporating are as follows:
Cash Flow Benefits of Incorporating
This option assumes the following: $36,050 of cash is kept in the professional corporation every year for 20 years without being invested.
This option assumes the following: $36,050 is invested every year (held by the professional corporation), for 20 years, at a 5% annual growth rate, and a 51% tax on investment income.
For an evaluation of your situation, please book a complimentary consultation.
This material is provided for general information only and is subject to change without notice. While every effort has been made to compile this information from reliable sources, no warranty can be made as to its accuracy or completeness. As it is impossible to include all situations, circumstances and exceptions in an article such as this, a further review should be done by a qualified professional within the context of your circumstances. KCPA, or any organization, or any individual involved in the preparation or distribution of this article accept no contractual, tortuous, or any other form of liability for its contents or for any consequences arising from its use.