Inside a dental PC: what to do with the money you leave in

Money you leave in your professional corporation can do three things, and only three: sit in an investment account inside the PC, move up to a holding company and be invested there, or come out as salary and fill registered room. Most dentists use some of each. The choice matters because those earnings have so far borne one layer of tax — 9% federally on the first C$500,000 of active business income for an eligible Canadian-controlled private corporation in 2026, plus your province’s small-business rate — while the same dollar paid out to you meets a top personal marginal rate that is a multiple of it.

That spread is a deferral, not a discount. The rest of the tax is waiting for the money to come out, and the three routes price the wait differently — in different years, and only one of those costs shows up on this year’s return.

The deferral is the point, and it compounds

Deferral gets described as a timing benefit, which undersells it. The benefit is that you invest a pre-personal-tax dollar. A dollar of practice profit left in the PC reaches the investment account having paid only the combined small-business rate; drawn out first, it arrives having paid personal tax at a much higher one. The larger base compounds from day one, and the personal tax you eventually pay is charged on the distribution, not retroactively on the growth behind it.

So “should I leave it in” is rarely the live question. Cash you need personally in the next year or two is cheaper to plan for than to extract in a hurry; cash you don’t need is working harder inside the corporation than outside it.

Investing inside the PC costs you the rate on your practice income

Investment income inside a corporation is taxed on its own track. Interest, rents, portfolio dividends and taxable capital gains go in at a high corporate rate, part of which is refundable and comes back only when the corporation actually pays taxable dividends out. A PC that accumulates quietly for a decade leaves that refundable pool sitting on the balance sheet until a dividend releases it. Over a full cycle the design is broadly neutral. Within any single year it is not, and the year is what you file.

The sharper cost is the grind. Adjusted aggregate investment income — broadly, the passive income the corporation earns in a year — reduces the federal small-business limit once it passes a threshold, and removes it entirely at a higher one. Two features catch dentists out. It runs off the prior year’s passive income, so the portfolio you build this year re-rates next year’s practice income. And it is measured across the associated group, so moving the portfolio into a second corporation you control does not split the problem. Capital gains enter the calculation at the 50% inclusion rate, which means a year in which you rebalance can move the number considerably more than a year in which you simply hold.

Whether a holdco is available at all is your college’s call, not the arithmetic’s

A holding company is the usual answer to a growing corporate portfolio. Dividend the surplus up, invest it there, keep the operating corporation lean. For a dental PC there is a prior question, and it is not a tax question: provincial college rules that limit who may hold shares of a professional corporation. Those rules are set by your college rather than by the CRA, they vary, and they decide whether a holdco — or a family member, or a family trust — can hold shares of your PC at all. Your lawyer confirms the position before anything gets drafted; the arithmetic is the second question.

Where a holdco is available, it does two things worth a second T2, the corporation’s income tax return, and separate books: it puts accumulated surplus at a distance from clinic risk, and it gives you control over the year in which dividends reach you personally. It does not solve the grind, for the associated-group reason above. The five-question test is the rest of that decision.

Only salary creates RRSP room, so the room sets a floor under your pay

Dividends generate no RRSP room. Salary does, because contribution room is built from earned income — a percentage of the prior year’s, capped by an annual ceiling the CRA indexes. A dentist who takes the entire draw as dividends because the payroll account is a nuisance has, ten years on, created none. That is not recoverable later.

So if you intend to use registered room, the salary figure is set by the room you want rather than by the rate comparison, and it becomes a floor the rest of the plan works around. Individual pension plans run off T4 employment earnings too, so an IPP conversation is a salary conversation first. The full comparison — CPP both halves, the payroll calendar, the lender question — is in salary or dividends.

If the practice might ever be sold, the portfolio becomes a purity problem

Here the two goals pull against each other. The lifetime capital gains exemption shelters up to C$1,275,000 of gain on a sale of qualified small-business-corporation shares in 2026, but the shares have to pass asset tests — what proportion of the corporation’s value is used in an active business, both at the moment of sale and across a period running backwards from it. A securities portfolio, surplus term deposits and a shareholder-loan receivable from you are generally not active-business assets. The same accumulation that makes the deferral attractive is what puts the exemption at risk, and a clean-up a month before closing generally satisfies the moment-of-sale test while doing nothing for the backward-looking one.

There is a dental wrinkle. Many practice sales are structured as asset sales — goodwill, equipment, patient records — in which case the share exemption is not in play and the proceeds land in the corporation with a second layer of tax still ahead of them. Which structure you get is partly the buyer’s decision, which argues for keeping the share route open rather than assuming it. The LCGE primer covers the tests properly.

A worked example: C$350,000 a year staying in

Illustrative, round numbers, December 31 year-end. The PC pays associates, hygienists and front-desk staff, pays you what you need to live on, and still has C$350,000 of after-corporate-tax profit left each year, year after year.

Invested inside the PC, year one is uneventful. A large after-corporate-tax base goes to work and the passive income it throws off is small. Eventually the character changes: the portfolio gets big enough to push passive income past the threshold, and the grind lands on the following year’s practice income — the year nobody was watching for it. Nothing on the year-one return hints at this.

Dividended to a holdco, the same dollars sit on a different balance sheet. The practice corporation stays lean, which is what the QSBC tests want to see, and the surplus is at a remove from clinic risk. The costs are a second corporate return, separate books, intercompany balances someone reconciles every year, and the college question answered first. The grind is unchanged.

Paid out as salary into RRSP room, the amount is the smallest of the three by a wide margin — it converts only as much surplus as your room absorbs, and it costs CPP both halves plus the payroll work. It is also the only one that is permanent in your favour: room used is sheltered from a future grind, a future claim against the clinic, and a future change to the corporate rules.

Ranked on deferred capital alone, the first wins. Ranked on what your shares look like to a buyer in 2032, the second. Ranked on what you keep regardless of what the corporate rules do next, the third. Your age, whether you own the clinic or only practise in it, and whether you expect to sell shares or assets decide which ranking governs — which is why this is re-run annually rather than set once and inherited.

What Cadence does

We track adjusted aggregate investment income through the year instead of discovering it at year-end, because the grind arrives a year after the decision that caused it. Before your year-end we set the salary figure against the RRSP room you will actually use, the dividend piece against what you need personally, and both against what the practice shares would need to look like if you sold them. Where a holding company is on the table we get your college’s position through your lawyer before modelling anything. That is the year-round planning work rather than a December conversation, and it is how we work with dentists and other incorporated health professionals.