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hansol

Business/tax/self-employment queries: ask me anything

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Hi guys,

 

I've noticed there have been a few threads from members wondering about the business-side of practice: a few self-employment queries, tax-related questions, etc. With this in mind, I was wondering if there are any other members out there who have these types of queries, and wouldn't mind posting them here. Then depending on what comes up I will do my best to post more detailed threads regarding the queries and the business-side of things.

 

I'm an associate at a CA firm in town here that specializes in dealing with health care professionals and their practices, and I see a lot of young grads coming in with all sorts of queries and questions about starting out in practice, sole proprietor vs. incorporation, etc. I thought maybe I would try to address some of the queries on the forums here in hopes of helping out.

 

So like I said, any questions or queries you guys have you can post them here, and I will do my best to answer them.

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Dentist2012,

 

Generally speaking, these days Alberta is the most tax-advantageous location to be, especially for small business. While recently a few provinces have aggressively dropped their small-business tax rates, these same provinces have higher personal tax rates, as well as PST/HST issues to contend with. So from a purely numbers perspective, Alberta would be the most beneficial place to set up practice.

 

Donnadee,

 

I'll need a bit more info to adequately answer your question, but if I understand it correctly, you could possibly lease a professional corp "franchise", essentially giving you rights to use a specific practice's logo and advertising and that sort of thing, but that is generally the extent of "leasing" in its usual context as it applies here. That being said, on the office chance that you were looking more for an "associate" vs. buy a practice vs. buy a share of a pratice angle:

 

Associating at a firm is certainly more simple to set up. You work there (usually under a contract basis), service the practice's patients, and get a percentage of the patient billings. And with a setup like this you generally avoid having to deal with the "operations" side of things such as bookkeeping, tracking inventory, etc. (I can get into having your own prof. corp. associate at a firm, but will hold off for now.)

 

Buying a practice of course means you take on the entire operations. You now have to deal with staffing, inventory, rent expense, and all that good stuff. You can earn more profit in a setup like this as opposed to associating, but there are more headaches as well.

 

Now all that being said, you can also buy a portion of a practice as well. I generally see operations where a practitioner associates for a few years, and then goes on to buy possibly 20% of the practice, and the venture operates that way. I will try and do a write-up on the possible practice-sharing arrangements that I have seen and what is involved to illustrate this, if anybody is interested.

 

As for what is most advantageous, it all depends on what you are looking to get out of the deal. If you are in it for making a pile of money, definitely owning the whole operation is the way to go. The downside is that the practice becomes your life. The other side of things is to associate; you work 9-5, leave work at the office, and generally don't have to worry about the practice outside of work hours. The downside is that you won't make as much doing things that way. Generally it comes down to the "work/life blanace", and that varies from person to person.

 

So hopefully that is what you were looking for donnadee; if not, I apologize. Give me a few more details regarding the circumstances/leasing arrangement and I might be better able to fill things in. Best regards -Cameron

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Comparing Vancouver and Toronto, which city give you more tax advantage when setting up a solo practice?

 

What is the best financial plan if my goal to to startup (or buy in) a solo practice in 2-3 years given that I have no student loan to pay?

 

thanks hansol!

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Unfortunately it's not quite as simple as "Toronto vs. Vancouver"; small business rates are comparable between the two, but it's the personal tax rates and the respective impact on the personal income that you "earn" from your practice that will really matter. A very simplistic way to help judge things barring a detailed analysis from your accountant would be to have a look at the proportion of income that is taxed at the highest rates in each province, and decide from there. What you're looking for is the lowest rates for the highest amount of income earned.

 

Best "financial plan" is probably not the most romantic: Live in your parent's basement and minimize expenses, socking away as much money as you can as an associate. Then when you have a nice nest-egg built up, that's when you make your move. The first two years of a start-up are the most difficult, and that's where buying a retiring professional's practice really helps. The reality is that buying an established practice costs money, and having that nest-egg built up via a low-overhead environment is what will give you an edge. Financing an aquisition is always possible, but the ability to avoid interest payments and use your own cash to fund the aquisition is what can help give you an edge over other practitioners.

 

(Very late replying, but figured better late than never. Any other questions, just let 'em rip.)

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hey hansol,

 

thanks for your input! another question: is it possible at all to incorporate as an associate? If so, above what income does it make sense (considering that there will be fees involved with incorp)? Finally, in your experience with dentists, is this form of employment common where an incorporated associate works for another practice? (say in areas where associates make enough to justify this)

 

thanks!

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Absolutely it makes sense to incorporate as an associate. In fact, it's one of the best things you can do from a tax perspective, and is something I see quite frequently. The biggest thing to keep in mind is that small business tax rates on income earned up to $500k is generally around 14% (depending on the province you reside in.) This is compared to approx 35% personal tax rates. So right there is a large tax savings, assuming you don't need to pull all the money out of your corp to live on.

 

What this allows you to do is build up equity in your corporation at a very low tax rate, and use that equity to grow your business. That's in fact the whole reason behind the small-business tax rates. A pleasant side-effect of this is that it also allows you to invest 86 cents on every dollar earned vs 65 cents when you earn the income personally; This allows you to increase your retirement/investment savings at a faster rate as well.

 

I could go on at length, I'll list one other advantage: incorporation allows you and a spouse to income split. A simplistic way to explain this is to assume two tax rates: 25% on income earned up to $250k, and 50% on amounts earned over $250k. So using these rates, lets say you earn $500k for the year:

 

If you earn that money yourself, you'll pay $62,500 tax on the first $250k (250*.25) and another $125k (250k*.5) on the next $250k, for a total of $168,000 in taxes paid.

 

Now, if we have the ability to income split by passing income to your spouse, we can imagine the following scenario: you earn $250k yourself, and pass the other $250k in earned income to your spouse. As such, you both earn $250k, and avoid the 50% tax rate. In total, you wind up paying $125,000 in taxes (62,500*2). This is a tax savings of $43,000.

 

I apologize in advance for using numbers, as I know it can be a technical annoyance, but the ability to income split is a very good option to have, and one that isn't available as an unincorporated entity.

 

hey hansol,

 

thanks for your input! another question: is it possible at all to incorporate as an associate? If so, above what income does it make sense (considering that there will be fees involved with incorp)? Finally, in your experience with dentists, is this form of employment common where an incorporated associate works for another practice? (say in areas where associates make enough to justify this)

 

thanks!

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Typically you're looking at anywhere from $400 - $1,200 for initial incorporation, depending on whether you do it yourself vs. have a lawyer do it. After that you're looking at anywhere from $1,000 - $2,500 for an average Prof Corp year-end in accounting fees. (An important thing to realize is cheapest rate is not always the best; as the expression says, there's no such thing as a free lunch.) Lastly, annual registration of your corp I believe runs anywhere from $30-$100 depending on where you reside.

 

A good rule of thumb is if you see yourself having about $20,000 or more in unused cash or savings after expenses, a corporation is a decent idea. If you find yourself spending everything you earn, the increased professional fees don't result in any appreciable savings, and also incur the extra paperwork headache that comes with running your own business.

 

what is the average annual fee for setting up/maintaining the incorporation status? ie accountant fee, fee to RCDSO etc

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Absolutely you can, but realize that there are different "tax rates" for different sources of income. Only dental income will be subject to the 14% rates; any investment income will be taxed at around 35% in the corp. That being said, when you flow through that investment income to your person, the corporation is refunded that "high rate" tax.

 

However, one thing to keep in mind is investment income is taxed personally at around 35% anyway, so earning investment income either personally, or in the corporation, are comparable. What isn't comparable is that the money you are investing (your dental earnings) has been taxed at 14% - you then invest this money having only paid 14% tax on it initially. Contrast this with where you earn dental income personally, and then invest it. You'll have already paid 35% tax on this income, so essentially you're working with 20% less capital to invest. That's a big reason to invest via your corporation, and not personally.

 

Also, I should mention that a lot of the info here is more "in-general"; there are things to take into account such as personal tax brackets, registered investment accounts (ie. rrsp's), personal tax credits, etc. But I think the important thing here is to understand the big picture first, and then tailor the advice to your personal situation afterwards via sitting down with your accountant and going from there.

 

Can I keep regular securities in a corporation? I thought that corporate savings need to be used towards dental purposes.

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So for someone like me who is saving much more than I'm spending - it would make sense for me to incorporate and keep my cash/investments in the corporation? I'm paying lots of taxes this year at 46% marginal when I'm only spending a small amount to live.

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For someone in your shoes, it makes huge sense to incorporate and use the company as a low-tax vehicle. There are of course a few things to be aware of with such a setup, but from a long term savings point of view, clients that are set up in a position such as you have described are doing quite well for themselves. 46% tax really tends to limit savings and investment opportunities...

 

So for someone like me who is saving much more than I'm spending - it would make sense for me to incorporate and keep my cash/investments in the corporation? I'm paying lots of taxes this year at 46% marginal when I'm only spending a small amount to live.

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If a friend finishing dental school has significant ($150,000) amount of student debt to repay (at prime since professional line of credit), and he anticipates having significant portion of earnings available to either invest or repay debt, does it make sense for him to pay the costs of incorporation, use the tax saving differential of corp versus personal tax to invest rather than repay debt until the deadline for debt repayment in 10 years? Your posts got me thinking. I hope I have the opportunity one day to apply this learning!!

 

I think an important addition to this question is do tuition tax credits have a time limit to use? I thought it was 7 years. You certainly do not want to lose those.

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hey hansol,

 

can you tell us what the best way to decide who to have as a dental CA is? it seems there are a number of them in the gta area. What characteristics and certifications would a good dental CA have that will distinguish them from others in the market? Also, who should one hire, a CA or a CPA?

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I think an important addition to this question is do tuition tax credits have a time limit to use? I thought it was 7 years. You certainly do not want to lose those.

 

don't think there is a time limit - but you do have to use them as soon as you are able (ie pay taxes). There would be no advantage to not doing this away as money now is always better than money later.

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This one is pretty simple. and one that I recommend quite often, as it seems to be the best bang for your buck. Basically just go down to the registry office, and register your corp there. You'll need a copy of the share structure, and once everything gets processed, you pick up one of those do-it-yourself minute books, and just fill out the templates provided.

 

As I stated above, you'll need a copy of the share structure, and these is where people sometimes get in trouble. You want to structure your corp with the greatest amount of "options" in terms of shareholders (both current and future), and that's something your accountant or lawyer can help with. You don't want to be amending your articles of incorporation down the road, as then the lawyers need to get involved, and that gets expensive. Doing it right the first time avoids this.

 

 

 

How exactly do you go about doing the cheaper "do it yourself" incorporation that you refer to above?

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Unfortunately I can't offer a decent answer here, as the question has so many variables that without specifics I can't really comment. One thing I can say though is if Ontario really starts to push this provincial CPP idea that is going around, ON is going to be one of the costliest places to do business in terms of payroll taxes. You're possibly going to be looking at a sunk cost of $8000 per staff member on your payroll.

 

About the only thing I can really add is basically look specifically at the provincial tax rates that are in effect for the income level you're earning, and see where things are at. Often provinces have different rates than the federal ones, and that can really have an effect on how much tax one is paying.

 

My apologies for not being much help here, as the answer could run 10 pages without ever getting around to addressing your specific circumstances.

 

Thanks Hansol for all the great insight. Could you address a comparison of tax implications for the choice of practicing in BC versus Ontario? Thanks

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Pinky, I will do up a separate post on this one; it's rather "intensive" give me a bit of time to get it all on paper. Thanks.

 

lHansol - would love for you to elaborate on your reference to "practice sharing options"

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Okay this is an interesting scenario, and will depend on how a person feels about finance and "time value of money" and all that. One thing to remember is accountants tend to be quite conservative, so by all means seek other opinions to contrast with this one:

 

Because borrowing rates are so low right now, we are in a very fortunate time in terms of being able to access "cheap" money. However, nobody can really say how long this goes on for. Certainly getting rid of debt as fast as possible is never a bad idea, regardless of the market returns of the time. With the markets, you can never be 100% sure about returns; with debt, you can be 100% sure that you will need to repay it.

 

Typically, what I like to suggest without knowing the specifics of your actual scenario, is pay down debt as fast as possible, and once the debt is paid off, THEN start focusing on investments. The interesting thing about earning investment income while paying off interest on a loan is that you put yourself in a unique scenario where your net returns are not all that great in terms of the risk of the assets you're invested in. In normal-people speak, this means if you invest in something where you earn 7% (a "risky" asset return in the current market) but are paying 4% interest on student loans, your net return for the year is 3% - a return that could be achieved by simply investing in a "riskless" GIC, for example.

 

Funnyguy, just thinking out loud, but what I could see doing in your scenario is incorporating and making the majority of your income in the corp, and leaving the majority of the cash in there. The cash you do take personally should be a combination of dividends and salary in the amounts enough that you can maximize use of your tuition tax credits or any other non-refundable tax credits available to you. This cash you would then use strictly for debt repayment and living expenses. Remember, the more cash you take out, the higher you're taxed at, so the goal here is to maximize the speed in which you can pay off that debt while also mimizing tax for the year.

 

If a friend finishing dental school has significant ($150,000) amount of student debt to repay (at prime since professional line of credit), and he anticipates having significant portion of earnings available to either invest or repay debt, does it make sense for him to pay the costs of incorporation, use the tax saving differential of corp versus personal tax to invest rather than repay debt until the deadline for debt repayment in 10 years? Your posts got me thinking. I hope I have the opportunity one day to apply this learning!!

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Okay this is a bit of a loaded question. In the accounting world, there has always been a bit of a "competition" for which designation was the "best." In my experience, after a person has been in practice for a while, the designation they carry isn't as relevant as much as the experience they have in practice. And with all 3 designations now merging into one "CPA" designation, the competition will soon be irrelevant. That being said, the CA route was/is very intensive, and some food for thought was while you would often hear a CA student maybe take the CMA/CGA route as a fall-back plan, you never heard of a CMA/CGA student pick the CA route as a fall-back plan. You can make your own conclusions from this, but again, I want to point out that the main thing to look at is the individual accountant and their experience with your field; adding numbers is adding numbers at the end of the day.

 

Regarding whom to look for in an accountant for dental-specific practices, I'm a little biased, as that's what my practice is of course, so please seek other opinions as well. What I think is important is you want an accountant who understands the unique sides of the industry. He should have an understanding of joint venture setups so that you can maximize the earning potential of two practices working under one roof, for example. He should also be able to explain the GST/HST issues that come with a dental practice (for example, some aspects of the practice will collect GST, while others are GST free.) If your accountant is unfamiliar with this, get out of there fast.

 

Additionally, one thing I would look for as a new professional starting out would be whether my accountant is "reachable" or not. Again, to use a personal example, my practice is "paperless" - as long as a client can scan/email their paperwork to me, I can do everything remotely and PDF the finished result to the client, with the followup review work done via telephone. Now, this isn't anything fantastic, but what it means for you, the new dental professional, is that you can be vacationing in Mexico and still review business issues with your accountant at the same time. I've found that this "little" bit of value-added gives the client huge comfort, as you know that no matter where you are or what's happening, as long as you have your smart phone with you, you can still take care of any emergency business that comes up, and not have to wait to be "scheduled in" at your accountant's convenience. So this is a long-winded way of saying make sure your accountant is up to speed on technology and has the ability to handle all the questions and unncertainty that come with starting up your own practice.

 

hey hansol,

 

can you tell us what the best way to decide who to have as a dental CA is? it seems there are a number of them in the gta area. What characteristics and certifications would a good dental CA have that will distinguish them from others in the market? Also, who should one hire, a CA or a CPA?

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thanks for the detailed replies,Hansol..very helpful!

another quick question..is it possible and would it make sense to incorporate under one corporation if say you have a dentist and a doctor in a family? if these 2 ppl had joint investments/savings e.t.c would it make sense to have 2 separate corporations or 1? not even sure if 1 corporation is possible but just figured i should ask.

thanks!

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Alright, so I'm in sort of a unique situation. I'm currently in dental school in Australia and will be graduating with a debt of about $220k. I will also have a SIGNIFICANTamount of tax credits available to me. I was wondering what would be the smartest thing to do financially, in order to pay off the debt as quickly as possible.

 

I will have the option to work in Australia and Canada. If I decide to work in Australia, will I have to pay taxes in both countries? And what happens to my tax credits if I work in Australia? Would Canada be the better option financially?

 

Secondly, should I incorporate straight out of graduation or should I wait until the debt is paid off?

 

Sorry for the many questions but I really appreciate the advice! :)

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