Maximizing Your Dental Professional Corporation
Christopher Bowlby - Feb 15, 2023
As a dentist, from being both a healthcare professional and business owner, there are many different special considerations to incorporate into your wealth plan.
As a dentist, from being both a healthcare professional and business owner, there are many different special considerations to incorporate into your wealth plan. A dental practice is one of the few healthcare professions where your practice can have a very large intrinsic value and aligning both your practice and your personal finances is extremely important in achieving your long-term goals.
With a Dental Professional Corporation, there are significant tax benefits such as creating a tax deferral mechanism to build wealth inside the corporation by retaining earnings inside the corporation and utilizing the small business capital gains exemption of $971,190 (for 2023) on a sale of the professional dental practice.
By using a Dental Professional Corporation, you are able to claim the small business deduction on the first $500,000 of the corporation’s annual taxable income. This tax advantage allows a dental professional corporation to pay tax between 11-16% on the first $500,000 of taxable income. (12.2% in Ontario)
With a Dental Professional Corporation, taxes are deferred by the shareholders until dividends are paid from the corporation. This deferral is significant, especially for dentists in the top income bracket as you are able to more efficiently save more funds inside the dental professional corporation, creating more funds to be available for investment, and can be withdrawn throughout retirement when you are at a lower tax bracket.
Capital Gains Exemption
The lifetime capital gains exemption (LCGE) is another main tax benefit for using a Professional Corporation, but has complex rules to be able to qualify to use the exemption such as the Small Business Corporation Test, Holding Period Test and Asset Use Test. When planning for retirement and to maximize this benefit, it is important to purify your balance sheet at least 24 months prior to a liquidation event.
This is particularly important with the asset use test as 90% of assets in the Dental Professional Corporation must be attributable to the active business at the time of the sale and at least 50% of the assets are used in the active business during the prior 24-month period (wages, equipment, salaries, etc.).
Purification of a DPC
With a Dental Professional Corporation, it is common for dentists to invest the retained earnings that are left inside the corporation. However, since none of these assets are considered usable in an active small business, this can create issues when it comes time to sell the practice. With the step of “purification”, you are able to move retained earnings to a second corporation, such as a personal holding company and thereby separating active and passive income and assets. These transactions can be undertaken on a tax-deferred basis which means that there will be no taxable implications and you still receive the tax-deferred status.
By working with your accountants and lawyers, our team is able to help create a strategy where you are able to qualify for the LCGE which maximizing your investable assets and reducing taxes to achieve your financial goals.