Incorporation and Individual Pension Plan (IPP)

In this post you’ll be introduced to the concepts of Incorporation and Individual Pension Plan (IPP).  For incorporation, you’ll learn why it might be good for your dental practice. The basics of an Individual Pension Plan (IPP) will also be covered.

Incorporation:

When a dentist incorporates their dental practice it becomes a professional corporation, which may provide certain advantages. For example, you have the option to split your income by paying salary or dividends to shareholders. Shareholders can include family members who have lower incomes and therefore, a lower tax rate, allowing you to save more of your earnings. faq_split_income

Other advantages of incorporation include:

• The opportunity to defer taxes.

• The opportunity to choose your own year-end for tax reporting purposes, thereby leaving money in the corporation for a specified period of time.

• Lifetime capital gains exemption: Once you sell your practice, you may be able to take advantage of a capital gains tax exemption, which for 2015, is $813,600. This means you would be able to claim up to this amount tax-free upon the sale of your practice – assuming you have never used any of your lifetime capital gains exemption.

•  If you’re considering the purchase of a practice and are incorporated, depending on your situation, you may be able to pay off the practice quicker than if you were not incorporated. Overall, incorporating has its advantages, but you should be aware that there are additional costs and time requirements associated with the administrative side of operating a professional corporation. Examples of these are: record keeping, preparation and filing of corporate financial statements, filing of tax slips, and the hiring of professionals such as lawyers and accountants.

Individual Pension Plan (IPP):

This tax sheltered retirement account can be advantageous if you are at least 40 years of age, earn a base salary of at least $100,000 per year and have a corporation.  Although an IPP is meant to increase your pension savings, it is more strictly governed. For instance, as per Canadian legislation, you cannot access your pension benefits until retirement and the government imposes annual reporting requirements.

faq_ipp

Other points to consider are:

• The maximum IPP contribution limit is greater than the RRSP contribution limit: This may have an effect on your RRSP contribution, since the amount of money you allocate to an IPP reduces your RRSP contribution.

• There are set up and ongoing costs to maintain an IPP.

• Contributions are tax deductible to the corporation and you have a level of protection from creditors. There are many factors to consider when determining if you should incorporate your dental practice or set up an IPP. Speak with an accountant and lawyer to understand if either is the right option for you.

As a new dentist with a steady and growing income, you have numerous and competing options on how to achieve your financial goals. The good news is our non-commissioned Certified Financial Planners (CFPs)* at CDSPI Advisory Services Inc. are happy to answer your questions at no cost and with no obligation. We are here to help. Call: 1-800-561-9401 or Email: investment@cdspi.com

* Restrictions may apply to advisory services in certain jurisdictions. Financial planning and advisory services are provided by licensed advisors at CDSPI Advisory Services Inc. Information on this site is for informational purposes only and is not intended to provide financial, legal, accounting or tax advice.