If you are a dentist and are concerned about structuring your tax affairs properly, then you must read this article.
In this article, I discuss the tax implications of the three different types of tax structures for dental practices.
Locum and Principal – Dental Practice Taxes Canada
The first type of tax structure for a dental practice is known as a Locum and Principal Arrangement. This is a short-term arrangement, where you cover for the principal dentist’s absences. The principal dentist may be absent because of illness, vacation or other reasons and will need you to look after his patients while he is away.
Typically, the office of the principal dentist invoices patients for services you have rendered. You receive a percentage of the billings to compensate you for your professional services.
It’s fair that you pay for some of the common expenses of the principal dentist’s office, because you are working from his office. However, make sure that the common expenses are not directly deducted from your pay, because HST will be charged.
To avoid HST, you should reduce the percentage of the billings that you receive in order to compensate the principal dentist for the common expenses. Common expenses include rent, utilities, administration, payroll and other common costs.
Association – Dental Practice Taxes Canada
The second type of tax structure for dental practices in Canada is known as an Association. This is very similar to the Locum and Principal arrangement, but it is for a much longer period of time.
In this tax structure, you become an associate of the principal dentist. The principal dentist invoices patients for your services and you receive a percentage of the billings. Make sure the common expenses are not directly deducted from your pay, because that will trigger HST on the common expenses.
Cost Sharing Agreement – Dental Practice Taxes Canada
This third type of tax structure for dental practices in Canada is known as a Cost Sharing Arrangement. This is a very common tax structure for dental practices in Canada.
In this structure, two or more dentists operate their own independent practices from a common facility. Each dentist that is part of the cost sharing agreement must pay for their proportionate share of the common expenses.
There are three main characteristics of a cost sharing agreement:
- The principal dentist pays for all the common expenses of the dental practice, such as utilities, rent, administration, payroll, equipment leases, and furniture and equipment. The principal dentist is reimbursed by the other dentists for their proportionate share of the common costs
- A common bank account is maintained to cover for all of the common expenses. Each dentist, including the principal, should periodically deposit a pre-determined amount of money into the common bank account to make sure sufficient cash is available to pay for expenses.
- Each dentist is responsible for specific shared expenses, which are typically outlined in the cost sharing agreement.
The advantage of a cost sharing structure is that each dentist has the opportunity to independently operate his own dental practice and at the same time reduce overhead costs.
The payments between dentists in a cost sharing arrangement will not be subject to HST if the agreement is structured properly.
About the Author – Allan Madan
Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation . Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.
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