January 29, 2021
by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA
COVID has fundamentally changed how we live and how businesses operate. It has taught us the importance of being resilient and to look for opportunities even in dire situations. As a result of COVID, many dentists have experienced:
While you may have only been focused on the government handouts such as wage subsidies, rent subsidies and interest-free loans, you may not have seen tax opportunities that each of the above items presents. With COVID resulting in many expensive government programs, you will want to take advantage of all the tax opportunities available.
Working from Home – Home office expenses, renovating home to facilitate home office
Tax deductions for employees working from home due to COVID are now more accessible. There are two methods to claim home office expenses:
1) Detailed Method and 2) Simplified.
Detailed: You must have worked at least 50% of the time from home over a period of at least 4 consecutive weeks during 2020 or you only use your workspace to earn income and you use it regularly for meetings with clients, customers or patients. You’ll need invoices, bills, receipts, tax form (T2200) signed by employer as proof. Utilities, rent and maintenance can be claimed and there is no limit on the amount.
Simplified (Temporary Flat Rate): You must have worked at least 50% of the time from home over a period of at least 4 consecutive weeks during 2020. No support documentation is required. Eligible expenses are set at a $2-per-day flat rate with a $400 total limit.
If a dentist is using a home office for teledentistry and/or other patient-related services (i.e. charting, treatment planning, predeterminations), they should be entitled to claim some amount for use of home office.
Any family members who provide services to the dental office should also be entitled to claim home office expenses if they work from a home office, even if not on a regular basis.
As an alternative, instead of claiming home office expense on your personal tax return, consider having your Professional Corporation (PC) reimburse you for the relevant portion of your home
office expenses. This allows home office expenses to be claimed as a deduction by the PC directly, in which case you (the dentist) do not need to make any claims on your personal tax return.
Buying PPE, Adding Operatories, Upgrading Software and Hardware
Dentists get a tax deduction in respect to buying PPE, adding operatories, upgrading software and hardware as follows:
The tax department permits a tax deduction equal to the above noted per cent times the cost, in the year purchased. In subsequent years, for PPE and hardware, the remaining balance times the percentage will be the tax deduction for that year. For operatories and software, the cost can generally be fully written off over 5 years and 2 years, respectively.
For purchases prior to 2024, the tax rules currently allow the tax deduction in the first year to be 150% of the above noted rates. Simply stated, buying PPE, adding operatories, upgrading software
and hardware may reduce your tax bill.
Dental Practice Value Decreased – Tax Savings
The dip in dental practice values due to COVID has created a tax savings opportunity for dentists.
Decreased practice values during COVID saves taxes by providing a window of tax saving opportunity to add shareholders to the Professional Corporation (PC) when the value is depressed. In subsequent years, if practice values rise, this appreciation could be engineered to be reflected in these recently added shareholders’ hands, thereby multiplying the Lifetime Capital Gains exemption (LCGE), which in 2021 is about $892,000. Each LCGE is worth about $230,000 in actual tax savings. See example below.
2 Children are not currently shareholders
*Assume value in 2030 is about $3,550,000 and LCGE is still available at that time.
** Assume kids do not sell their shares for at least 2 years since becoming equity shareholders and practice value returns to pre COVID value.
Lower Interest Rate Creates Tax Savings Opportunity
Lower interest rates have created a tax savings opportunity. The prescribed interest rate is defined to be 1% as of January 2021.
Lend money to “poorer” family members at the current prescribed rate of 1%. Document the loan.
Taxes will be saved provided the money is invested and generates a return greater than 1%. For example: 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 4%, a net family tax savings of about $1,000 will be realized.
Tax Lanscapes: December 7, 2020
As of December 7, 2020, the Federal government has spent $240B fighting COVID-19 in 8 months (per CBC News). The above Government assistance will have to be paid for.
We believe dentists and others who are perceived to be the 1% will end up paying for these and other programs/government assistance. Let’s explore some tax saving opportunities while they are still available:
Claim your Lifetime Capital Gains Exemption (LCGE) and still own your practice – 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.
Stretch your donations – Give 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.
Optimize your dividend/salary mix – 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.
Dentists should seize these tax saving opportunities before the tax savings window closes. Dentists are the likely candidates to help pay for costly COVID government programs when those windows close.
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 email@example.com / firstname.lastname@example.org / email@example.com. 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.