Incorporation
Incorporation guide before
buying a dental practice
Incorporation before buying
a dental practice
Before purchasing the assets or shares of a dental practice, it is important to consider incorporating a company to handle the transaction. By doing so, instead of personally borrowing funds from the bank, the company can borrow the funds on your behalf.
This strategy allows you to repay the loan using pre-tax dollars rather than after-tax dollars, which can be more advantageous.
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If the funds are borrowed personally, each year the purchaser must withdraw a salary or dividend from the clinic, pay taxes on that amount, and then use the remaining funds to reimburse the loan. However, if the corporation borrows the funds, the loan can be repaid directly by the corporation.
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The net cost of borrowing
When acquiring a dental practice, you typically have two options for obtaining the necessary funds:
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Option 1-Personal Loan: If you borrow the money personally from the bank, any income you earn from the dental practice will be taxed at your personal income tax rate, which can be quite high. For example, let's assume a personal income tax rate of 50%.
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Option 2-Corporate Loan: On the other hand, if you create a corporation before the closing date and have the corporation borrow the money from the bank, the corporation will pay taxes at the corporate tax rate, which is generally lower than the personal tax rate. For example, let's assume a corporate tax rate of 20%.
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Calculating the net cost of borrowing
Let's break down the actual costs of repaying a 1M bank loan to purchase a dental clinic, ignoring interest for the sake of this example.
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Scenario 1-Loan taken personnally
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If you take the loan personally, you will need to earn 2 million in income to repay the loan after paying 50% in personal income taxes.
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Scenario 2- Loan taken by the corporation
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If the loan is taken by the corporation, you will to earn $1.25 million in income to repay the loan after paying 20% in corporate taxes (combined federal + Quebec).
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In this example, by utilizing a corporation to borrow and repay the loan, you would save $750,000 (2M - $1,250,000) in taxes. This demonstrates the significant tax advantages of using a corporate structure for loan repayment.
Corporate Structure
You have two options to choose from when incorporating your company, with or without a family trust.
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Option 1: Without a Family Trust
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You can opt for incorporating the company first and then add a family trust at a later date. This choice will save you some accounting fees for the initial years, as you won't need to produce a tax return for the trust right away. However, it's essential to consider that adding the trust in the future might incur additional costs compared to creating it simultaneously with the incorporation.
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Option 2: With a Family Trust
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In this option, the family trust is established at the same time as the incorporation. The trust will become a shareholder of the corporation, providing you with the advantage of efficiently managing any excess cash from the dental corporation. The family trust is particularly crucial for ensuring that you can sell your clinic shares tax-free when the time comes by accessing the lifetime capital gains exemption (LCGE). This exemption allows you to sell your shares without incurring taxes, provided the corporation meets specific criteria, including not retaining excess cash or investments within the dental corporation. The family trust plays a vital role in helping you achieve this tax benefit.
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While it is ultimately your decision whether to create the trust at the time of incorporation or not, I highly recommend considering setting it up simultaneously with the incorporation. Doing so will optimize your tax planning and ensure you can take advantage of the LCGE benefits effectively.
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Furthermore, at some point, you may need a holding corporation to receive excess cash from your dental corporation. However, it is not necessary to create the holding corporation at the time of sale. You can establish it later when the need arises or when you decide to invest in real estate, for example.
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By carefully considering these options and planning ahead, we can help you create the most tax-efficient and financially advantageous structure for your dental practice.
In Option 1, the Dentist is 100% shareholder of Dentco.
Dentco will contract the bank loan for the purchase of the clinic.
In Option 2, the Dentist is 100% shareholder of the voting and non-participating shares in Dentco and the Trust is 100% shareholder of the non-voting and participating shares in Dentco. This means that the dentist controls the decisions of Dentco but the Trust owns the value of Dentco. The Trust will allow for the multiplication of the Lifetime capital gains exemption of approx. 1M for each family member when a sale occurs.
Dentco will contract the bank loan for the purchase of the clinic.
Family Trusts
A family Trust has numerous benefits such as the multiplication of the lifetime capital gains exemption as well as on-going purification of your dental corporation. It is an indispensable tool for dental practice owners throughout the career. Although it is easier to put the family trust in place at the time of your incorporation, it remains a personal choice.
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If you want to know more about how to create a family trust and all of the legal requirements to help you get started, please click on the link.
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Amalgamation post-sale
To streamline the management process and avoid the burden of dealing with two separate corporations after the purchase, we propose a tax-efficient solution known as "amalgamation." This term refers to the merging of your newly created corporation with the clinic you are acquiring. However, to carry out this process legally, we must first incorporate a new corporation that matches the type of the clinic being purchased.
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For instance, if the clinic is currently a federal corporation, we will need to create a federal corporation as well. On the other hand, if the clinic is structured as a Quebec corporation, we will establish a Quebec corporation for the amalgamation. This step is a legal requirement for successfully performing the amalgamation process.
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It's important to note that the costs involved in creating federal incorporations are slightly higher compared to establishing a Quebec corporation. However, the benefits of amalgamation, such as simplifying the management and tax planning, outweigh the initial expenses.
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By aligning the type of corporation with the clinic's structure, we can ensure a smooth amalgamation process, allowing you to focus on the growth and success of your newly integrated dental practice without the burden of managing multiple separate entities. The amalgamation process must be completed on the same day at the closing of the legal documents.
Once the legal papers are signed, Dentco will own 100% of the shares of Clinico. Dentco contracted the bank loan for the purchase while Clinico owns the assets of the clinic. The goal is for the loan and the assets to be included in the same corporation. Therefore, we will amalgamate the 2 corporations so that the bank loan and the assets of the clinic are in the same corporation.
Fees
We offer two options for incorporation, each tailored to your needs and preferences:
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Option 1: Without a Family Trust
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Quebec Corporation: $2,500 plus tax
Federal Corporation: $3,000 plus tax
Option 2: With a Family Trust
Additional $4,000 plus tax for the trust
**Please note that if you decide to add the trust at a later date, the estimated cost will be at least an additional $8,000+ depending on the complexity of the file.
Tax numbers
On the day we finalize all the legal procedures, we will proceed with the amalgamation process as previously discussed. To simplify matters for you, there is an option to seamlessly continue using all the tax numbers associated with the clinic you are acquiring. This means that we can send a letter to both Revenu Québec and the Canada Revenue Agency, formally requesting the continuation of the existing deductions at source numbers and other tax numbers.
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I will take care of preparing this letter on your behalf, ensuring that it contains all the necessary information for a smooth transition. You will then be able to mail the letter to the respective tax authorities after the sale is complete. This way, you won't have to worry about any disruptions or delays in your tax processes during the transition period.
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Our goal is to make the entire amalgamation process as seamless and hassle-free as possible for you. With our expertise and attention to detail, you can trust that all necessary steps will be taken to ensure a successful and tax-efficient integration of your newly acquired dental practice.
Getting Started
To kickstart the incorporation process, kindly complete the form provided in the link below. In the form, you can indicate whether you would like to create the family trust now or at a later stage.
Additionally, please have one piece of identification ready in PDF or JPEG format.
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Once your completed form is received, your incorporation structure will be created promptly. All of the documents will be sent to you for electronic signature and will be subsequently submitted to the Ordre des Dentistes for approval and processing. Throughout the entire process, notifications will be sent with further instructions and updates.
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