updated dental student presentation inc - g&r final

The Business of Dentistry

A CPA’s Insights for Dental Students

The Business of Dentistry

Who is this guy?What is he going to talk about?

G&R Chartered Professional Accountants

• Steven R. Gray, CPA, CA graduated Magna Cum Laude from Robie Street High in 2000

• Formerly Rector Colavecchia Roche - Chartered Accountancy firm operated in Dartmouth for over 30 years

• Recently re-branded as G&R Chartered Professional Accountants

• Work with dental clients around the province within a two hour radius of Halifax

Today’s Seminar• Employment & associate options

• Acquiring & incorporating a dental practice– Pros– Cons– Steps to take

• Tax time reminders– Upcoming deadlines

Employment & Associate Options• Corporate dentistry is a growing trend

– e.g., Dental Corporation of Canada

• Dentists work as employees and earn a salary– T4 income is easy-peasy, any accountant will do– RRSP, TFSA, Life Insurance savings plans available

• Associates work as self-employed contractors– E.g., 60/40 split between the practice & associate– T2125 income is trickier– Tax saving options similar to employees

Employment & Associate OptionsPros to the employment option include:– Focus on patient care, being a dentist!– Reduced administrative burden– Potentially less stress as a result– Work/life balance improvement

Cons to the employment option include:– Reduced access to tax savings and planning opportunities– $$$, there’s a reason corporations want to own dental

practices - a 29.1% profit margin for dental businesses with production over $1,164,000

Acquiring a Dental Practice• Topic for a seminar all on its own!

• Asset purchase – buyer’s preference (generally)– Tangible assets - equipment, systems, leaseholds, etc.– Intangible assets - patient list / goodwill / staff

• Share purchase – vendor’s preference (generally)– Shares of the company that owns these assets

• Asset or share price is a negotiation, not a science

• Financing available – big banks love dentists

• Location & personal fit with you is crucial – associate 1st

Incorporating a Dental Practice

If you like it...... should you put an Inc. on it?

Answer is… it depends

Why Incorporate? The Pros

• Legal reasons exist– Limited liability & creditor protection– Separate legal entity – succession – Accountants are not lawyers– Talk to a qualified lawyer regarding incorporation

as you should for:• Associate & non-compete agreements• Wills & estate plans• Shareholder & share purchase agreements

Why Incorporate? The Pros• Taxes, taxes, taxes

– Potential tax savings may exist with:• Corporate tax rates• Income splitting opportunities

– Potential tax deferral may exist• Funds left in corporations• Similar to an RRSP

– Canada Pension Plan (“CPP”) ramifications

Potential Income Tax Savings• Active business income in Nova Scotia taxed at

13.5% on the first $350,000 where individuals pay 54% tax on income over $200,000

• Example: – An active business earning a profit of $100,000 would owe

$13,500 of corporate income tax, leaving $86,500 in the corporation

– A dividend of $86,500 would trigger a $16,455 personal tax bill

– A combined income tax bill of $29,955 or 30%, which means you keep 70% of what you earn

Potential Income Tax Savings

• A self-employed dentist earning a profit of $100,000 would owe $33,326 of personal income tax and CPP premiums or 33.3% tax rate meaning you keep 66.7% of what you earn

• Tax and CPP premiums of $33,326 for the unincorporated dentist > $29,955 of tax for the professionally incorporated dentist

Income Splitting Opportunities• Control rests with the dentist– Nova Scotia Dental Act (“NSDA”) 40 (1) allows dentistry to

be performed by a corporation

– NSDA 40 (2) requires the majority of the voting shares in the corporation to be held by one or more licensed dentists

• Opportunity for wider share ownership to provide income splitting– Consult your accountant & lawyer to determine what share

structure is right for you

Potential Tax Deferral• Funds left in the corporate structure taxed at 13.5% on the

first $350,000

• Savings build up for a retirement fund– Corporation has $0.86 of after-tax profit to invest as

opposed to as little as $0.46 for an individual

1 2 3 4 5 6 7 8 9 10

Tax Planning Opportunities

• Optimal tax savings often come from two key strategies:

– Income Splitting - “Even-Steven” income between spouses or common law partners

– Income smoothing - Smooth income over time• Pay too much tax in peak years• Don’t pay enough tax in trough years

Canada Pension Plan (CPP)

• Incorporating provides the potential to “save” Canada Pension Plan contributions– CPP is a forced savings of 9.27% on your first

$54,900 of self-employed income in 2016– Employee portion is $2,544.30 (4.95%)– Employer portion is $2,544.30 (4.95%)– First $3,500 is CPP exempt– Total forced savings of $5,088.60 whether you like it or not

If you can “save” CPP...

... should you?

Answer is… it depends!

“Saving” CPP Contributions

• Pros for CPP– Forced savings work for some personalities – Professionally managed portfolio– Secure annuity for as long as you live– Death, disability, and survivor benefits

“Saving” CPP Contributions

• Cons for CPP– Forced savings don’t work for some personalities– Non-liquid investments, you can’t access your

principle– Death – benefits may not outweigh the costs

Why Incorporate? The Cons• The “*” is an accountant’s best friend

• Legal-ese warning along the lines of:“Please consult with a qualified tax advisor or accountant to ensure a corporation is right for you”

• CPA’s have the enviable role of playing “Debbie Downer” when it comes to investment or tax saving schemes plans.

• We get to break the bad news, the cons

Why Incorporate? The Cons• Do you want to complicate your life?– Corporations will complicate your life by bringing

another entity into your world

• Legal protection and benefits may be limited– Bankers will require guarantees– Reputation in the business community• There are seven degrees of separation in the world

and maybe two or three in Nova Scotia– Insurance coverage requirements and costs are similar – consult a broker

Why incorporate? The Cons

• Tax saving benefits may be limited if:

– You require your profit to fund your lifestyle or personal debts (i.e., no tax deferral)

– You are single (i.e., no income splitting)– Your children are minors (i.e., also no income

splitting)– You “save” the CPP, but fail to save for retirement

Why Incorporate? The Cons

$100,000 profit example for 2016: $33,326 for unincorporated dentist- $29,955 for the incorporated dentist $3,371 difference

($5,088) represents CPP savings$1,717 added income tax cost

Why Incorporate? The Cons

Corporations come with costs for “necessary evils”

Why Incorporate? The Cons

• Necessary evils often come wearing suits, shirts, smiles, ties…

– Accountants to file tax returns, T-slips, etc.– Lawyers to incorporate, reorganize, dissolve, etc.– Banks to manage accounts and credit cards– Licensing boards, registry of joint stocks, etc.

• Overall, an increased paper burden whose costs ($2,500 per year and up) may outweigh the benefits of incorporating

Steps To Take• Consult a lawyer, an accountant, and colleagues

who have acquired a practice to see if the pros will outweigh the cons for your situation

• Hire an accountant early to review your personal tax situation (if you are an associate) or the acquisition with you

• Hire a lawyer to incorporate your company properly and register it with the Registry of Joint Stocks and adhere to the Nova Scotia Dental Act

Tax Time Reminders• Individuals– RRSP contribution deadline is March 1, 2017– Income taxes and CPP are due May 1, 2017 at the latest

(assuming installments are up-to-date)– Tax returns for self-employed individuals (i.e., associates)

are due by June 15, 2017

• Corporations– Taxes are due within three months of their year-end at the

latest (assuming installments are up-to-date)– Tax returns for corporations are due within six months of their year-end

Questions?

230-3 Spectacle Lake Drive Dartmouth, NS B3B 1W8

Telephone: (902) 463-9571steven@grcpa.ca