Bookkeeping for Canadian Dental & Medical Practices
- Targeted Accounting
- Bookkeeping
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Table of Contents
The Exempt Supply Problem
Every other business in this series collects sales tax and claims back what it pays. Health practices mostly do neither, and that single fact reshapes the economics of running one.
Most services rendered by physicians and dentists to patients are exempt supplies for GST/HST purposes. Exempt is not the same as zero-rated. On a zero-rated supply you charge 0% but still recover input tax credits. On an exempt supply you charge nothing and recover nothing — the tax you pay on rent, equipment, lab fees, supplies and software is simply a cost.
For a practice paying $120,000 a year in taxable inputs in Ontario, that is roughly $15,600 in unrecoverable tax annually. It doesn’t appear as a line anyone reviews, because it’s embedded in every invoice.
The practical consequences follow directly. Budget in tax-inclusive terms. Compare equipment quotes tax-inclusive. And when weighing a lease against a purchase, remember that the tax on both is a real cost rather than a timing difference.
Key Takeaways
- Most health care services are GST/HST exempt, which means you don’t charge tax — and cannot recover the tax you pay on rent, equipment and supplies.
- Practices with taxable or zero-rated elements may recover part of that tax, and most don’t claim what they’re entitled to.
- Professional corporations are governed by your provincial regulator as well as the tax rules, and who may hold shares is restricted.
- Associate arrangements structured as contracts carry genuine employee-reclassification and PSB risk.
- Because tax on equipment isn’t recoverable, the real cost of a purchase is the tax-inclusive price — which changes lease-versus-buy arithmetic.
Mixed Practices and Partial Recovery
Few practices are purely exempt, and the exceptions are where recoverable money sits.
Certain medical devices and appliances are zero-rated rather than exempt. Orthodontic appliances are the most significant example, and the CRA has an established administrative approach allowing orthodontic practices to treat a portion of the fee as consideration for the zero-rated appliance — which in turn supports input tax credit claims on related inputs. Practices doing meaningful orthodontic work and not registered for GST/HST are frequently leaving a real annual amount unclaimed.
Purely cosmetic procedures performed for non-medical purposes are generally taxable rather than exempt. A practice with a significant cosmetic component may be required to register (the small supplier threshold rules are in our GST/HST guide), and once registered gains partial input tax credit entitlement.
Other taxable elements appear in practices without anyone noticing: renting space to another practitioner, selling retail products, providing administrative services to an associate, or certain third-party reports and examinations not performed for treatment purposes.
Where a practice makes both exempt and taxable supplies, input tax credits are apportioned, and the allocation method must be fair, consistent and documented. This is genuinely technical, and it is worth a specific engagement rather than a general approach — the recovery usually exceeds the cost of the advice by a wide margin.
Professional Corporations
Physicians and dentists in Ontario, Manitoba and British Columbia may incorporate, but a professional corporation sits under two sets of rules at once: the tax legislation, and the governing body for the profession in that province.
The regulator — the CPSO and RCDSO in Ontario, for example — typically dictates the corporate name, requires a certificate of authorisation to be obtained and renewed, restricts the business the corporation may carry on, and — most consequentially — governs who may hold shares. Ontario permits family members to hold certain non-voting shares in medical and dental professional corporations, a provision that does not exist for every regulated profession or in every province.
The tax advantages are the standard ones: the small business deduction on retained income, deferral, and the ability to time compensation. What incorporation does not provide is protection from professional liability — malpractice exposure follows the practitioner regardless of structure.
Where family members do hold shares, dividends to them are subject to the TOSI rules, and professional corporations face a narrower set of exclusions than other businesses. Issuing shares without confirming the TOSI position is the most common planning error in this area.
Associates and Locums
Associate arrangements are usually structured as independent contractor relationships, with the associate billing the practice or retaining a percentage of billings. That structure is defensible when the substance supports it, and precarious when it doesn’t.
The same CRA control tests apply here as anywhere: who sets the schedule, who owns the equipment and the patient records, whether the associate can work elsewhere, who carries the financial risk. An associate working fixed hours set by the principal, using only the practice’s equipment, with no other engagements, looks like an employee.
An incorporated associate faces a second exposure: the personal services business rules. Reducing that exposure is covered in bookkeeping for consultants and professional services. A professional corporation with essentially one client — the practice — providing the services of its sole shareholder is squarely in the zone those rules target, and the consequences include loss of the small business deduction, an additional 5% federal tax, and denial of most deductions.
Locums and part-time associates working at a single location are the highest-risk profile. It is worth reviewing the arrangement properly rather than relying on the fact that it is common practice.
Equipment and Leaseholds
Practice equipment is capitalised and depreciated through capital cost allowance, generally in the class covering furniture and equipment. Computer hardware and systems software fall into a faster class.
Leasehold improvements — the build-out of an operatory or clinic space — are their own class, written off over the term of the lease rather than at a declining-balance rate. Practices that invest heavily in a fit-out should confirm the lease term used, because a short initial term with renewal options produces a different result than a long one.
Because input tax on these purchases is largely unrecoverable in an exempt practice, the capitalised cost includes the tax. That raises the CCA base, which recovers part of the cost over time through deductions — but only part, and slowly.
Practice Cash Flow
Practice revenue arrives through several channels with different timing: patient payments at the point of service, insurance assignment with a lag, and provincial plan billings with their own cycle and their own adjustment and rejection patterns.
Reconcile each channel separately. Rejected and adjusted claims are the most commonly lost revenue in a practice, because a rejection that nobody follows up simply disappears rather than appearing as a bad debt. Track claims submitted against claims paid, monthly, and age the difference the way you would any receivable.
Buying Into or Acquiring a Practice
Practice transitions are among the largest transactions a health professional will undertake, and the structure is settled long before the money moves.
Asset purchase or share purchase. Buying assets means acquiring the equipment, leasehold improvements, patient records and goodwill, with cost allocated across them — which determines your future depreciation and is negotiated in the purchase agreement rather than decided afterwards. Buying shares means acquiring the corporation whole, including its history and any liabilities in it, and is generally preferred by the vendor because it may access the lifetime capital gains exemption.
The allocation of purchase price in an asset deal deserves real attention on both sides, because it is zero-sum: amounts allocated to depreciable equipment give the buyer faster write-offs and the vendor recapture, while amounts allocated to goodwill are treated differently again. It is a negotiable term with a measurable value, and it is frequently signed without anyone modelling it.
Goodwill typically represents the largest part of a practice’s value and is depreciated slowly, so the after-tax cost of a purchase is higher than the headline price suggests. Factor that into financing rather than assuming the purchase price is deductible over a few years.
Patient records carry obligations beyond their commercial value. Provincial privacy legislation and your regulator both govern their transfer and retention, and the retention period for clinical records commonly exceeds the CRA’s six years by a wide margin. Confirm what you are required to keep and for how long before agreeing who holds what.
Buy-ins and partial interests
Buying a partial interest in an existing practice introduces a further question: are you acquiring shares of the professional corporation, an interest in a partnership, or simply a cost-sharing arrangement with separate practices under one roof? These are genuinely different structures with different tax, liability and exit consequences, and the informal version — everyone shares the rent and splits the staff — is the one most likely to produce a dispute when someone leaves.
Whatever the structure, agree the exit terms at the start. Valuation method, notice period, what happens to patient records, restrictive covenants and how a departing party is paid out are all far easier to settle while everyone is optimistic. A practice agreement without an exit clause is the most common source of expensive disagreement in this sector.
Practice Books That Account for Exempt Supplies Properly?
Our bookkeeping service works with dental and medical practices on GST/HST recovery, professional corporation structure, and associate arrangements.
