Saving taxes involve planning and taking action before the tax savings window closes. Trying to save taxes when completing your personal or corporate tax returns is often too late, like closing the barn door after the horses have left.
There are tax planning and saving ideas dentists should consider implementing before 2024.
1. Alternative Minimum Taxes (AMT)
When dentists and their family members sell shares of their dentistry professional corporation (DPC, sell their practice), they may be able to save taxes by using their lifetime capital gains exemption (LCGE) to shelter some or all of the resulting capital gains. However, there are tax rules, Alternative Minimum Taxes (AMT), which often trigger an extra tax bill on the sale of the DPC shares, even though dentists use their LCGE. In 2024, AMT rules will change, likely increasing AMT for most vendors. Therefore, to the extent possible and practical, a dentist may save taxes and money by selling their dental practice (DPC shares) in 2023 as opposed to 2024.
The same concept may also apply to any other sale of shares/investments which triggers significant capital gains (i.e., real estate) – it may be better to sell in 2023 compared to 2024.
2. Tax Write Off Relating to Purchases of Big-Ticket Items (Equipment, Software, Hardware, Renovations, etc.)
The tax savings window allowing 100% tax deduction and write off of big-ticket items including equipment, software, hardware, renovations closes at the end of 2023. Therefore, consider buying, not leasing, these items before 2024. To qualify for the 100% tax deduction, also ensure that the item purchased is “placed in service” and ready to be used by December 31, 2023.
3. Capital Gains Strip
A tax savings window/maneuver, involving reorganization of corporations, including a dentistry professional corporation, resulting in tax savings of about 20% likely closes at the end of 2023. This maneuver converts a dividend which may be taxed as high as 47% into a capital gain, which may be taxed as high as 27%, thereby generating a 20% tax savings. This maneuver will trigger a tax bill sooner but at a lower rate. This maneuver is complex and there may also be tax risks even in 2023. Ensure to discuss in detail with your accountant/tax advisor.
4. Donations
Consider making all of your annual charitable donations by December 31, 2023, to ensure you will enjoy the related tax savings on your 2023 personal tax return.
Also, proposed changes to the Alternative Minimum Tax (AMT) in 2024 may reduce the tax efficiency of making significant donations after 2023. Consider making larger donations by the end of 2023 to avoid the possible impact of AMT in 2024.
5. Trigger Tax Losses in 2023
If your non-registered investments triggered overall net capital gains so far this year in 2023, review your other investments which may be in a loss position. If consistent with your investment goals, consider selling investments in a loss position before December 27, 2023, to enable the resulting capital loss to offset your other capital gains for the year, hence resulting in a lower tax bill. If you do so, please ensure you do not buy back the same investment for at least 30 days, as doing so could disallow the capital loss.
6. Tax-Free First Home Savings Account (FHSA)
If you are at least 18 years of age, do not currently own a home as your residence in the year and also did not own any such home during the preceding four calendar years, you can qualify to contribute up to $8,000 for 2023 into the FHSA, which is a savings account to help save for the future purchase of a home. For 2023, if you qualify and contribute up to $8,000 by December 31, 2023, you can claim a deduction for the amount contributed on your 2023 personal tax return. Our clients often lend their children money to buy a home. Doing so will multiply the principal residence exemption, thereby avoiding any taxes on the gain when the property is sold, provided certain tests have been met. Document the loan to children in the unlikely event that they get divorced or there is a relationship breakdown.
7. Sale of Practice to Next Generation
A dentist who is planning to sell/transfer a dental practice to a child should consider some new tax rules which take effect on January 1, 2024.
Two years ago, the tax rules were amended to allow a parent to transfer any business to the next generation in a tax efficient manner. Prior to this change, the tax rules were very unkind to intergenerational transfers of businesses, including dental practices. However, earlier this year the government proposed a number of restrictions on how a business can be transferred to the next generation in a tax-efficient manner. Such restrictions are scheduled to take effect in 2024. Hence, a dentist should consider transferring the practice to a child by the end of 2023 to avoid these new restrictions. Ensure to discuss this further with your accountant/tax advisor.
8. Land Transfer Tax (LTT) on luxury homes in Toronto
The city of Toronto has proposed a significant increase in LTT payable on the purchase of homes valued at $3 million and higher to take effect in 2024. Anyone considering the purchase of such homes should save a considerable amount of LTT if the closing date can be arranged on or before December 31, 2023.
9. Repayment of CEBA loan
Most dental practices qualified for a CEBA loan during the pandemic. Including the subsequent increase, most received a total loan for $60,000 (i.e., original $40,000 plus subsequent $20,000), which required a repayment of only $40,000 with the other $20,000 being forgiven. In order to benefit from the forgiven amount, please ensure the repayment is made no later than January 18, 2024. This date is an extension from the previous repayment date of December 31, 2023.
About the Authors
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca / louise@dcy.ca / basil@dcy.ca / eugene@dcy.ca . Visit our website at www.dcy.ca. This article is intended to present ideas and is not intended to replace professional advice.
