Professional Corporations for Dentists: How to Maximize Tax Deferral

For dentists practicing in Ontario, incorporation is one of the most significant financial milestones of a career. A Dentistry Professional Corporation (DPC) — regulated by the Royal College of Dental Surgeons of Ontario — offers powerful mechanisms for tax deferral and wealth accumulation when structured correctly.

The power of the Small Business Deduction

In Ontario, active business income earned inside a CCPC up to $500,000 is taxed at a combined federal and provincial rate of approximately 12.2%. A dentist operating as a sole proprietor would pay marginal rates exceeding 53% on the top portion of the same income. This gap creates the deferral opportunity: if a dentist earns $400,000 but only requires $150,000 for personal living expenses, the remaining $250,000 is left inside the DPC and taxed at 12.2%. Over a 20- or 30-year career, the deferral compounds into millions of dollars in additional wealth.

Income splitting with family

DPCs were historically used for income splitting by paying dividends to lower-income family members. The Tax on Split Income (TOSI) rules severely restricted this. Under TOSI, dividends to family members who do not actively work in the business at least 20 hours per week are generally taxed at the highest marginal rate.

Despite TOSI, legitimate options remain. A spouse who works in the practice (e.g., as office manager) can be paid a reasonable salary commensurate with duties. Once the dentist reaches age 65, TOSI provides an exception that allows dividend sprinkling with a spouse, similar to pension income splitting.

Preparing for the LCGE

When a dentist eventually sells the practice, the shares of the DPC may qualify for the Lifetime Capital Gains Exemption — sheltering over $1.25 million in gains. To qualify, the corporation must meet strict asset tests: 90% of the corporation's assets must be used in an active business at the time of sale. If the DPC has accumulated significant passive investments, it may fail the test. "Purifying" the corporation by moving passive assets into a holding company prior to sale is a critical planning step.