Covid has resulted in many costly and some argue necessary government programs. Pundits suggest the top 1%, including dentists, will end up paying for these programs. How? Speculation is rife that tax breaks and/or tax rates will rise for this 1%. The next federal budget, which will be unveiled on April 19, 2021, might increase the dentist’s and his/her family’s tax bill. This article will be of interest to dentists, especially those who have their own dentistry professional corporations, as well as those who own their dental practice.
1) Inclusion rate of Capital Gains
Currently, 50% of capital gains are subject to taxes. The other 50% of a capital gain is tax free. Discussion is rampant that more than 50%, possibly 75%, could be taxed, leaving only 25% tax free. Previously, the inclusion rate rose from 50% to 66.66% and then to 75% before being reduced back to 50%. Hence, history supports a higher inclusion rate of capital gains thereby, effectively increasing taxes on capital gains.
Examples of capital gains include:
i) Sale of shares of one’s dental practice
ii) Sale of shares e.g., Apple, Facebook, Shopify, Google, etc.
iii) Sale of real estate (other than principal residence)
2) Elimination or restriction on Lifetime Capital Gains Exemption (LCGE)
Currently, there is a Lifetime Capital Gains Exemption (LCGE) of $892,218 (in 2021) which equates to a tax savings for each individual in Ontario of about $235,000. The LCGE effectively shelters capital gains up to $892,218 when one sells shares of their dental practice from taxes*. In 2017, there was a proposal to eliminate and/or restrict the usage of the LCGE. However, after public outcry, the government relented.
WHAT ACTIONS SHOULD BE TAKEN NOW BEFORE THE TAX SAVINGS WINDOW CLOSES?
1) Claim LCGE now, while still owning your dental practice. A tax maneuver known as crystallization of the LCGE is available to dentists. This maneuver will lock in the tax savings amounting to about $235,000, while the dentist still owns their practice. If this “loophole” is subsequently closed after you implement this tax-savings maneuver, you would have already realized this tax savings.
2) Multiply the LCGE by involving family members in the tax savings game. If one person saves $235,000, four will save $940,000. There is a misconception that children must be 18 and older to engage in this tax-savings game. Indeed, there is no restriction on the age of a child when it comes to using them to multiply the LCGE. When you and your family members sell your practice to a buyer/3rd non-related party, it may be possible to shelter the entire selling price from taxes* by using family members in the tax-savings game.
3) Implement a capital gains strip maneuver. This maneuver could be done in connection with your dentistry professional corporation (DPC), effectively stripping cash and/or investments which have accumulated inside your DPC and having this cash taxed as a capital gain at 27% instead of as a dividend at 47%. A tax savings of about 20% can be realized from implementing this maneuver. However, there are tax risks involved, so be sure to address these risks with your tax advisor.
It is important that we each pay our fair and reasonable share of taxes. However, it is also prudent to implement tax-savings strategies which minimize our tax bill. Saving taxes requires visualizing the future, anticipating any hurdles, and implementing a plan to save taxes before the tax-savings window of opportunity closes.
*except, Alternative Minimum Taxes (AMT). When one pays AMT, they can recover/get back the AMT paid over the next seven years, provided they have minimum levels of future income.
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 / 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