The Trudeau government hasn’t been friendly to dentists’ pocketbooks. And here are some things to watch out for in the upcoming federal budget:
Small Business Tax Rate
With their first budget, they made it harder for certain business structures to multiply the use of the small business tax rate (currently 15% on the first $500k of active business income earned). Imagine this: a dentist has a professional corporation and their spouse has a hygiene or technical services corporation (which provides services to the professional corporation). Previously, those 2 corporations, so long as they were owned by the spouses separately, would have each enjoyed the 15% tax rate on the first $500k of active business income. But with the last Federal budget, those corporations became associated and basically have to share the $500k. There was talk of making this 15% tax rate available only for small business owners who had a set number of employees (like 6; as apparently they’re doing in Quebec), that luckily didn’t happen. But that is ONE of the things to watch out for in this upcoming budget.
Next, they made it more costly to sell assets than before. That’s because goodwill – the asset which makes up the biggest portion of the purchase price for a dental practice – is now taxed more like a capital gain (25%) instead of what it previously used to be taxed at (closer to 12%). This makes it even MORE appealing for a dentist to want to sell shares. But…
Purifying Before a Sale
Then came changes to the way in which dentistry professional corporations, to be purified so that the shareholders could take advantage of the lifetime capital gains exemption, were taxed. The government made it harder to remove non-active business assets out of the corporation on a tax-free basis. There are a myriad of rules (which I’ll discuss in an upcoming blog post) which came into play. Sufficed to say: if you’ve got too many non-active business assets sitting in your dentistry professional corporation and you wait until you’re about to sell before removing them, you’ll likely PAY capital gains tax on moving those assets (whereas before, they could have been transferred on a tax-free basis as an inter-corporate dividend).
Whole Term Life Insurance
Last December, again as a result of changed made by the last federal budget, many of my clients rushed to buy whole term life insurance through their corporations before new tax rules took effect January 1 2017 (which would make it more expensive to use these assets to withdraw money tax-free from your corporation).
With respect to capital gains, there’s a lot of talk that they’re going to increase the inclusion rate (currently 50% of your capital gain is taxable) of your capital gain. This means that, for example, if they increase it to 75%, then only 25% of your capital gain will be tax-free; the remaining 75% will be taxed at your marginal tax rate.
Higher Tax Rate
A new tax bracket for those making over $202,800 was introduced with a tax rate of 33%. For those making over this amount, they will be paying more in tax than they would have otherwise.
Dentists were hit pretty hard financially with the last federal budget. I guess the everyday Canadian may see dentists as a group doing well financially (e.g. 2015 statistics Canada data from Ontario dentists’ income tax returns shows $200k net income on average), so no one is crying over spilled milk. The government needs to raise taxes from those who are well off in order to pay for infrastructure. But by over taxing small business – which employ so many people – the government could be hurting the economy. I have a feeling, no matter what the government does to try to make it more difficult for hard working people to save a buck, some will always find a way to do so. Risk-taking, coupled with clever arguments, will result in different strategies. And then it’s up to the tax courts to figure out whether the taxpayer was entitled to structure their affairs in the way that they did to legally avoid (not evade) tax.
We’ll circle back to the budget when it comes out. Hopefully, with the uncertainty following the U.S. election and the improving Canadian economy will cause the Trudeau government to ‘chill out’ when it comes to taxing small business owners – including dentists!