Dentists may be able to benefit from giving shares of their practice to family members. This article will examine what tax benefits may be available when a dentist gives shares of their dentistry professional corporation (DPC) to their children.
However, giving shares of a DPC to children is not ideal for every dentist. Because every situation will have its own unique set of facts that will determine whether this strategy will be beneficial, we highly recommend that you first consult your tax advisors, accountant, and lawyer before considering this strategy.
The contents of this article are not to be construed as legal or tax advice.
Can Children of Voting Shareholders Hold Non-Voting Shares in a DPC?
The children of a voting dentist shareholder in a DPC are eligible to hold non-voting shares in that DPC.
DPCs are health professional corporations that hold a certificate of authorization from the Royal College of Dental Surgeons of Ontario (RCDSO) under the Ontario Regulated Health Professions Act, 1991.
Under Ontario law, a DPC’s voting shares must owned by a member of the RCDSO. However, the DPC’s non-voting shares can be owned by a member of the RCDSO, a family member of a voting dentist shareholder, or by trustees in Trust for minor children that are the beneficiaries of a voting dentist shareholder.
The RCDSO has expressly recognized that non-voting shares can be owned by a family member of a voting shareholder such as a spouse, child, or parent.
Moreover, non-voting shareholders who are not members of the RCDSO also have limited liability under the Ontario Business Corporations Act.
What are the potential tax advantages for giving non-voting shares to children?
A dentist may be able to pay dividends to their children as shareholders in the dentist’s DPC. A DPC may be able to lower its corporate tax rate by paying dividends to non-voting children, which could result in significant net tax savings for the DPC through tax splitting.
A dentist may also be able increase the amount of capital gains savings under the Lifetime Capital Gains Exemption (LCGE) by issuing shares to their non-voting children. This is especially relevant when a DPC is being sold. The owner dentist could issue some shares to their children to potentially access the LCGE of multiple persons – the dentist and their children.
It is important that dentists speak to their accountant and tax advisors for guidance before pursuing any tax savings strategies.
What are the potential tax risks for giving non-voting shares to children?
Dentists should note that amount of funds in dividends paid to their children must be reasonable or they will be subject to the tax on split income (TOSI) rules. On January 1, 2018, the TOSI rules came into effect with the purpose of limiting income splitting by private corporations.
The TOSI rules apply the highest marginal tax rate to split income of an individual under 18 – sometimes called “the kiddie tax.” If the TOSI rules apply, then splitting income with minor children through the dividends of a DPC may no longer be a viable way to save on taxes.
The TOSI rules can also apply to adult children, but some exceptions can still allow individuals to benefit from income splitting.
It is essential that dentists speak to their accountant and tax advisors before pursing any tax saving strategies.
How could trusts for children beneficiaries be used to maximize tax benefits?
Capital gains in non-voting DPC shares held in a Trust may not be subject to the kiddie tax rules. This exception allows an individual acting as a trustee for a beneficiary who is the minor child of a dentist shareholder to own non-voting shares.
Utilizing a Trust could potentially be an effective tool to avoid the kiddie tax. Income earned in a Trust may be able to flow though the Trust and be taxed in a minor’s hands at their lower tax rate.
Takeaways
Depending on the situation, some dentists may be able to benefit from giving non-voting shares of their DPC to their children. Non-voting shares held by children may enable certain tax reduction strategies for the DPC through paying dividends to non-voting children shareholders, benefiting from multiple LCGEs, and using Trusts to reduce the kiddie tax.
Because every dentist’s circumstance will have its own unique facts, not everyone will benefit from using this strategy. We highly recommend that you first consult your tax advisors, accountant, and lawyer before considering this strategy to better understand if it could work in your specific situation.
Thank you to Ephraim Barrera for his contribution to this article. The contents of this article are not to be construed as legal or tax advice. Contact Emerge Law’s lawyers for legal assistance.