Common Deductible Expenses for Dentists
Author: John Yang, CPA, CA, LPA
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Dentists in Canada incur various expenses related to their practice, and understanding which ones are tax-deductible can help reduce your tax burden.
Some of the most common deductible expenses that are considered grey areas for dentists include meals and entertainment, automobile expenses, home office expense, travel and conferences.
By understanding the tax deductibility of these expense items, dentists can maximize their tax savings and ensure that they are not paying more than necessary in taxes. In this article, we will take a closer look at these deductible expenses one by one from a business owners’ perspective and how they can benefit Canadian dentists.
Meals and entertainment
Generally speaking, if an expense is incurred for the purpose of gaining business income, that expense is deductible. For meals and entertainment, as long as the event occurred for business purposes to earn business income, it would become a deductible expense. Keep in mind, for dental professionals the deductibility for meals and entertainment is at 50%. i.e., if $100 dollars meals and entertainment expense incurred, CRA would only allow dentist business owners to deduct $50 dollars.
To be audit proof for the meals and entertainment expenses, the dentist needs to be aware that he/she has to keep the receipts for the event.
And there are two copies of receipts. Let’s say that the dentist is in a restaurant, the dentist is going to receive two receipt slips. One is about what type of food was ordered. That is the content of purchase. The other is the credit card slip, which is the evidence of pay. The dentist will need to keep both. Just the credit card slip is not sufficient, CRA level one audit is going to require both a receipt (i.e., what was the purchase content) and the evidence of pay (i.e., credit card slip). Usually, I tell my clients to build a habit of not only filing these two slips of receipts, also after payment is made, write on the back of the receipts who you had the meals with and what cases were discussed during the meal. So they can have support for business expense deduction on an ongoing basis. And certainly, reasonability should be kept in mind and only business meals should be included in the yearend tax filing.
Automobile Expenses
Dentists need to be aware that CRA requires the taxpayer to maintain a vehicle logbook, in which the date, starting location, ending location, distance of the trip, and business reason of the trip needs to be documented.
There are two methods to track vehicle expenses. One of the percentages of vehicle expense method. The other is the per kilometer allowance method.
For the percentage of vehicle expense method, taxpayer is required to keep all automobile related receipts, and at yearend based on the percentage of business usage occurred for the automobile related expenses. A corresponding percentage of the total automobile expenses becomes deductible. For example, if the taxpayer’s total annual vehicle expense is $10,000 dollars, and 50% of the automobile usage is for business, which is supported by the vehicle logbook. Then $5000 auto expense can be tax deductible.1
For the per kilometer allowance method, the dentist is not required to keep any receipts. CRA only requires the dentist to maintain a vehicle logbook. And the business is able to reimburse its owner on a per kilometer basis. For 2022 year, first 5000 business kilometers can be reimbursed at 61 cents per kilometer; and remaining business kilometers can be reimbursed at 55 cents per kilometer.
Based on practice experience, for dentists who do not drive a lot, the percentage of vehicle expense is the preferred method, it can usually result in higher deductions, but the dentist is required to keep all receipts. For dentists who practice in rural areas, who work between two or three small townships and drive around long distance between dental clinics each day, the per kilometer allowance method would be more beneficial and result in higher deductions. Let’s say a dentist who drives 25,000 kilometers for business a year, the dentist would be able to deduct 5000 x .61 + 20,000 x .55 = 14,050, which is a monthly deduction of $1,170.83 dollars. This is likely sufficient to cover a regular passenger vehicle’s all associated monthly expenses.
Dentists also need to be aware that the direct distance between home to work and work to home does not count. This is mostly due to fairness rules. Because an employee drives from home to work and work to home every day and they don’t get any tax deduction. That is cost of living, why should a business owner, in our context a dentist, be any different? It is fairness.
The common way to break that perspective is to change the angle of view, any distances to and from work to a non-home destination for business purposes would be deductible vehicle trip and thus a deductible business expense.
Home Office Expense
CRA’s view on home office expenses is somewhat outdated. They require the home office space to be exclusively used for business purposes, and in their documentations, they also require home office space to be used to meet clients. That is in fact one of the conditions to write off home office expenses. But in the post-COVID business environment, a good chunk of business meetings occurs online with Zoom and Teams. It is a grey-area to argue whether the dentist really meets with any patients at their home office. From practice experience, CRA in this area tends to use the approach of “if the taxpayer is reasonable, they will be reasonable. And vice versa.”
Generally speaking, for the exclusive area of the home that is solely used for business, the associated expense of that exclusive area can be a deductible business expense. Again, reasonability must be kept in mind, CRA likely won’t believe you that 80% of your home is used for business purposes. And once they feel that the taxpayer is unreasonable, they will just decline the whole deduction amount. So that’s something to be mindful of.
Dentists also need to be aware that if they own their home, it is recommended to forego the home office deduction. In Canada, we have principal residence exemption, i.e., when a taxpayer sells their principal home, the gain is tax-free. There is an underlying condition of the principal residence exemption, which is the property must be used for residential purposes. An exclusive area used for business purposes, which is home office, is not an exclusive area used for residential purposes. So, for a small, a few hundred dollars’ worth of home office deduction year over year, it could jeopardize a portion of the principal residence exemption, which could be worth tens of thousands of dollars. That’s clearly not a good deal, especially for dentists who have nice homes. Again, something to be mindful of.
Travel and Conferences
CRA’s administrative policy for conferences is that each taxpayer on an annual basis are allowed to deduct two conferences. And in order for the whole trip to be deductible, the business portion of the trip needs to be more than 2/3 of the entire trip. If the business portion of the trip is less than 2/3 of the entire trip, then the trip would only be proportionally deductible.
Any dentists who like to purposely book fancy training sessions aboard need to keep reasonability in mind. Why do you have to take that implant course in London, UK, not London Ontario? CRA upon audit is going to ask justification. So, the dentist would be mindful of these decisions. And a steak house meal costs $2,000 dollars for 2 people is likely not going to be accepted by CRA as reasonable business expense. It might be reasonable for a large hedge fund money manager, but that context is hard to be adopted into a small private corporation or business owner’s perspective.
Conclusion
In conclusion, as a business owner and a dentist, understanding which expenses are tax-deductible can help maximize tax savings and reduce overall tax liability. For the common grey areas of expenses listed above, while some of these expenses may require additional documentation or proof of business use, the potential tax savings can make it worthwhile to understand their tax-deductible nature and CRA’s requirements upon examination. Consulting with a tax professional or accountant can also help ensure that dentists are taking advantage of all available deductions and maximizing their tax savings.
- Certain auto deductibility threshold needs to be kept in mind, such as for leased vehicle monthly max deduction room is at 950 dollars per month; and for purchased vehicle there is a price ceiling for capital cost allowance of 36,000 dollars. Furthermore, the auto expense paragraph is written under the perspective that the business owner is using a personally owned vehicle for business purposes. Due to the business nature of dental clinics, corporate owned vehicle and its income tax implications are not discussed here.
About the Author:
John Yang, CPA, CA. LPA. is the principal of Yang Chartered Professional Accountant P.C., which is an CPA firm specialized in dentistry. John is a frequent speaker on various dentistry topics, including Canadian income tax planning, wealth management, dental clinic management and dental clinic performance analysis, and dental clinic transaction planning, etc.
If you find the above article to be interesting and entertaining, and would like to find out a more customized accounting and tax solution for your and your family, please feel free to reach out to John Yang at jyang@johnyang.ca.
