5 tax-planning mistakes incorporated dentists make with retained earnings

Your corporation earned well this year. After paying yourself a salary or dividends, there is a healthy balance in the corporate account, maybe $200,000, maybe $500,000, maybe more. What happens next is where many incorporated dentists and physicians lose money without realising it. Here are five common mistakes.

1. Leaving surplus cash idle in an interest-bearing account

Interest earned inside a Canadian-controlled private corporation is investment income, taxed at about 50.17 percent in Ontario in the year it is earned. An amount equal to 30.67 percent of the interest goes into a notional refundable tax account and comes back only when the corporation pays enough taxable non-eligible dividends, as explained in RDTOH explained. Those dividends are then taxed in your hands, so the refund limits double taxation rather than removing the tax: the combined corporate and personal cost remains. Interest is also the least favourable kind of investment income: it is fully taxable every year, where only half of a capital gain is taxable and only when it is realised.

A large balance held in cash for years, beyond what the practice needs as a reserve, can fall behind inflation after tax, and it adds to the passive income that matters in mistake 3. The fix is to decide what the corporate money is for and invest it accordingly, as part of the overall plan, not as an afterthought. The options and their tax treatment are in the corporate investing guide.

2. Setting salary and dividends without looking at the whole picture

Your accountant prepares the corporate return, and your personal investments may be managed separately. But how much you pay yourself, and whether as salary or dividends, affects both sides at once. The right mix depends on your RRSP room, CPP, pension options, what the corporation will earn on money it keeps, and whether any family members are shareholders, where the tax on split income rules limit what dividends to them can achieve. If nobody looks at both sides together, the mix may be costing more than it needs to. The trade-offs are laid out in the salary vs dividends guide.

3. Ignoring the $50,000 passive income threshold

When the adjusted aggregate investment income of your corporation and any associated corporations goes over $50,000 in a year, the $500,000 small business limit for the next year shrinks by $5 for every dollar above the threshold, and is gone at $150,000.

In Ontario the cost is smaller than many articles suggest, because Ontario does not follow the federal reduction. At the fully phased-in rates, after Ontario's small business rate fell to 2.2 percent on July 1, 2026, active income pushed out of the limit is taxed at 17.2 percent instead of 11.2 percent, a difference of 6 points. So the maximum extra corporate tax from the grind is $30,000 a year, and only if the full $500,000 limit would otherwise have been available and used. That is still real money, and the passive income calculator shows the figure for your numbers.

There are planning responses, including an individual pension plan, investing for deferred capital gains rather than interest, and corporate-owned permanent life insurance, whose growth inside an exempt policy is generally not taxed and does not count toward the threshold. Five ways to manage the SBD grind compares them with numbers. Disclosure: I am a licensed insurance and investment advisor and life insurance is among the products I place, so weigh that option alongside the others with your accountant.

4. No plan for the corporation at death

If something happens to you, what happens to the corporation? Who can sign for it and keep the practice's obligations covered? Do your wills deal with the shares? How will the retained earnings reach your family, and at what tax cost? Many incorporated professionals have a personal will but have never looked at these questions for the corporation, which can leave their family with a slow and expensive process to reach the money inside it.

The bigger issue is tax. At death you are generally deemed to have disposed of your shares at fair market value, which can create a capital gain on your final return. When the corporation later pays out the same value to your estate or family, that distribution can be taxed again, for example as a dividend on a wind-up. Without planning, the same corporate value can be taxed twice. Coordinated planning by your lawyer and accountant addresses that overlap, and the routes for the money, dividends, a capital dividend account payout, or a sale or wind-up, are each taxed differently. When a corporation receives a life insurance death benefit, the proceeds less the policy's adjusted cost basis are generally added to its capital dividend account, which can be paid out tax-free with a capital dividend election, one reason ownership decisions matter.

5. Not revisiting insurance after incorporating

Disability, critical illness and life insurance are often bought once and never reviewed. Once you are incorporated, who owns each policy, who pays the premiums and who receives the benefit all change the tax result. Corporate ownership alone does not create a capital dividend account credit: it generally arises when the corporation receives the death proceeds, reduced by the policy's adjusted cost basis, and paying it out requires an election. Disability insurance needs to match how you are actually paid, since dividends are not always treated like salary when benefits are set. Critical illness coverage can be sized to practice overhead, not only personal income. The structures are covered in the corporate-owned life insurance guide. The same disclosure applies: these are products I place, so have your accountant check any structure.

If your retained earnings question comes with a practice attached, the way I work through it with incorporated dentists, including what an eventual practice sale means for today's decisions, is on the financial planning for dentists page. Physicians have their own version at financial planning for physicians.