In volume 63 of The Professional Advisory I wrote about associate agreements from the associate’s perspective. As stated in that article, the associate can be an individual dentist or a dentistry professional corporation (PC). Due to space limitations that article did not discuss the use of a PC. This article considers some benefits of a PC as the associate.
Before you proceed, an initial step is to review your existing associate agreement to confirm it permits you to use a PC as associate. Typically the agreement will provide the associate can do so upon prior notice to the principal, provided the associate dentist personally guarantees the PC obligations under the associate agreement. If the associate agreement does not permit use of a PC, then you need to speak with the principal dentist to obtain the principal’s prior consent to use a PC as associate.
There are many potential tax benefits in using a PC as the associate. Those benefits can extend to the dentist’s specified family members. It is always worthwhile to contact your accountant to determine if it is appropriate to use a PC as the associate and involve your family members.
The laws permit specified family members of an associate dentist to be non-voting shareholders of the dentist’s PC. A “family member” means a dentist’s spouse, child or parent. Having such family members as non-voting shareholders can result in substantial tax savings for the family unit.
Creating the proper share structure for your PC with non-voting shares is a critical step and your tax and legal advisors will assist you in that process. Consider in particular whether the PC non-voting shares to be issued to your family members participate in the annual profits only (‘non-equity’ shares) and/or in the PC’s growth (‘equity’ shares).
For an associate PC, issuing ‘non-equity’ shares to your family members is the typical route. These shares have the right to a variable dividend in an amount determined in each year by you in your sole discretion. For maximum flexibility each family member should have a different class of shares. That way in each year you can declare different dividend amounts on each class, depending on the needs of each family member shareholder. For example, your parent may need assistance with living expenses, while your spouse needs nothing at all that year.
Minor children (under age 18) cannot own shares in their own name. Shares for your minor child must be issued to a trustee on the child’s behalf. Current tax laws discourage paying dividends to shares held in trust for minor children. Typically no dividends are paid on the minor child’s shares. When the child reaches 18, the shares are transferred directly into the child’s name.
A shareholders agreement is essential if family members receive (i) ‘equity’ shares or (ii) ‘non-equity’ shares that are not redeemable by the PC. A shareholders agreement is a private contract between the shareholders. Your associateship dental practice is your livelihood. It is critical that you, the dentist, and not your family members, have absolute control of your PC at all times.
You might be surprised to learn that non-voting shares of a PC (or any corporation) have voting rights under the Ontario Business Corporations Act in certain cases. In some circumstances shareholders are entitled to vote separately as a class, whether or not that class of shares carry the right to vote. Imagine the scenario where you do not have a shareholders agreement and you need to reorganize your PC share structure, but your family member will not agree. This can be dealt with in the shareholders agreement by family members giving a voting trust or power of attorney in favour of the dentist relating specifically to the PC shares.
Consider other events such as death of a family member or divorce or separation from your spouse. Those events are stressful enough. The shareholders agreement should specify what happens to the family member’s shares. For example, the shares might be redeemed by the PC or purchased by the dentist. The shareholders agreement should deal with how those shares are going to be valued and the terms of payment.
The dentist must remain in control of the associate PC regardless of changing circumstances. A properly drafted shareholders agreement will ensure this. The ideal time to complete the shareholders agreement is at the beginning of the process when the shares are issued to family members.
The rules permitting family members to own non-voting shares of your associate PC present significant tax planning opportunities and potentially substantial tax savings for you and your family. However, the laws are complex. Proceed carefully and with the benefit of proper and expert professional advice.