Posted under: IPP
Fraser Lang
April 15th, 2025
Federal tax changes have turned what was once prudent planning by dentists on its head, leaving many without adequate retirement savings. This article discusses how Retirement Planning for Incorporated Dentists through the Individual Pension Plan (IPP) can help to resolve the government-created gap.
Dentists handle important and stressful work; while caring for a high number of clients. But when it comes to retirement planning, they need to care for themselves; and retirement planning for incorporated dentists is critical. One avenue in which they can be assisted in their busy days is helping them to properly utilize their Dentistry Professional Corporation (DPC) to maximize their retirement.
Over the last 10 years, federal tax policy has targeted professional corporations, dentists included. Dentists have unique planning around their corporate structure. Unlike other professionals, the plan is normally to sell the shares of their DPC when they retire. Sitting parallel to their DPC is normally a hygiene corporation or a holding company. To understand the impact let us look at tax planning for Dentists.
Before 2018, there was a tax advantage to paying the lower corporate rate and retain earnings in the DPC, paying out dividends in retirement. The suggested strategy was adopted by many, which lead to the DPC retaining assets and being used almost as an unregistered pension plan built around the combination of the lower small business tax rate, and the ineligible dividend tax rate, as a singular retirement strategy.
Fast forward to 2018, and we have seen via tax policy this strategy turned on its head. As of 2018, the Tax On Split Income (TOSI) rules meant family members had to account for their efforts that contributed to the profits of the Dental Practice, assuming they are shareholders in the hygiene corporation, to enjoy the preferred tax rate on the dividends. This was coupled with changes to the taxation of passive income within the DPC and its associated companies, which if the taxable income in a year is north of $150,000, could result in the loss of the small business deduction (SBD) limit in that year. The tax changes were enacted with no grandfathering of retained assets prior to the budget. The result was that prudent savers who had retained millions in the corporation could end up paying this unintended tax, negating their years or decades of prudent planning up to this point.
DPCs, unlike many professional corporations, can sell the shares at retirement. This is typically the goal and with a share sale, keeping the corporation onside for passive assets is crucial. Retained earnings are typically transferred as an intercorporate dividend to the hygiene corporation or holding company. There still can be concerns of passive income issues such as the clawback rules due to passive income which relates to all related companies combined.
These changes have raised serious concerns for dentists, many of whom do not have an alternative source of funds for retirement. The majority do not have a pension plan. So how do dentists mitigate these changes to optimize their retirement income and keep the DPC purified for a future share sale?
Individual Pension Plans (IPPs) have been in existence for decades, yet only a small number of incorporated Dentists take advantage of these strategies. The IPP allows the DPC to contribute significantly higher amounts than within their RSP, using pre-tax corporate dollars. With the IPP, we can capture past years of funding, deduct investment fees, and any administrative fees.
Let us look at the example of Dr Jones, a 50-year-old Dentist, who has been incorporated for 10 years. He took a T4 of $55,000 per year for the first 5 years to maximize CPP, and in the last 5 years, he has increased his T4 earnings to $150,000 in 2024 to maximize his RSPs. Over his working years he has accumulated $240,000 in RSPs.
Through the IPP, in year 1, the DPC can contribute $39,900 for 2025, $95,800 in past service, with a transfer of $170,500 from his RSP as a qualifying transfer. Assuming the 7.5% growth rate that CRA utilizes as a return assumption, by age 60 the IPP asset value would be at $1.5 million versus $1.01 million if he instead sticks to an RSP strategy with the same 7.5%.
In the past, the major opposition by Accountants and Advisors to the IPP were a lack of flexibility assuming a requirement to fund the plan, and due to complexity. However, most provinces have relaxed funding rules, with Ontario for example, passing Bill 213 in 2020, which exempts Ontario IPPs for Professionals from provincial funding rules and administrative requirements. Funding is no longer required, administration is streamlined, and in retirement there no longer are any locking-in rules if the plan is terminated.
For Incorporated Dentists, the usage of IPPs to reduce corporate and personal taxes and manage passive income in light of changes to tax policy, should be considered. The IPP will provide increased funding, creditor proofing, and diversification to their financial plan, along with corporate tax deductions on contributions.
Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners across Canada, and corporate pension administration. With offices in Calgary and Toronto, we have served 7,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at [email protected] or 403.249.1820 and follow us to learn how we can help Build Your Future. www.gblinc.ca
