Tax Matters for Dentists

Numetrica Cloud Accounting

As a dentist running your own practice in Canada, tax planning is an important part of managing your finances. Your choices about business structure, deductions, income smoothing, and retirement savings accounts can significantly impact how much you pay in taxes each year.

An optimized tax strategy can lead to substantial savings over your career. Before delving into key options around your taxes, consult with both a tax professional and a financial advisor to ensure coordination. Tax rules can differ by province, so be sure to understand both federal and provincial regulations that apply to your practice.

Let’s take a closer look at some of the top dentist tax planning realities in Canada – and how you should approach them to maximize your savings.

Dentists in Canada have two main options for how they structure their practice, and this choice significantly impacts how they file their taxes:

If you operate as a sole proprietor, your dental practice's income and expenses are reported directly on your personal income tax return (Form T1). This means your business income is combined with your other personal income sources and taxed at your personal income tax rate.

As a sole proprietor, you can deduct eligible dental expenses like equipment, instruments, professional development costs, accounting fees, RRSP/TFSA contributions, and more. However, you need to meet certain criteria to qualify for some write-offs. Consult a tax professional to maximize savings.

If you set up your dental practice as a corporation, it becomes a separate legal entity. You file a corporate tax return (Form T2) for the business income and expenses. The after-tax profits can then be paid out to you as dividends, which are taxed at a lower personal rate.

Incorporating also opens up additional tax deferral strategies. As an employee of your corporation, you receive a taxed salary on your T1 return. You can optimize your salary to minimize combined corporate and personal taxes. Speak to an accountant to model out your best option.

As a dental hygienist in Canada, you can deduct a wide range of dental expenses related to your profession on your tax return. This is a great way to help you save on your tax bill. Some common expenses that can be claimed include: Dental instruments and equipment - You can deduct costs associated with dental tools, machinery, and protective gear required for your work. This includes items like scaler tips, face masks, gloves, sterilization equipment, etc. Professional development - Fees for conferences, courses, textbooks, travel, and other costs related to expanding your dental hygiene knowledge can be written off. However, be aware of CRA rules around taxable benefits. Accounting services - The fees you pay for accounting help, tax planning services, financial advisory, and filing your tax return can also be deducted. Using professionals ensures accuracy and optimisation. Contributions to RRSP & TFSA - Any contributions to your Registered Retirement Savings Plan or Tax-Free Savings Account can be subtracted from your annual taxable income. This is a great way to save and prepare for the future.

When claiming deductions, be sure to keep detailed receipts and records to support your claims. Consult the CRA guidelines and connect with a tax professional to ensure you maximize savings opportunities and file appropriately based on your self-employed status.

Self-employed dentists are taxed at their personal marginal tax rates, which are progressive based on income level. Canadian personal tax rates range from 15% on the first $50,197 of taxable income up to 33% on income over $221,708.

Incorporating your dental practice opens up tax planning opportunities, as the first $500,000 of active business income is taxed at a flat 9% small business corporate tax rate. Income splitting with family members and tax deferral strategies may lower your overall tax burden.