In December 2015, the federal government tabled a notice of ways and means motion to implement tax changes effective January 1, 2016. Given the Liberal majority, it is expected the tax changes will occur as planned. Due to publishing deadlines, this article was written in December 2015, so it will be interesting to see what actually happens by the time this article is published.
Such tax changes include a tax increase by four per cent for taxable income above $200,000. This means that dentists can expect to pay $4,000 more in income tax for every $100,000 of income in excess of the $200,000 threshold. For dentists who have dentistry professional corporations (PC), the tax increases would include their salary (ordinary income) and dividends paid to the dentist by the PC.
There are also references about the government:• imposing limits on the PC low tax rate on the first $500,000 of income• possibly even restricting prescribed family members (dentist’s spouse, children and parents) as permitted shareholders of your PC!
If all these measures come to fruition, this could substantially alter the way dentists order their business affairs and dental practices.
From a legal perspective, only a dentist or a PC can own the professional dental goodwill of a dental practice. That goodwill includes custody and control of all patient records and files (including patient billing records and treatment plans), patient charts, X-rays and models, patient lists, and use of any dental practice names.
However, the other assets of the dental practice can be owned by others. This creates opportunities for dentists to reorganize their practices on a tax efficient basis by involving their family members in the ownership structure. Family members can participate in direct or, more typically, indirect ownership of the practice. Depending on the tax changes actually implemented by the federal government, it is worthwhile to review some alternatives.One option is to create a technical services corporation (TSC). A TSC is a separate corporate entity that provides services such as dental hygiene services to patients that are not required to be performed by a dentist. Net after tax profits generated by the TSC can be distributed to the TSC’s shareholders. The shareholders of a TSC are not restricted to a dentist. A dentist’s family members, including extended family members, can be the shareholders of a TSC.
A family trust might be created to be the TSC shareholder. A trust is a rather strange hybrid entity (neither a person nor a corporation), administered by one or more people known as trustees. The family trust agreement can list numerous people as beneficiaries who may receive income from the trust each year.
Typically the family trust agreement provides it is a discretionary trust, meaning the trustees determine which of the named beneficiaries may receive some or all of the trust income. That decision is wholly discretionary and may vary each year. One beneficiary might receive trust income in one year but a different beneficiary or beneficiaries receive such income in another year.
Therefore, by creating a TSC with a family trust as the TSC shareholder, a dentist can provide for a broad group of beneficiaries who can receive profits from the dental practice.
In a PC, only the dentist’s spouse, child, or parent can be shareholders. But the dentist’s parents-in-law, brothers and sisters, and other relatives, whether by blood or marriage, can also all be named as beneficiaries in a family trust agreement.
If structured properly so that the two companies are not associated, your PC and TSC may each enjoy the low corporate income tax rate. And with a family trust as the TSC shareholder, the ability to sprinkle profits among a much broader range of extended family members is created. Lastly, the beneficiaries of the family trust might even be able to take advantage of the capital gains exemption on the sale of the TSC shares.
The purpose of these possible structures, in the context of this specific article, is to sprinkle the profits generated by the dental practice to family members who are in lower income tax brackets than the dentist. Simply stated, the goal is for the family unit to reduce their overall taxes.
Each situation and dental practice is different. Careful planning is required to ensure the best results for you, the dentist, and your family members. It is critical to retain professional advisors who are very familiar with such structures and who focus on advising dentists on such matters.