I wish to share some common tax pitfalls and ways to avoid them.

1. Often times the dentist and his/her family member may buy or lease a car in the name of the PC and have the PC pay for all car expenses including gas, repairs, maintenance, etc. The tax department has a trap known as the standby charge and operating cost benefit. In essence, if the dentist or the family member uses the car less than 90% of the time for business, this trap will hurt the dentist and/or their family member as 24% of the original cost of the car or 2/3 of the annual lease cost will be added to the individual’s income as if he or she received a salary equivalent to 24% of the cost of the car or 2/3 of the annual lease cost.  Consider charging a tax free allowance to the PC as follows: The PC will pay 52 cents/km (first 5000 km per year) and 46 cents/km for each additional business km driven.  The recipient will get this amount tax free and the company will get a tax write off for the amount paid. Note: business mileage excludes driving from one’s home to their dental office (vice/versa). If one drives indirectly, say from one’s home to their accountant’s office and then to the dental office, then this is considered business mileage.

 

2. A dentist may choose to pay his/her spouse or family member unreasonably large amounts on the premise that if the tax department disallows the unreasonable portion that the only consequence will be  reduction in expenses and the spouse or family member will be taxed on the reduced amount.  The tax department traps such scenarios by reducing the tax deduction taken by the dentist to that amount which they deem appropriate or reasonable, while still taxing the recipient/family member on the higher amount. Hence, this could result in double taxation.

 

3. Given the recent stock market collapse, many dentists are selling shares and because they believe the shares are a good investment, they subsequently buy them back right after they sell the shares. They do this in order to trigger a capital loss while still owning the shares. The tax department has created a trap known as the superficial loss rules. This set of rules denies the loss except where the dentist or taxpayer waits more than thirty days before buying back the shares and does not purchase any additional shares 30 days prior to the sale. Another way of getting around this trap is by selling the shares and having the dentist’s adult children or parents buy back the shares immediately after he/she has sold them.

 

4. Some dentists or their family members have businesses which continuously generate losses. Their rationale is that these losses will reduce their income from other sources.  The tax department could trap this scenario by applying a test known as reasonable expectation of profit (REOP). REOP basically questions whether or not one can generate a loss on a continuous basis and whether this loss is reasonable. If it is deemed to be unreasonable then the loss may be denied.  Simply stated, where one has a side business which generates losses year after year, there is a greater likelihood that this loss will be challenged by the tax department and hence greater chances of the taxpayer being audited.

By knowing the various tax traps, one can better navigate around them with some peace of mind.