Dentistry Professional Corporations: The Ins and Outs and Costs of Incorporation
Back in March 2014 we wrote a blog called “Are you a Doctor or Dentist? It May be Time to Incorporate”, illustrating the potential benefits of incorporation – virtually all related to tax advantages. Now that you are familiar with the benefits of incorporation we are going to explain to you the process and items
to consider when incorporating a dentistry professional corporation (“DPC”).
Once you have decided to incorporate your own dentistry professional corporation you should meet with both your lawyer and accountant to discuss incorporation and the other steps that have to be taken. It generally takes one day to complete the incorporation once we have the requisite information from you and about ten days to obtain a Certificate of Authorization from the RCDS Ontario.
Name of Dentistry Professional Corporation
One of the first items we will ask you is what would you like the name of your DPC to be. There are specific rules regarding the name of your DPC. Your DPC must use your last name. You can use Dr. and your first name or your first initial. You must also use “Dentistry Professional Corporation”. So, for example, if your name is Dr. Joe Smith one option for the name of your DPC is “Dr. J. Smith Dentistry Professional Corporation”. Prior to incorporation we will conduct a required name search for the name to ensure that there is not another dentist utilizing the same name.
Who can own shares of a Dentistry Professional Corporation and What Type of Shares are Issued?
Voting shares of a DPC must be owned by the licensed dentist. The good news for dentists is that family members can be shareholders of the DPC. Family members, however, can only own non-voting shares of the DPC. Family members include the dentist’s spouse, parents and children. If the dentist has minor children (under 18 years old) the licensed dentist must hold the shares for the minor children in trust until the child becomes 18 at which time the shares will be transferred to that child directly.
The type and number of shares being issued to you and your family members is most often determined by your accountant and lawyer.
There are often three (3) classes of shares that we issue – common, preference and special shares which most often are issued for the following purposes:
See below under the heading “Rollover Agreement to Transfer Practice to the DPC”. As noted you will be transferring your practice to the DPC at its tax values in order to avoid the payment of income tax. In consideration of you transferring your practice to the DPC the DPC will issue you Preference Shares which are frozen in value and equal to the valuation of your Practice at the time of transfer to the DPC. This value is most often determined by your accountant.
Special shares are normally frozen in value when issued (and do not share in the growth of the DPC) – for example at $1.00. They are often issued to family members in order to enable you to declare and pay dividends to your family members. We always issue a different class of special shares to each family member. This allows the dentist to declare different amounts of dividends to each family member (or not to declare a dividend to a particular family member). Once a child reaches 18 years of age he or she would have little or no outside income and therefore substantial dividends could be declared and paid to that child with little or no tax. However, once that child starts earning his or her own outside income (which makes the payment of dividends of no tax benefit) no further dividends will be declared for that child. Parents and a spouse may also be issued Special Shares for the same reason. Because the Special Shares are frozen in value the DPC can redeem the Special Shares at any time.
Common Shares are also known as growth shares. The advantage of common shares is that as the value of the DPC increases the value of each common share will also increase. On a sale of the shares of the DPC each holder of Common Shares will enjoy the benefit of the $800,000.00 capital gains exemption. Therefore if your future capital gain will exceed $800,000.00 you would most likely want at least your spouse to have common shares (non-voting) as well as yourself. Many dentists do not want their children to have common shares as they are concerned that on a future divorce of the child the child’s spouse may claim part of the value of the common shares. Dividends may also be paid on the Common Shares
The decision as to what type of shares are to be issued is made with the assistance of your accountant and lawyer.
Dentistry Professional Corporation Structure
There are several nuances between a regular corporation and a DPC. For example, the articles of your DPC must provide that “the corporation cannot carry on a business other than the practice of dentistry and activities related to or ancillary to the practice of dentistry”. It is also important to note that only the dentist can be an officer or director of the DPC. You should ensure that you retain a lawyer familiar with dental law to ensure compliance with the requirements and the proper structure of your DPC.
(a)Application to the RCDSO
Once your DPC has been incorporated we will send you a copy of the articles of incorporation which you can take to your bank to set up a new bank account for the DPC or simply to change the name on your existing practice account.
We will complete the application to the RCDS Ontario and meet with you to sign and then submit the application along with the college fee of $750.00 in order to receive a Certificate of Authorization for the DPC.
(b)Rollover Agreement to Transfer Practice to the DPC
In order to transfer your existing Practice to the DPC you and the DPC would enter into a S. 85(1) Rollover Agreement which is a fairly normal agreement to transfer your Practice to the DPC. Both you and the DPC will elect in the rollover Agreement under S. 85(1) of the Income Tax Act, Canada (“ITA”) to rollover the Practice at its tax values in order that there are no taxes to pay under the ITA. In consideration of you transferring your Practice to the DPC the DPC will issue shares (most likely Preference Shares) to you which shares would have a value equal to the value of your Practice.
If you are a tenant under a Lease it may be a requirement under the lease where you assign your Practice to a new name (the DPC in this case) to obtain the Landlord’s consent. We would normally review your lease on your behalf and discuss it with you. This will entail a review of your lease.
(d)Advise Insurance Companies
As you will now be practicing under the DPC you should send written instructions to all insurance companies of the change and advise them that all future cheques and payments should be made to the DPC and not to you personally.
We will also provide you with a Retainer/Employment Agreement whereby you personally agree that all services being provided to patients by you are being made on behalf of the DPC and all payments received by you personally are being paid to you personally and are held by you as trustee for the DPC. Canada Revenue Agency has taken the position that if you receive payments personally and do not have this agreement you may be taxed personally for these payments rather than in the DPC.
(f)Renewal of Certificate of Authorization for College
It should be noted that each DPC must apply for a renewal of the Certificate of Authorization by August 31 in each year for which the college charges $175.00 for applications received prior to August 1 in each year and $200.00 if received in August. It should be noted that if you incorporate prior to August 31 (even if in August of a particular year) the College will still require a renewal of your Certificate of Authorization.
FEES AND DISBURSEMENTS
We do not charge to meet and/or consult with you on the incorporation of your DPC. Once you decide to go forward with the incorporation of your DPC we charge $3,000.00 which includes the incorporation of your DPC as well as preparing and filing your application to the College and obtaining your Certificate of Authorization and all post-incorporation matters noted above including (i) the Rollover Agreement, (ii) the Retainer/Employment Agreement and (iii) reviewing and discussing your lease. This fee includes all disbursements including $50.85 for your name search, $39.56 for the certificate of status (required for the RCDS Ontario application), $356.00 for the Ministry incorporation fee and $63.00 for the minute book for the DPC. The only extra cost for you will be the $750.00 fee to the RCDSO.
It is important to follow the strict guidelines for DPCs to ensure you are in compliance with applicable laws and the requirements of the RCDS Ontario. If you want to discuss any of these matters please do not hesitate to Contact Us by e-mail or phone.