Accounting & Tax

COVID-19’s Subtle and Pervasive Impact on Dentists

By

David Chong Yen

on

February 21, 2022

February 21, 2022

It is almost two years since the pandemic started.

How Did Dentists Fare?

The pandemic has had an unequal impact on society. Dentists have fared well in comparison to many in our society. 85% of our dental clients’ billings from dentistry are higher than they were pre-COVID-19. This is partially offset by reduced hygiene production due to fallow time constraints and staff shortages. After collecting the Canada Emergency Wage Subsidy (CEWS) and other government subsidies, 90% of our dental clients generated more profit and cash flow than pre-COVID-19.

What Impact Did COVID-19 have on Dentists?

Many dentists were not treated well by their landlords during Covid. This led to more dentists looking to buy a dental building to secure their future and preserve or enhance their dental practice’s value. Building ownership avoids the consequences of landlords imposing a demolition or relocation clause. These clauses negatively affect a practice’s value as the building could be demolished or force a practice to be relocated without much notice.

Dental associates were encouraged to buy their own practices due to the insecurity which COVID-19 had on their livelihood. In essence, some dental associates decided to buy themselves a job.

COVID-19 emphasized mortality. Some dentists went to their lawyer sooner, to prepare double wills to save probate fees, in the event of their death. Other dentists decided to pass on some of their wealth to their children while they are alive. This took the form of lending where loan proceeds were often used by children to buy a home. Because the loan was documented, this loan serves to protect the money if the child were to be divorced. In other cases, cash gifts were given to children 18 and older. The children invested the money and had the investment income taxed in their hands at a lower tax rate, thereby saving the family taxes.

COVID-19 taught many to appreciate their team. In many cases, services were restricted as team members were not available to do the work. Indeed, pre-COVID-19, dentists viewed salaries as an expense/cost. The pandemic taught dentists and others to view salaries as an asset, a goodwill generator.

COVID-19 extracted its pain and left in its wake a greater appreciation for life. Some dentists started to focus on loving themselves and investing in their health. This resulted in some dentists deciding to sell their practice. One client asked us, “How much can I eat?”

Many dentists became more aware of their spending and saving habits using this period as an opportunity to pay down debt/loans.

Many dentists appreciated their practice’s longevity and upgraded their practice through renovations, new equipment, and software. The Federal Government rewarded them by permitting 100% tax deduction with respect to most capital purchases in the year of purchase. Previously, the tax
deduction for such expenses had to be spread over several years. This fast write-off will be available until the end of 2023. Where possible, purchase these assets before your year-end to get the write-off in the current year.

When their practice value dipped, some dentists used this circumstance to their tax advantage. They added family members (spouse, parents, and children) as equity shareholders to their professional corporation, thereby multiplying the Lifetime Capital Gains Exemption (LCGE) of $892,218 in 2021 to avoid taxes when they sell their practice in the future. Everyone is entitled to the LCGE which could result in tax savings of about $230,000, assuming 2021 tax rates. The dip in practice value facilitated more of the practice’s subsequent rise in value to be tax sheltered since family members can only benefit from any rise in value in the practice after they become equity shareholders.

How do Dentists Move Forward?

We do not know when COVID-19 will end. However, we do know that dentists are in a fortunate position to survive and thrive during this pandemic. Dentists would be well advised not to squander this opportunity and use it to pay down debt and/or invest in their practice.

Dentists would be well advised not to squander this opportunity and use it to pay down debt
and/or invest in their practice.