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Dr. Luisa Schuldt (LS): Welcome to Brush Up, brought to you by Oral Health. I am your host for today, Dr. Luisa Schuldt. I am a periodontist and prosthodontist out of Font Hill, Ontario. Our guests today are David Chong Yen and Eugene Chu of DCY Professional Corporation. They are highly skilled tax specialists and they’ve been advising dentists for decades. Today they are going to give us some tips and discuss, in general, tax planning. Welcome Eugene and Dave.
David Chong Yen (DCY): Thank you very much for having us, it’s a privilege and a pleasure to speak with your readers and members. Let’s get into this tax update! If I sound excited it’s because saving money is for everyone and that’s the whole purpose of today’s session. So things to help dentists, year-end tax planning ideas. So number one tax planning idea is COVID tax rules. During COVID, the government instituted certain tax rules to help people save money. Let’s get into that. So buy – and I emphasize the word buy, not leasing – buy software, hardware, equipment, renovating your office prior to 2024 (i.e. between now and end of 2023), it’s going to save you taxes. Why? Because the government made an exception to permit 100% tax deduction in respect of those purchases. Bottom line: buy, don’t lease, any software, hardware, equipment, and renovations that you need. So that’s item one. Eugene, you had some comments there.
Eugene Chu (EC): To add to Dave’s point, we’re talking about year-end planning but it’s not the calendar year end because, if you have a corporation, every corporation has a different year end. So you should really know when your corporations year end is and try to buy those renovations, that equipment, the software, etc. before, so that you can have that tax deduction in that year end, so you can get that tax write off faster. It’ll save you taxes immediately versus if you wait till after year-end, then you have to wait a whole other year before you get any benefit to the to the tax. To add to that, the 100% right off is for, you know, equipment, leaseholds, computer software, etc. but the government also expanded some benefits for people who were buying building or renovating their building. So if you live in certain geographic areas in Ontario, you can get up to $90,000 back from the government for buying a building. So the building can’t be in a populated area, such as Toronto, but in more remote areas you can get up to $90,000 if you buy a building or if you renovate your existing commercial building before 2024.
DCY: Excellent point.
LS: I understand that there are tax benefits for everyone, independent of where you reside. The $90,000 is just something additional that will be admitted for them. Okay.
DCY: Yes, and Eugene, you mentioned about the home buyer’s plan. Expand on that home buyers plan.
EC: Right. So during COVID, house prices went up again and the government is implementing a new program for 2023. So this program will allow first time home buyers to save faster for their down payment. So if you’re a dentist and you have children, you know, turning 18 or older and they’re looking to buy a house, you might want to help them invest in this new hack, this new first time homebuyers account. You can invest $8000 a year, up to $40,000, and the benefit of it is that it combines the best of both worlds of the RSP and the tax-free savings account. So when you contribute $8000, your child or whoever is investing in this first time homebuyers account, will get a tax right off, so the deduction from their income the $8000, so they get some tax savings from that. And then whatever it grows to. So if you invest, it generates interest, it generates dividends, etc., capital gains, that income is tax free. And then they can withdraw that money toward the purchase of their home and that’s also tax free. So just like a tax-free savings account, you could take the money out and you don’t have to pay tax on it. But just like an RSP, you can put the money in and you get a deduction for it, so it’s the best of both worlds. That’s going to be starting in 2023, and so that’s a good way to help your family to save money towards their goals of acquiring a home in the future.
DCY: Excellent point, Eugene. Let me add, some dentists often say to me, “Dave, Eugene, I want to buy a home for my child or help them buy a home, but I’m concerned that they might get divorced, etc., and then I flushed that money down the toilet, so to speak. Can you give me some practical tips on how to minimize that loss if it ever arises because of an ex son-in-law or daughter-in-law divorcing my son or daughter?” And the answer is yes. What we recommend our clients consider is lend money to their child. And actually have the loan documented. “Dave, Eugene, what’s the benefit?” Benefit is, if your child ends up getting divorced, then that loan will reduce how much your ex in law gets because it’s a liability. I would make sure you document that loan. That practical idea extends beyond just lending for home. Example: many of our clients send their children to university. They may go to all different schools and, especially if it’s in the states, we’re talking about hundreds of thousands of dollars. So what we suggest our clients do is lend that money, document the loan, and in an unlikely event the child gets divorced, that loan will reduce what the ex in-law gets. Then they’ll say, “Dave, what happens if I die? What happens to that loan that my child holds?” Well, you can work with your estate lawyer, but some of our clients in their will may forgive that loan upon their passing. So something to consider. Okay, let me transition to another practical idea, which is using family members in the tax-savings game. So the way to save taxes legally, effectively, efficiently is to use various family members in the tax-savings scheme. Big picture: that’s the advantage. The disadvantage is if you have a breakdown in the relationship with that family member, then what I’m about to say may not be the smartest thing. But assuming you don’t have a breakdown in the relationship, it works well. Here is how to implement. Pay family members a reasonable salary for the work they do in helping you with your practice. They don’t have to be physically at the office, they could be working remotely. Let’s say they went to UBC and your practice is in Toronto or in Ontario, they could be helping you design a website, etc., and you can pay them a reasonable amount for that. So use family members in the tax-saving scheme. Now, as an offshoot of that idea, if they work 20 or more hours per week throughout the year on behalf of the practice doesn’t have to be physical in the office, could be working remotely – then is there a shareholder, it could be intact if you could pay them dividends, and that will further increase lever the tax savings. Eugene, elaborate on that for me a little bit, knowing that we have 20 minutes or so.
EC: One of the questions a lot of dentist ask is what’s a reasonable salary to pay our family member? You’re looking at what you would pay a stranger to do the same or similar work and that’s what you pay, that’s what’s considered reasonable, right? So if you were going to hire someone to build you a website and it cost you $10,000, then that would be what you could pay your child to build that same website, to maintain it, etc. It’s important to keep in mind that in Canada the first about $15,000 is tax free, so if you were to pay your child or a family member – that has no other income – $15,000 and they would get $15,000 tax free from your corporation and they would not have to pay any personal taxes on that. And what could they do with that $15,000? Well, go back to the last point where with the new homebuyers account: there is $8000 there, you have your TFSA, there’s $6000 there, so now your family has from that $15,000, 14 of it is accountable in the form of some kind of investment for their future, right? And that’s another tax-savings tip, is that the person that should be paying for all the household expenses –tuition for the kids, the vacations, etc. – should always be the richer family member, so typically that would be the dentist. That allows the poorer family members – the spouse, the children, etc. – to invest that money and have that investment income grow in their name and not yours. If your salary is $200,000 or more, you’re in the 50% tax bracket. So if you make a dollar of interest, $0.50 is going to the government, right? Versus if your kids or your spouse in a lower tax bracket, their investment income will grow with a lot less tax. If you put it in the TFSA or that new homebuyers account, then it’s basically tax free and that’s how you can have the whole family benefit from splitting income.
DCY: Thank you, Eugene. And we’ll often hear about this professional corporation. It makes sense to set up a professional corporation if you’re making more than $170,000 and if you can afford to leave much of the money that you’ve made inside the corporation. If you need to take out all of the money from the corporation in order to pay your student loans back or to reduce your home mortgage now that mortgage rates have gone up, then the benefit of a professional corporation is very little. And then you have to weigh that against the cost of setting it up and maintaining it. There are some benefits. So, Dave, what’s the big benefit of having a professional corporation? One benefit that comes to mind is the first $500,000 of income of the professional corporation is taxed at 12.2%, right? Compared to the top tax rate of about 53.53%. So that’s one benefit. Another big benefit is this lifetime capital gains exemption. What’s that? How much is that, Eugene, starting in 2023?
EC: 2023 is going to be about $970,000.
DCY: So that’s the capital exemption and let’s bring it down to brass tax. How much actual dollars savings in the individual spot does that $970,000 lifetime capital gain exemption represent?
EC: It’s about $260,000. So you have a $970,000 gain and that’s shelter and that would result in a taxable of $260,000. But since you have the capital gain exemption, that taxable disappears because of that exemption. So $970,000 would result in $260,000 more in your pockets if you were to sell your dental practice.
DCY: So there is a big benefit in having a professional corporation, especially if you have your own practice, i.e. not just as an associate. And that is the lifetime capital gain exception. Now, if one person can save that much, can we multiply those savings, Eugene?
EC: For sure. Just we always want to involve the family in the tax savings game. So including family members as shareholders in your professional corporation will allow you to utilize their lifetime capital gains exemption. So now if you have 3-4 family members, now you have $970,000 times three or four people, right? So when it comes time to sell your practice and you sell it for several millions of dollars, each family member who holds equity shares in your company will basically save you $260,000.
DCY: And that family member includes your spouse, your parents, and your children, so it would not include your cousins, your in-laws, etc. So that’s the lifetime capital gain and the multiplication of that. Okay, switching gears to the other item and that is with respect to HST. HST, and this one you might want to pay attention to. I’m going to give you a panoramic perspective. There were two recent cases involving HST (actual cases went to the court, kind of thing) and they had a decision. The most recent case involved Davis Orthodontics – I can say the name without breaching confidentiality because it is public information, so if you Google it, you’ll see the actual case. Davis Orthodontics, not to malign them, but it’s public information. What can we take from that case? Davis challenged and won his position or veer position and that is they can get HST refund of certain expenditures made. So don’t want to get too much into the detail of it because you might benefit from actually reading that case, which you can Google ‘Davis Orthodontics HST’ and you’ll see it pop up. The bottom line is you might want to touch base with your own advisor, ask them, “Hey, look, I’m a prosthodontist, I’m a periodontist, I’m an orthodontist, would it be cost beneficial for me to be A) a HST registrant? (So you have to register first) And then B) if I was, how much of a refund might I expect?” So that’s one item to consider. And let me leave you with the last item that is the gift card comment, which Eugene will make.
EC: In the past, you were allowed to give non-cash gifts to employees, up to $500, and the benefit of that would be that the staff didn’t have to pay any income taxes, so it wouldn’t go on payroll. There’s no CPP or EI from the employer perspective or the employee’s perspective. An employee would then get basically a $500 gift tax-free, and that would help with retention, etc. So the CRA recently has made a change that allows gift cards to be considered as non-cash. In the past, gift cards were basically the same as cash, that they would want it on their T4s, they’d make it taxable, and it made it very hard to administer gifts to all your employees. But the CRA has changed their stance on that, so now you can give gift cards up to $500 to each employee. No, that doesn’t include family members. Family members who are employees are not eligible for this, but non-related employees can get gift cards for $500 and they don’t have to pay taxes on that $500 and the employer can save some payroll taxes, CPP, EI. So that’s something for the holiday season that hopefully will help you show appreciation to your staff who’ve been working through COVID. And it’s a challenging labour market out there so any little bit helps.
DCY: Excellent point, Eugene. Very topical, very relevant. Thank you very much for hosting this event. Thank you, Dr. Luisa, for introducing us and for hosting this event, as well as your team. Greatly appreciate it.
LS: Well summing things up thank you for the very valuable information. I hope everybody has the opportunity to put some of these tips into practice. Thank you, Eugene. Thank you, David.
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