Unincorporated vs. Incorporated: What Dentists Need to Know

May 28

Written By Kyra

The discussion around unincorporated vs. incorporated dentistry has been ongoing and will likely continue for some time.

Why? There are two main reasons:

Not all dentists are the same.
Tax rules will continue to change.

Not All Dentists Are the Same

Let’s begin by reviewing the basic definition of incorporated versus unincorporated.

How you choose to receive your income directly affects your tax outcomes.

If you are not incorporated, you pay personal income tax on all income you receive, as it passes through you.

However, if you are incorporated, you have established a company and positioned yourself as its controlling owner. This means that you and your practice exist as separate entities for tax purposes. In this situation, your company essentially becomes a separate taxpayer.

What Are the Benefits of Incorporation?

Here are some of the ways an incorporated dentist can receive income:

Your company can pay you a salary, plus a bonus.
Your company can pay you dividends from profits.
Your company can pay you through a combination of salary and dividends.

Overall, many dentists prefer to incorporate. However, not all dentists or dental practices are the same.

For example, some incorporated dentists prefer to receive their income exclusively through a salary, while others prefer dividends or a combination of both.

Salary vs. Dividends: What's the Difference?

Tax rules differ significantly between salary and dividends.

Salary and bonuses: Payments made to you by your company represent a tax deduction for your company and taxable income for you personally.

Dividends: Dividends paid to you are not tax-deductible by your company. They are taxable to you, but generally at a different rate than salary or bonus income.

By retaining profits in your company rather than withdrawing them personally, you may be able to defer taxes and improve overall tax efficiency.

However, tax authorities have established a concept called integration. The objective is for you and your company to pay approximately the same total amount of tax as someone who is not incorporated, depending on the circumstances.

As you can see, navigating these waters can be tricky. Because every dentist's situation is different, it is important to work with a professional who can help you make informed decisions after considering a wide range of factors.

In 1789, Benjamin Franklin famously wrote: “... in this world, nothing is certain except death and taxes.” At TMFD, we would add an important certainty for dentists: Nothing is certain except death, taxes, and ongoing changes to tax rules.

Tax Rules Will Continue to Change

If you are a new dentist, you are probably asking yourself: Should I incorporate?

The answer is not simple. In the past, the scales were often tipped in favour of incorporation. However, legislative changes that came into effect in 2018 changed the landscape. Today, there is no universal right or wrong answer when it comes to incorporating versus remaining unincorporated. If you are facing this decision, here are five important factors to consider.

1. The Cost of Tax Filings: Tax filing costs are generally higher after incorporation. Your company will have its own filing and accounting requirements, which you should factor into your decision.

2. Unused Tuition Tax Credits: If you have unused tuition tax credits, these may help reduce your personal income taxes. Depending on your circumstances, this can make deferring incorporation worth considering.

3. Buying Your First Home: If you plan to buy your first home in the near future, consider how your income will be assessed by lenders. Banks may place greater emphasis on your personal salary income and less on income received through dividends. This can make the timing of incorporation an important consideration when preparing for a mortgage application.

4. Canada Pension Plan (CPP) Contributions: If you are incorporated and pay yourself exclusively through dividends rather than a salary, you generally will not contribute to the Canada Pension Plan (CPP) through that income. This means you will not build CPP entitlement through those dividend payments, which may affect your retirement planning.

5. Registered Retirement Savings Plan (RRSP) Contributions: If you are incorporated and pay yourself exclusively through dividends, your ability to accumulate RRSP contribution room will be affected. RRSP contribution room is generally based on earned income, which includes employment income but not dividends. RRSP contributions may also help reduce your taxable personal income.

These factors matter when developing a long-term financial plan.

When Does Incorporation Make Sense?

After considering the specifics of your unique situation, we may conclude that incorporation is the right choice for you. For example, incorporation may be worth exploring if your income exceeds your personal lifestyle expenses, allowing you to retain profits within your company. It may also be worth considering if you earn more than $188,000 per year (the threshold referenced in our original 2025 guidance), at which point you may have reached the annual maximum for RRSP contributions, subject to your individual contribution room and applicable limits.

However, as we have mentioned, every dentist is different. Whether you are incorporated or not, our experienced team stays on top of an ever-changing legislative landscape to help ensure you make the most tax-efficient choices possible.

Please don't hesitate to reach out to us today.

“Your situation is not exactly the same as anyone else’s; and tax rules will inevitably continue to evolve. So, you need to work with professionals who can consider your entire financial situation in a holistic way.”
— Chris Molloy, Senior Financial Advisor

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