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Lifetime Capital Gains Exemption for Dentists: CNILs, ABILs and AMT…

By October 1, 2022October 11th, 2022Corporate

Thinking of selling your practice? You should – if you qualify – try to qualify for the Lifetime Capital Gains Exemption (“LCGE“). Why? Because it could save you $240k in taxes!!!! And you can multiply the LCGE if your practice is worth a lot and you set up the share structure properly. Here’s an example:

  1. You (the dentist) have a dentistry professional corporation (“DPC“).
  2. You’ve owned the common shares of that DPC 50/50 with your spouse for at least 2 years.
  3. Your DPC meets all of the asset tests required to qualify for the LCGE (which I’ve previously written about).
  4. You and your spouse bought the shares for $100 each (that’s the adjusted cost base of the shares).
  5. Your and your spouse now sell all of the shares for $1.8-million.
  6. There’s no debt in the DPC when you sell.

Result? How about 480k in tax savings!

Now you know the big fuss about trying to qualify for and use the LCGE.

In this blog, I’ll be discussing some tax nuances which may reduce or otherwise limit a dentist’s ability to use the lifetime capital gains exemption to the fullest extent possible. Yes, I’m talking cumulative net investment losses (CNILs), allowable business investment losses (ABILs), and alternative minimum tax (AMT).

Cumulative Next Investment Losses (CNIL)

A dentist’s CNIL is the amount by which their post-1987 investment EXPENSES exceed their post-1987 investment INCOME. So if they invested and lost money, they have a CNIL balance.

Investment expenses generally include:

  • Net losses from property
  • Business losses from rental property
  • Share of current losses (other than allowable capital losses) incurred as a partner in which he or she is not actively involved
  • Limited partnership losses (other than allowable capital losses) carried forward from previous years and claimed in the current year
  • 50 % of flow-through resource expenditures

Investment income generally includes:

  • Income from property (e.g. interest, dividends, rent, royalties, etc.)
  • Partnership income (other than capital gains) incurred as a partner in which he or she was not actively involved.
  • Amount received in a year in respect of an annuity (other than an income-averaging annuity contract or an annuity purchased pursuant to a deferred profit-sharing plan)
  • 50 % of recoveries of resource expenditures

So how do you calculate an individual’s CNIL account? Well, you need to add up all the INVESTMENT EXPENSES and INVESTMENT INCOME from 1987 onwards. And you wouldn’t be looking at individual investment expenses and income. Investments are pooled.

Now, even if a CNIL exists, so long as the taxable capital gain exceeds the dentist’s CNIL account balance by a sufficient amount, the entire lifetime capital gains exemption can be taken.

Allowable Business Investment Losses (ABIL)

ABILs are a special class of capital losses that a taxpayer incurs on the sale of shares in a small business corporation or when a debt is owed to you by a small business corporation. If you own shares in a small business corporation that has gone bankrupt during the year, it may have been considered disposed of for zero proceeds. Half of a business investment loss is deducted against ALL types of income for up to 10 years (not just capital losses). And here’s the kicker: if an ABIL is realized in the year, whether or not it is claimed on the tax return, it is used in the LCGE calculation. Yikes!

Alternative Minimum Tax (AMT)

AMT has been around since 1986. It tries to make the Canadian tax system fair by forcing high-income earners and trusts to pay some minimum level of tax. AMT is a separate tax calculation. So you calculate your taxes normally and then using the AMT method, you pay whichever taxes are higher. The AMT is based on your “adjusted taxable income”.

Adjusted taxable income is determined by taking your net taxable income and adjusting for certain “tax preference items”. Tax preference items include the LCGE. Your adjusted taxable income is then reduced by a $40,000 exemption and multiplied by the lowest marginal federal tax rate of 15%. Again, if this AMT amount is greater than your net federal taxes payable, the AMT amount becomes your federal tax liability for the year. There is also provincial AMT.

It may come as a shock that taxpayers who otherwise qualify for and use the LCGE must still pay the AMT.

The only good news is that if you do pay AMT, you can carry over the difference between the AMT and your net tax liability for 7 years. This carryover amount can be deducted from your regular tax liability for the next 7 years or until it is used up. So you can use the AMT that you paid as a CREDIT towards future taxes (to the extent that your regular tax liability is over the AMT amount in future years). If you don’t have enough regular taxes payable in the next 7 years, then the AMT credit is lost.