By Hani Al-Dajane
Recently, the federal government released the 2024 Canadian Federal Budget, introducing a series of tax changes. Proposed changes to the Income Tax Act with regard to the tax treatment of capital gains could impact your decisions regarding such as selling your dental practice. Below is a breakdown of what these changes mean for you and your practice.
What Does Capital Gains Taxes even mean?
Capital gains are profits made on the sale of capital property such as a business. The tax is only on the profit, not the total selling price. If the proceeds from the sale exceed the property’s cost, a portion of the gain is taxable when the property is sold (i.e. capital gains realized). The “capital gains inclusion rate” means the portion of a capital gain that will be taxed.
What Does the Increase in Capital Gains Tax Look Like After 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%.
Dentists , You Need to Understand The Lifetime Capital Gains Exemption
As an owner of a Dental Practice, an important exemption to keep in mind is the Lifetime Capital Gains Exemption (“LCGE”). The LCGE allows you to deduct a portion of the capital gains from the sale of your DPC from taxes, up to a certain limit. Beginning June 25 2024, the amount that will be exempted from tax under the LCGE will increase to 1.25 million (from $1,016,836). Starting in 2025, those with eligible capital gains below $2.25 million will pay less taxes as a result of these changes.
Example:
To illustrate how the LCGE works, consider the example of Dr. Brown, who sells her DPC shares and realizes a capital gain of $1.5 million. Dr. Brown can apply the LCGE exemption to the first $1.25 million of her gain, which is effectively shielded from taxes. The remaining $250,000, however, will be subject to capital gains tax at the current inclusion rate of 50%.
It’s important to note that there several key criteria to be eligible for the LCGE such as that, throughout the 24 months before sale, at least 50% of the FMV of the corporation’s assets must have been used in active business operations in Canada.
Navigating the requirements for the LCGE can be complex and we recommend consulting with Emerge’s team to explore how these rules apply to your business.
How These Changes Impact Dentists?
If you are a dentist contemplating selling your dental practice, you must carefully consider the timing and structure of the transaction, specifically if selling shares of your DPC. Understanding capital gains tax and exemptions can have a significant impact on the net proceeds that you receive from the sale.
At Emerge Law, we can assist you in taking proactive measures before the proposed capital gains inclusion rules take effect on June 25 2024. Some examples of planning opportunities include:
- Accelerating transaction timelines such as sales, reorganizations, estate freezes, etc. provided anti-avoidance rules are taken into account, due diligence can be undertaken, and a fair price can be obtained.
- Choosing the optimal structure of holding capital assets – whether it is a corporation, individual, trust, partnerships or a combination thereof.
These changes to the Income Tax Act should be taken into account when choosing a business structure or when making decisions regarding selling a dental practice. Speak to a lawyer professionals at Emerge Law Professional Corporation to plan your next steps. Understanding these tax changes can help you make decisions that align with your long-term financial goals and ensure you maximize the proceeds from your dental practice.
Thank you to Zainab Alsalihi for her contributions to this article.
The contents of this article should not be construed as legal advice. Please contact Hani Al-Dajane at Emerge Law for any further questions.