Opening a second or third dental clinic is a major milestone for your practice. It also adds complexity to your tax planning. Each new location can affect your corporate structure, tax obligations, payroll costs and the amount of income you retain.
Planning ahead can help you manage these costs as your practice grows. Here are the main tax considerations for multi-location dental practices in Canada, from choosing a corporate structure to planning for an eventual sale.
Choose the Right Corporate Structure for Your Dental Clinics
Your corporate structure affects how you manage income, liabilities and future growth. Review your options before opening another location.
One Professional Corporation or Several?
Many dentists operate through a dental professional corporation (DPC). You can run multiple clinics through one corporation or establish separate corporations, subject to provincial rules.
One corporation generally means simpler bookkeeping and tax filings. Separate corporations may offer flexibility for partners, sales or risk management, but add administration and do not guarantee liability protection or extra tax benefits.
Consider a Holding Company
Where permitted, a holding company (holdco) may receive qualifying intercorporate dividends, generally without immediate additional corporate tax. This can move surplus funds for investment or future acquisitions.
Professional corporation ownership rules vary by province. Confirm that your proposed structure complies with your dental regulator’s requirements and applicable tax rules.
Protect Your Small Business Deduction
The small business deduction (SBD) can reduce the corporate income tax rate on qualifying active business income. For eligible Canadian-controlled private corporations (CCPCs), the federal deduction generally applies to the first $500,000 of qualifying income, subject to the applicable business limit and other restrictions.
Associated Corporations Share One Limit
Opening a separate corporation for each clinic does not automatically give you a new $500,000 business limit.
When corporations are associated under the Income Tax Act, they generally must share the available business limit. Association depends on specific ownership, control and other statutory rules, so separate legal entities are not necessarily treated as independent businesses for tax purposes.
You can allocate the shared limit among eligible associated corporations. Work with your accountant to determine an appropriate allocation based on each clinic’s income and overall tax position.
Watch Your Passive Investment Income
Investment income earned by your corporations can also affect your SBD.
The federal business limit is generally reduced when the combined adjusted aggregate investment income of a CCPC and its associated corporations exceeds $50,000 in a taxation year. The reduction generally eliminates the business limit once that income reaches $150,000.
As your practices grow, retained earnings may accumulate across your corporate group. Discuss investment strategies with your tax advisor, including how investment income is calculated and whether particular investments fit your goals. Corporate-owned life insurance may be worth evaluating in some circumstances, but it should not be treated as a guaranteed way to avoid the passive-income reduction.
Plan for Multi-Province Dental Practice Taxes
Operating clinics in more than one province can introduce additional corporate tax and payroll obligations.
Allocate Income by Permanent Establishment
When a corporation has permanent establishments in multiple provinces, taxable income generally must be allocated among them. The formula usually considers gross revenue reasonably attributable to each province and salaries and wages paid there. Maintain location-level revenue and payroll records to support your filings.
Account for Provincial Payroll Taxes
More clinics and employees may increase provincial payroll taxes. Ontario’s Employer Health Tax (EHT) generally provides a $1 million annual exemption to eligible employers, but employers with more than $5 million in combined Ontario payroll generally cannot claim it, subject to applicable exceptions. Associated employers must share the exemption.
British Columbia has its own Employer Health Tax rules and thresholds. Confirm provincial requirements and budget for applicable payroll taxes.
Understand GST/HST Rules for Dental Services
Most qualifying dental services are GST/HST-exempt. Practices generally do not charge tax on these services and cannot claim input tax credits (ITCs) for expenses used to provide them. GST/HST on equipment, renovations and supplies can be a significant cost.
Some supplies receive different treatment. Certain cosmetic dental services performed for purely aesthetic purposes may be taxable, while qualifying orthodontic appliances may be zero-rated.
For registrants whose fiscal years begin on or after January 1, 2025, the CRA’s previous administrative arrangement for dentists claiming ITCs no longer applies. Dentists must use the regular ITC rules based on the extent expenses relate to commercial activities.
The $30,000 small-supplier registration threshold generally applies to taxable supplies, not exempt dental services. Ask a tax advisor to review taxable revenue and registration obligations.
Maximize Deductions When You Expand
Opening another clinic often requires substantial spending on equipment, renovations and technology. Understanding how these costs are deducted can help you plan cash flow and corporate taxes.
Equipment and Leasehold Improvements
Dental chairs, imaging systems and other qualifying equipment are generally deducted over time through capital cost allowance (CCA). Leasehold improvements, hardware and software may fall into different CCA classes. Enhanced first-year deductions may apply to eligible assets, depending on acquisition dates, classification and when the property becomes available for use.
Buying an Existing Practice
An acquisition price may be allocated among equipment, other tangible assets and goodwill. The allocation affects future tax treatment and deductions. Work with your accountant and legal advisor to establish and document a supportable allocation before closing.
Pay Yourself and Your Family Efficiently
As your practice grows, you may have more flexibility in how you receive income from your corporation.
A combination of salary and dividends can affect your personal income tax, registered retirement savings plan (RRSP) contribution room and Canada Pension Plan (CPP) contributions. The appropriate mix depends on your financial goals, cash flow and personal circumstances.
Be cautious when paying dividends to family members. The tax on split income (TOSI) rules can apply the highest marginal tax rate to certain split income, including some private corporation dividends received by family members. Exceptions may apply depending on factors such as the individual’s age, involvement in the business and the nature of their contributions.
Review your compensation strategy with your accountant before making changes to how you or your family receive income.
Plan Your Exit Early
If shares qualify as qualified small business corporation shares, a sale may be eligible for the lifetime capital gains exemption (LCGE), subject to the applicable limit and strict conditions. Generally, at least 90% of asset value must meet the active-business test at the time of sale, and more than 50% must generally meet the test throughout the preceding 24 months.
Excess cash and passive investments can affect eligibility. Corporate purification — restructuring assets to meet the tests — takes time, so plan well before a sale.
Take Control of Your Multi-Location Dental Practice Taxes
Expanding your dental practice requires careful tax planning. Review your corporate structure, monitor the small business deduction across associated corporations, and account for provincial payroll taxes, GST/HST and capital purchases.
Dental Tax can help you navigate the tax considerations of growing your practice. Consult with a tax professional experienced in dental practices before opening another location or planning a future sale.
