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The 2024 Federal Budget: What Dentists Need to Know

By May 7, 2024May 17th, 2024Corporate, Selling A Practice

On April 16, 2024, the federal government released the 2024 Canadian Federal Budget, introducing a series of tax changes to fund initiatives such as housing and affordability. One of the most notable changes is the increase in the capital gains inclusion rate, which significantly impacts dentists who plan to sell their dental practice. Here are some of the highlights you need to know.

Increase to Capital Gains Tax

Capital gains are the profits made by an individual or business from the sale of assets, such as shares of a corporation (e.g., a dentistry professional corporation), dental practice assets (e.g., goodwill, equipment, supplies), or real estate property. Under the 2024 budget, there is a significant change in how capital gains are taxed, to be effective June 25, 2024:

  • For Corporations
    • The taxable portion of capital gains (the inclusion rate) will increase from 50% to 66.67%.
  • For Individuals (including Trusts or Partnerships)
    • The first $250,000 of capital gains will remain at the 50% inclusion rate, while capital gains exceeding $250,000 will be taxed at 66.67%.

This is Canada’s first capital gains rate increase in 25 years. The federal government justifies it as a necessary step towards generational fairness.

Increase to the Lifetime Capital Gains Exemption

The Lifetime Capital Gains Exemption (or LCGE) is an exemption available under the Canadian Income Tax Act, which allows individuals to exclude a portion of capital gains from being taxed when selling shares of a qualifying small business corporation.

The 2024 exemption limit is currently $1,016,836. Under the new budget, the government plans to increase the exemption limit to $1,250,000, with indexing scheduled to resume in 2026.

While eligibility is nuanced, it is safe to assume that if you run your practice through a properly structured DPC, the LCGE will be available to you. However, you need to remember that the total LCGE amount available accumulates throughout your lifetime and is not reset each time you earn a capital gain. Check out this post for more information on the LCGE and how it applies to dental practice sales.

How Does it Affect Dentists?

Is this tax hike an unfortunate policy change for dentists? Yes. Is it a retirement-altering change? Not necessarily.

There are many “if” factors that determine whether the capital gains tax hike will negatively affect you if you choose to sell your practice or practice-related assets. Such factors include whether you practice through a DPC, who the shareholders are, and how much of your LCGE you have available.

If you are a dentist contemplating selling your dental practice, you must carefully consider the timing and structure of the transaction, particularly if selling shares of your DPC. After evaluating your options, it may make sense to take particular action now. Such actions could include accelerating a sale to realize capital gains under the current, more favourable tax rates or potentially “crystallizing” capital gains before the new rates take effect. Another strategic response could be reorganizing your DPC to involve your family in the ownership structure, allowing the use of their LCGE, and potentially mitigating the impact of the increased rates.

Bottom Line

The 2024 federal budget brings significant changes that could influence how dentists manage their dental practices. Understanding these updates and taking proactive steps, if necessary, is crucial. If you are concerned about how these changes might impact you or need more information, please contact the DMC team. We are here to help you navigate the changes and ensure your dental practice aligns with the new landscape.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.

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