By now, you have likely heard of the government’s updates on the proposed tax changes, which is a mixed bag of good and bad news for dentists. Here is what you need to know and the actions you should consider.
1. Federal small business tax rate
The government will lower the Federal small business tax rate:
- 0.5.% decrease from 10.5% to 10% effective January 1, 2018
- A further 1% decrease from 10% to 9% effective January 1, 2019
As a result of the above, the combined Federal and Ontario provincial corporate tax rate for taxable income from an active business up to $500,000 will decline from the current rate of 15% to 13.5% effective January 1, 2018 and 12.5% effective January 1, 2019 for all professional, hygiene or technical service corporations. If your corporation’s fiscal year end is other than December 31, then the new corporate rate will be pro-rated based on the period before and after these effective dates. These rate changes do not apply to, or affect the taxation of investment income in the corporation.
A reduction of the small business tax rate means there is a greater tax deferral from having a corporation. A tax deferral means paying taxes later as opposed to sooner. A tax deferral exists because the corporation is paying a lower tax rate than the individual’s personal tax rate of up to 53.53%. If you have not already done so, consider setting up a professional/hygiene/technical corporation to take advantage of the tax deferral. Speak with your tax advisor to determine whether it makes sense for you to have a corporation as it would depend on your individual goals and financial situation.
2. Pay out dividends to family members before December 31, 2017
If the new rules take effect on January l, 2018, it may become very difficult to justify the dividends your family was receiving in the past. We recommend reviewing your current financial situation to see if paying out a larger than normal dividend to family members in 2017 is worth while. You should consider:
- How much cash you have in the corporation to be paid out;
- How much cash your corporation can normally generate each year; and
- What is the retained earnings balance on your balance sheet.
3. Review eligibility of your Corporation for the Lifetime Capital Gains Exemption (LCGE)
The government WILL NOT limit the LCGE for your family per their October 16, 2017 announcement. A common sense and conservative approach, in our opinion,
is to crystallize the LCGE before the government threatens to take this tax savings opportunity away in the future. We have written several articles in the past about the various tests involved in qualifying for the LCGE. In many cases, the primary obstacle is having too much inactive assets (i.e. cash, insurance and investments)
inside your corporation. We suggest reviewing the amount of cash, investments and insurance policies you have in your corporation and noting them down. You
should be reviewing the fair market value of your investments and cash surrender value of your insurance policies and not the cost/book value. The fair market value would be stated on your monthly investments statements and you would need to speak to your insurance advisor for the cash surrender value and adjusted cost base of any life insurance policies.
4. Review your shareholding structure
You may have setup your corporation over a decade ago and may not recall who owns what shares. Reviewing your share structure with your accountant will help them identify what can be done to maximize tax savings now that your family’s entitlement to claim their LCGE is not restricted. If you have qualifying family members who are not equity shareholders of your PC/HSC/TSC, consider making them equity shareholders to multiply the tax savings related to the LCGE.
5. Pay out your Capital Dividend Account |CDA) balance
As a matter of practice, paying out the CDA balance as soon as you can is always a good idea. This account holds the tax free portion of any capital gains your corporation realizes. There is no harm to pay it out early as the money is tax free. We don’t expect the government to eliminate any existing CDA balance, but we can never be too sure. Hence, as a precaution, you should consider paying out the CDA balance as soon as possible where applicable. It takes time for the
CRA to confirm the existing CDA balance and then to file the special election to pay the balance out, so plan accordingly.
We have always suggested proactive tax planning which rings especially true this year.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP and Eugene Chu, BAFM, MAcc,CPA, CA of DCY Professional Corporation Chartered 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.orgemail@example.comfirstname.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.