April 3, 2020
by David Chong Yen, CPA, CA, CFP, Louise Wong, CPA, CA, TEP, Basil Nicastri, CPA, CA and Eugene Chu, CPA, CA
Use family members in the tax savings game. Many dentists have a dentistry professional corporation (DPC). DPC’s if structured appropriately facilitate “sharing of income”. Family members may be eligible to receive dividends provided they work 20 or more hours per week on behalf of the practice throughout the year. A family member could earn $30,000 in dividends from a DPC and pay less than $1,000 in personal taxes, assuming they have no other income. A DPC if structured appropriately enables the lifetime capital gains exemption (LCGE) to be multiplied. Each LCGE of about $883,000 results in tax savings of up to $236,000. LCGE means when the practice (shares) are sold at a gain/”profit”, the first $883,000 of gains will not be subject to regular income tax.
Paying family members who work at the practice a reasonable amount (similar to what you would pay a stranger) results in tax savings. Let’s examine this case. A dentist making $200,000 in personal income pays $70,000 in personal taxes. A dentist making $135,000 and spouse making $65,000 pay $52,000 in personal taxes. In other words, sharing income in this example saved $18,000 in taxes.
The tax department made changes to allow accelerated tax deductions/write-offs when you buy equipment, computers, software and other capital assets. In light of infectious disease protocol and COVID-19, consider upgrading equipment such as sterilizers/autoclaves. Under the accelerated depreciation rules, a $10,000 equipment purchase would provide tax write-offs as follows:
Tax write off on Equipment
Year 1 Year 2 Year 3 Year 4
Old Rules $2,000 $1,600 $1,280 $1,024
Rules $3,000 $1,400 $1,120 $896
Many dentists have annual holiday parties especially in December to celebrate the festive season. Many record these expenses as meals and entertainment which is only 50% tax deductible. The tax department allows 6 meals to be deducted 100% provided all staff are invited. Forgetting to reclassify these expenses into a separate category means you lose out on 50% of the tax deductions.
Staff are allowed two non-cash gifts which total $500 tax-free. As an employer, you would not have to withhold any CPP, EI or income taxes from this gift. Make sure these expenses are identified as employee gifts as they may appear personal in nature and recorded as such.
Ensure you have the prerequisites for claiming certain tax deductions. For example, child care costs can only be claimed where the lower income spouse has salary or business income. Where a spouse is only receiving dividends, they won’t be able to claim child care expenses.
If you are concerned that the government may remove the LCGE, there is a maneuver that will allow you to claim the LCGE while still owning your practice. This allows you to take the tax savings off the table and not have to worry about if or when the government might change or remove it.
Lend money to “poorer” family members at the current prescribed rate of 2%. Document the loan. Interest on the loan must be paid for each calendar year by January 30 of the following year and all future years.
Taxes will be saved provided the money is invested and generates a return greater than 2%. For example, where one spouse who is in the highest tax bracket (53.53%) loans $100,000 to their spouse who is in the lowest tax bracket (20.05%) who invests it and earns 5%, tax savings of about $1,000 (($3000 X (.5353-20.05)) could be achieved.
Registered Education Savings Plan (RESP) contributions is a tax efficient way to save and pay for your children’s post-secondary education. The Federal government provides a grant/”gift” equal to 20% of the first $2,500 of annual RESP contributions per child or $500 annually.
Gift publicly traded shares, which have risen in value to a charitable organization. You will get a charitable donation receipt for the fair market value of the shares donated. You will not pay any personal taxes on the gain.
You will save taxes by optimizing the amount of salaries and dividends you receive from your dentistry professional corporation. For any given individual, depending on your circumstances, there is an optimum level of dividends and salaries which minimizes taxes. Speak with your advisor.
Saving taxes, like enhancing your dental care, is a year-round activity. Your financial health depends on it.
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 firstname.lastname@example.org / email@example.com / firstname.lastname@example.org . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.
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