5 tax-planning mistakes incorporated dentists make with retained earnings

What happens next is where most incorporated dentists — and physicians — lose money without realising it. Here are the five most common mistakes I see.

1 · Leaving too much cash in a savings account

Corporate cash sitting in a business savings account earning 2–3% is being taxed at the passive investment rate inside your corporation — which in Ontario can be over 50%. After tax, your “safe” savings account might be earning less than 1.5%. Meanwhile, inflation is running at 2–3%. You're losing purchasing power every year.

The fix isn't complicated, but it requires thinking about your corporate investment strategy as part of your overall plan — not as an afterthought.

2 · Not coordinating salary vs. dividend mix with your accountant

Your accountant optimises your T2 (corporate return). Your insurance and investment advisor optimises your personal investments. But the decision of how much to pay yourself — and whether to take it as salary or dividends — affects both sides simultaneously. The optimal mix depends on your RRSP room, your CPP situation, your income-splitting opportunities, and your corporate investment income. If nobody is looking at both sides together, you're likely leaving money on the table.

3 · Ignoring the $50K passive-income threshold

When your corporation earns more than $50,000 in passive investment income, your access to the small business deduction starts getting clawed back. For every dollar of passive income over $50K, you lose $5 of the small business limit. By $150K of passive income, you've lost the entire small business deduction on $500K of active income — which means you're paying the general corporate tax rate instead of the small business rate.

This is a planning problem with real solutions — including corporate-owned permanent life insurance, which grows tax-sheltered inside the corporation and doesn't count toward the passive-income threshold. But it requires proactive planning, not reactive filing.

4 · No estate plan for the corporation

If something happens to you, what happens to the corporation? Who has signing authority? How do the retained earnings get to your family? Is there a shareholders' agreement? Most incorporated dentists I talk to have a personal will but no corporate estate plan — which means their family could face a messy, expensive, and slow process to access the wealth that's locked inside the corporation.

5 · Treating insurance as an expense instead of a strategy

Disability insurance, critical illness insurance, life insurance — most dentists buy what their advisor recommended years ago and never revisit it. But when you're incorporated, the ownership structure matters enormously. Corporate-owned life insurance can create tax-free capital dividend account credits. Disability insurance needs to match your actual compensation structure. Critical illness coverage should be calibrated to your practice overhead, not just your personal income.

Insurance isn't a line item. It's a planning tool — and one that most incorporated professionals are using wrong.