What to do with the retained earnings in your dental corporation

Summary

Retained earnings is the accounting name for every dollar of profit your corporation has ever made, less every dollar it has paid out to you and any other shareholders. The figure is a running total on the company’s balance sheet, which is the one-page statement of what it owns and what it owes. On its own it tells you nothing about how much cash you have.

Surplus means cash the practice has earned, has already paid corporate tax on, and doesn’t need in order to operate. In our view an Ontario dentistry professional corporation should put surplus to work in this order, on 2026 figures:

1. Hold back a few months of operating costs, plus the corporate tax owed on this year’s profit but not yet paid. Budget about 12 cents on every dollar of profit, due two months after year-end, or three if the corporation qualifies.¹
2. Pay yourself salary rather than dividends, up to what you need to live on and enough to create the maximum RRSP contribution room. Room is what you’re allowed to put into a registered retirement savings plan next year. Salary creates new room at 18% of the prior year’s earned income, while dividends create none. The $33,810 cap for 2026 room applies to 2025 earnings, so salary paid in 2026 uses the higher 2027 cap.² The costs are immediate personal tax, and Canada Pension Plan contributions paid twice on the same salary, once by you and once by the company, at roughly $9,300 in total for 2026.³
3. Put everything else against practice debt until the debt is gone. Repaying a 7% loan saves the interest but also removes its tax deduction where the borrowing funded the practice. Compare that after-tax saving with investment returns after tax, rather than treating it as a tax-free 7% return.⁴ What you give up is flexibility, because you can’t un-repay a loan in a slow quarter.
4. Fill your tax-free savings account first, at $7,000 of new contributions per person for 2026, paying yourself the extra if step 2 didn’t cover it.²
5. Invest what’s left inside the corporation, weighted towards investments that grow in value (e.g. equity funds) rather than ones that pay interest (e.g. guaranteed investment certificates). Interest is taxed inside the company every year, while growth isn’t taxed until you sell.

Three things flip that order, and all three are set out under “How often this changes”. They are turning 50 or clearing the practice debt, a realistic sale of your shares within two years, and practising outside Ontario.

What the retained-earnings figure is

Retained earnings sits at the bottom of the balance sheet, adding up profit since incorporation and subtracting every dividend ever paid. A practice can report $600,000 of retained earnings while holding $40,000 in the bank. The rest turned into equipment, leasehold improvements (e.g. money spent building out rented premises, which you can’t take with you) and patient receivables, meaning fees billed but not collected yet. The profit you spent on a scanner two years ago still counts, because the cash turned into a machine, and a machine can’t be paid out as a dividend.

Two other numbers sit between that figure and money you can spend. First is the cash in the bank account, which in a growing practice is far smaller than the retained-earnings figure. Second is the corporate tax this year’s profit has already triggered but the company hasn’t yet paid. It normally falls due two months after your financial year ends, or three if the corporation qualifies, and you pick that year-end date when you incorporate.¹

One more line is worth finding, usually labelled “due to shareholder”. If you ever put your own money in, whether a deposit on the practice or covering payroll in a slow month, the company owes it back to you. Repaying you isn’t taxed, because the money is yours coming back.⁵

The tax on money left in, and on money taken out

Money the practice earns is taxed inside the corporation now, and taxed in your hands only when it comes out. For 2026 a Canadian-controlled private corporation (a private Canadian company not controlled by non-residents or by public companies) pays 9% federal tax on its first $500,000 of active business income. Active business income means money earned from dentistry rather than from investments.⁶ Ontario charges its own tax on that same first $500,000, at 3.2% on profit attributed to days in your financial year before July 1 2026 and 2.2% on days after. A practice whose year runs January to December 2026 therefore pays 9% plus 3.2% for the first half, and 9% plus 2.2% for the second, which averages 11.7% across the year.⁷

Set that against the top Ontario personal rate on salary of roughly 53.5%, which is what your last dollars cost once your income reaches the top federal bracket. A dollar left inside the corporation postpones about 42 cents of tax. Below the top bracket your own rate is lower, and so is the gap.⁸

Most of the gap closes on the day the money comes out to you. Canada’s tax system is built so that corporate tax plus personal tax on a dividend lands close to the tax on salary. Tax advisers call that design “integration”, so the corporation mostly buys you a choice about when to pay the tax, not a lower total bill.

Who may own the shares

Your practice company is an ordinary Ontario company that also holds a certificate of authorization, which is the permit to practise dentistry through a company at all. Ontario restricts who may hold its shares far more tightly than in an ordinary business. Voting shares elect the directors and control the company, and every one of them has to be owned by a dentist registered with the Royal College of Dental Surgeons of Ontario. Ownership can be direct, meaning in the dentist’s own name, or indirect, which is the word in the regulation that nobody agrees on. Non-voting shares carry dividends but no control, and may also be held by a spouse, child or parent of a voting dentist shareholder.⁹

Whether a holding company can sit above the practice corporation is a genuinely open question here. A holding company is a second company that owns your shares and holds surplus cash away from practice creditors. The answer turns on how “indirectly” is read, and on what the College says at your annual certificate renewal. We wouldn’t set one up in Ontario on an accountant’s recommendation alone, so ask your lawyer and the College first.

What investing inside the corporation costs

Ontario’s Business Corporations Act allows it, saying in as many words that investing money the corporation has earned counts as part of practising dentistry.¹⁰ Investing there starts from a bigger number, since a dollar of profit leaves 88 cents to invest if the company keeps it, against about 46 cents if it pays you first.

The cost is that investment income bears roughly 50% corporate tax up front in Ontario. Roughly 30 of those 50 cents are held aside by the CRA and refunded to the corporation later. The refund only comes as the corporation pays dividends out to you, at about $38 for every $100 of dividend paid.¹¹ The money also sits fully exposed to practice creditors, and moving it somewhere safer runs into the holding company question above.

A further cost arrives once the investments get large. Investment income above $50,000 a year cuts into the $500,000 of profit that qualifies for the 9% federal rate. For every $1 of investment income above $50,000, $5 comes off that $500,000, so at $150,000 none of your profit qualifies. The count runs off last year’s figures, added across your corporation and any others you or your family control.¹² Ontario doesn’t copy the federal rule, so a practice that loses the 9% federal rate, and pays 15% federally instead, keeps Ontario’s reduced rate.¹³ In our view that federal cost is smaller than the insurance and investment products sold as a way of avoiding it, and our guide on how investment income shrinks the small business rate works through the arithmetic.

How often this changes

Once a year suits most practices. We’d re-run the decision against last year’s investment income for your corporation and any others you or your family control, the shareholder loan balance, and how far you are from selling. Anything below is a reason to look sooner.

• You turn 50, or you clear the last of the practice debt. An individual pension plan, meaning a one-person company pension, usually beats corporate investing from there, and it needs years of salary behind it.
• A sale of your shares becomes realistic. The lifetime capital gains exemption that shelters part of the gain needs more than half of what the company owns to have been used in the practice throughout the 24 months before the sale, and almost all of it at the moment of sale.¹⁴ Investments held in that window can cost you the exemption.
• You start practising outside Ontario, since some provinces do let a company hold shares in a dental corporation on conditions, and the conditions differ by province.¹⁵

Closing thoughts

The largest wins here rarely come from structure at all. They come from using the years when your personal income is unusually low, whether a parental leave, an illness or the first year after a sale. A dentist who never draws more than they need can reach 65 with a large balance still inside the corporation and no low-income years left, so every dollar finally taken out is taxed near the top rate.

How we handle it

We set the salary and dividend mix before your year-end rather than after. We work from the cash balance on the balance sheet, the tax already owed on this year’s profit, the shareholder loan balance and the RRSP room you want. We file the T2, which is your corporation’s income tax return, and your personal return together, so the figures on the two are decided at the same time by the same person. Where the answer depends on the College’s rules, we’ll say so and work alongside your lawyer.