2017 was not a good year for dentists and their taxes. Tax announcements made in the summer and later amended in the fall left dentists with many questions and an uneasy feeling. If we can learn anything from 2017, it is that preparation and planning is critical. Starting the new year off right with a tax plan will help ease the stresses of taxes. Here are some planning steps you can take now:
Determine your salary/dividend mix ahead of time
One of the advantages of having a corporation is that you can determine your own personal income and taxes ahead of time. With restrictions being placed on income splitting starting in 2018, more emphasis should be placed on pre-determining the amount of money you take out of the PC so that you aren’t shocked when the tax bill arrives. Some tips to determine the appropriate salary/dividend mix:
- Work backwards by determining the amount of money you and your family need each year. By budgeting and monitoring your personal expenses, you can pinpoint the minimum amount of income you need to take out from the corporation. You should also take into account any personal investment goals you wish to achieve such as maxing out contributions to your Registered Retirement Savings Plan (RRSP) and Tax Free Savings Account (TFSA) or paying down a lump sum towards your home mortgage.
- You need a salary in order to contribute to RRSPs, Canada Pension Plan (CPP) and to deduct child care expenses. If none of these apply to you, then you can consider a dividend only strategy. RRSP, CPP and child care expenses all have various thresholds to meet. For example, a salary of about $150,000 is needed to maximize your RRSP contribution room for the next year, a salary of $55,900 to maximize CPP and salary requirements will vary depending on the number of children and their ages as well as your spouse’s income for child care expenses.
- Don’t save all the money inside your corporation. Taking out very little money from your corporation means you avoid personal taxes, but it also means you are not utilizing the low personal tax rates that are given to you each year. Taking out a dividend of $50,000 annually for 10 years will result in a lower tax bill, if you are not at the top rate, than receiving a $500,000 dividend at the end of the 10th year prior to selling your practice.
Determine if you need to restructure your corporation
The government’s original proposal meant that family members would be restricted from claiming the Lifetime Capital Gains Exemption (LCGE). This caught many by surprise as many dentists had structured their corporations years ago so that they could multiply the LCGE and tax savings and now they were being told they may not be able to. Fortunately, the government took a step back from this proposal and is not imposing those restrictions on the LCGE. Two lessons can be learned from this experience. First, make sure your corporation is prepared for the worst. Corporations with significant cash or investments were caught off-guard as they potentially could have faced a huge tax bill or had to give up the LCGE. In 2018, make an effort to clean up your corporation’s finances so that it can qualify for the LCGE at any given time. This means reviewing your corporate held investments, Universal or Whole Life insurance policies and excess cash and speaking to your accountant on how to extract these assets in a tax efficient manner. Second, take control of the tax saving tools so that you won’t be left vulnerable if the government decides to remove them completely. In the case of the LCGE, this means claiming it now while still owning the practice. The government can’t take away the LCGE if you and your family have already claimed it. This is known as crystallization; speak to your accountant about whether you want this to be apart of your tax plan for 2018. Each LCGE claimed results in a tax savings of up to $220,000. The LCGE and tax savings can be multiplied by making eligible individuals equity shareholders.
Make sure your documentation is in order
Documentation goes beyond just bank statements and credit card statements. In the case of family members who work for your practice, make sure you document all their contributions to the practice. Have copies of the following:
– Job description outlining their role and responsibilities
– Certificates from any dental seminars/courses they attended
– Time sheets for the hours and days they work in and out of the clinic
– Copies of emails and correspondence they have with patients, staff, suppliers, accountants, lawyers etc.
– Documents supporting their work (bookkeeping and payroll calculations etc.)
The government may have imposed restrictions on income splitting with family members, but there is nothing wrong with paying family members a fair and reasonable wage for the work they provide.
Start 2018 off the right way by making it your goal to be prepared for anything the government has to throw at you. If you prepare for the worst, nothing will catch you off guard ever again.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Eugene Chu, CPA, CA and Choy Men Lin*, 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.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.