3 reasons why you should be investing inside your DPC

06/23/2022   |   Wealth Matters for Dental Professionals

Many dentists, whether Associates or Practice Owners, will incorporate a Dentistry Professional Corporation (DPC). Usually, they will do this once they are billing enough that they do not need every dollar to meet their current expense obligations (including paying down student debt).

One question we get a lot is whether dentists should take the money out of the corp to invest personally, or invest inside the corporation. While there are advantages to investing outside the DPC in vehicles such as RRSPs and TSFAs, and while there are disincentives to generating too much passive (AKA investment) income inside the DPC, the lower income tax rate paid on corporate versus personal income means most dentists will do some investing inside their DPC.

1. Deferred Tax

Because of the lower tax rate, if you leave funds in the DPC you will have more after-tax corporate dollars to invest than if you pay it to yourself and trigger personal taxes.

Over time, the higher investment dollars in the corporation will give you access to better opportunities, lower fees and greater ability to diversify. You’ll have a larger amount of money compounding at a better rate.

EXAMPLE: A DPC with a $100,000 operating profit will have $87,800 left in the DPC after tax. This is substantially more money available for investment than paying the $87,800 out as a dividend. At the highest marginal tax rate an $87,800 dividend will leave you with $45,884 in your personal hands to invest.

We say “Deferred Tax” rather than “Lower Tax” because eventually you will pay out the funds and pay personal income taxes, but you’ll have more investments at that time due to deferring the taxes from an earlier to a later date.

2. Lower Tax on Dividends

Once your passive corporate investment income exceeds $50,000 per year, the operating profit from your practice will start to get taxed at a higher rate. By the time you reach $150,000 in investment income, you are paying corporate tax on your operating income at 26.5% instead of 12.2%. While this is still lower than your personal tax rate, it does reduce your annual investible capital.

It’s not quite as bad as it seems, however. The integration in our tax system means that as you start to pay a higher corporate tax rate on operating income, you will pay a lower tax rate on dividends you pay yourself. So although the higher tax rate will leave you with less to invest each year, there is only a 1.3% difference when the money is ultimately paid out as a dividend.

3. Refundable Tax

On the surface, it looks like the tax rates on investment income are fairly similar whether you invest inside the DPC or on a personal basis. Corporate investment income is taxed at 50.17% while personal investment income is taxed at 53.53% (at the highest Ontario rate). However, about ½ of the corporate tax is refundable if you pay a taxable dividend to shareholders. If you pay yourself dividends every year to support your living expenses, this will trigger a refund of some of the corporate investment tax. This effectively lowers the tax rate on investments to approximately 25%

Thanks for reading!

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