Times were good. You know – when government was smaller and left small businesses alone to start, build themselves up, save taxes, reinvest and expand. To create jobs. To run marketing campaigns. To renovate. To spend on innovation. To buy new equipment. To save / defer taxes. To increase the GDP. And now the current government is making it harder by shifting focus. The current government wants to be bigger. Wants to run new and costly programs. Is it just me or does the government not have a clear plan on what they want Canada to be and by when. Their spending is out of control. And who is fronting the bill for all of that? Taxpayers.
And now all small businesses seem to be targeted.
Take for example the following (which came out of the 2017 budget today). The government all of a sudden isn’t happy that businesses structured as corporations can income split among family members to save taxes on the whole. You know: a dentistry professional corporation that has a dentist and their spouse receiving $50k in dividends each instead of the dentist taking $100k personally, which results in significant tax savings. Like I said, the government all of a sudden isn’t happy they can do this. But guess what? That’s the nature of a corporation. That’s how dividends work. They’re not guaranteed forms of payment (like loan repayments are). It’s money generated from a business, for which taxes are paid, and then which can be distributed to shareholders (or not). That’s part of the benefit of having hard-working Canadians TAKE THE RISK of starting / maintaining their own business. Maybe that’s their retirement plan – you know: to keep the money in their corporation instead of in an RRSP and to take it out when they need it (when they do retire)?
So why is the government contemplating taking that away? It seems like they don’t like small Canadian controlled private corporations with only a few employees being used to horde cash, investments, property, etc. and avoid paying taxes. I’m sure they would prefer to FORCE everyone to buy RRSPs and pay for their own retirement (because they don’t trust that Canadians are smart enough to plan ahead and take care of themselves when it’s time to stop working). But small business owners are risk takers and entrepreneurs. They don’t think about retirement. They love what they do everyday and don’t want to be forced to stop. They don’t want to tie their cash up in an RRSP when they need it to expand their business. They could earn much more by reinvesting in themselves THAN BY getting a GIC from the bank or putting it in the volatile stock market.
FYI, the Government also already punishes (with very high tax rates) income earned by a corporation on a passive investment portfolio. But now, per the federal budget, they want to go after that too!
Private corporations exist to help mitigate risks of adventurous Canadians wanting to start their own business WHILE AT THE SAME TIME allowing private individuals to raise money to expand their business (by introducing ownership levels and maybe even allowing the company to raise public funds one day). What does the government not understand about this? Why interfere with that? I thought we were in a laissez-faire socio-economic society! Is the current government trying to drain Canada of all risk-taking, smart business owners? Who then is supposed to employ the vast majority of Canadians? The public sector?
From what I’ve read, here’s the worst part of the federal budget – namely, that the government wants to look at measures (old and new) in order to increasingly tax small business owners:
“The Government is therefore further reviewing the use of tax planning strategies involving private corporations that inappropriately reduce personal taxes of high-income earners. In doing so, the Government will also consider whether there are features of the current income tax system that have an inappropriate, adverse impact on genuine business transactions involving family members. The Government intends to release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses. In addressing these issues, the Government will ensure that corporations that contribute to job creation and economic growth by actively investing in their business continue to benefit from a highly competitive tax regime.”
I don’t agree with the notion that ONLY job creation will save a private corporation from paying more taxes. What if that private corporation invested, as per my opening statements, in running a marketing campaign? In buying new equipment? In leasing new space? There are OTHER things to invest in than just hiring more people. And actually, by taxing corporations more, there will be LESS money to hire people. Small businesses will have to scale back their expansion plans.
The only good news from the federal budget it that capital gains were left alone (maybe just for now).
If the government continues this path, Canada will NOT be competitive in attracting businesses, capital, and smart / risk-taking individuals.
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Note: the information in this blog is NOT legal advice and is provided for educational purposes only. If you require advice / assistant, contact DMC LLP. Laws are subject to change with little notice.
Now… On the subject of avoiding (not evading) taxes, I thought I would share an idea that recently came up which allows you to build up cash in your professional corporation while paying minimum taxes. This strategy involves borrowing and repaying $$$ every year while paying yourself dividends. Now, keep in mind that it only works well if interest rates are low, you don’t need to show a lot of personal income taxes (because you’re not trying to qualify for anything, and the government has messed around with the tax laws).
So with that said, here’s the idea:
In Year 1, your dentistry professional corporation earns income, pays 15% tax (current rate) on active business income and then dividends out 50k. Let’s use 50k as an example, OK? It’s easy math. Then, you have your spouse (who is also a shareholder) receive 50k. Now you’ve got 100k worth of dividends that you need to pay tax on. How much tax? Well, not that much, since they’re non-eligible dividends and you may be using certain other tax-saving strategies. But let’s assume (for simplicity’s sake) that your overall tax bill is 2500 and so is your spouse’s. So that’s 5k in taxes that you’re paying personally to live on 100k.
Now for the next move: you borrow another 50k as a line of credit at a very good rate (assume it’s like 3% because you’re borrowing it from the equity in your home from your mortgage lender). So if you take out 50k, by the end of the year, you’ll have racked up 1500 in interest. Not that much to have access to 50k!
OK, so now you have access to 150k for the year. Here’s the kicker: have your spouse keep their 50k untouched. Use only your 50k plus the borrowed 50k. That’s year 1. In year 2, your spouse repays the loan with their 50k from year 1. And in year 2, you begin the process all over again (your professional corporation pays 15% tax on active business income and distributes dividends of 50k to each of you and your spouse while you borrow an additional 50k from the equity in your home). The best part is this: you’ll save a bundle in taxes, you can use the funds that are piling up in your corporation to invest in other income-producing assets, you’re only taking out 50k at a time (so you’re not paying that much in tax), plus you’re income-splitting with your spouse. If you have children or parents that you can also income split with in this way, even better. Importantly, the 50k you’re taking out from your home isn’t considered income so you’re not paying tax on it. And with interest rates at historic lows, borrowing and repaying 50k at a time and paying something like 1500 a year is a no brainer for having access to that kind of money.
Now, why can’t you just avoid paying the interest by borrowing from your own corporation (and not paying any interest)? Well, for starters, s. 15(2) of the Income Tax Act says that, where a person is a shareholder (i.e. you or your spouse) of a corporation and that person receives a loan from that corporation, then the amount of the loan “is included in computing the income for the year of the person”. Ouch!
But wait… there is an exception: Section 15(2.6) of the Income Tax Act says that section 15(2) doesn’t apply if the loan is repaid within a certain period of time AND if that repayment isn’t part of a series of loans or other transactions and repayments:
15 (2.6) Subsection 15(2) does not apply to a loan or an indebtedness repaid within one year after the end of the taxation year of the lender or creditor in which the loan was made or the indebtedness arose, where it is established, by subsequent events or otherwise, that the repayment was not part of a series of loans or other transactions and repayments [emphasis added].
So section 15(2.6) says that, if the corporate loan is repaid within 1 year after the end of the taxation year (of the lender/creditor in which the loan arose), then it would not need to be included in the spouse’s income (and hence no taxes would need to be paid). So, the shareholder would not need to include the amount of the loan in his or her income and pay taxes on it so long as the loan was repaid within 1 year from the end of the corporation’s taxation year.
To better understand this situation, take the following example. A corporation’s year end is August 31. A shareholder takes out a loan on December 31st, 2017. The clock would only start ticking on September 1st, 2018. The shareholder would only need to repay it by August 31st, 2019 to avoid including it in his or her tax return.
I bolded the last part of s. 15(2.6) for a reason. The Canada Revenue Agency Interpretation Bulletin (IT-119R4) on shareholder loans helps explain what is meant by the phrase “series of loans or other transactions and repayments”:
¶ 28. It is a question of fact whether or not a repayment of a loan is part of a series of loans or other transactions and repayments. In most cases, when there are only a few loans or other transactions and a few repayments made during a taxation year of a lender, there is no such series. However, when only one loan or other transaction and one repayment occur in each taxation year of a lender, a series of loans or other transactions and repayments may still be in evidence. This could occur, for example, when a repayment is of a temporary nature, such as a loan that is repaid shortly before the end of the year and the same amount, or substantially the same amount is borrowed shortly after the end of the year. Such a repayment of a temporary nature is not considered to decrease the loan balance in applying subsection 15(2) and paragraph 20(1)(j) to a series of loans or other transactions and repayments.
¶ 29. Persons affected by subsection 15(2) may have loan accounts, drawings accounts, or other similarly named accounts that contain several charges for loans, payments made to third parties on behalf of the shareholder, advances against future salaries, rents or anticipated dividends or other charges, and one or more repayments. If a shareholder has an account with a number of these features (a running loan account), all of the relevant factors will be considered to determine whether a series of loans or other transactions and repayments exists. Bona fide repayments of shareholder loans that result from, for example, the payment of dividends, salaries, or bonuses, are not part of a series of loans or other transactions and repayments.
So if a shareholder were to take out a corporate loan and repay that amount before the year end (e.g. August 31st), and then shortly thereafter take out “substantially the same amount” as was repaid before the corporation’s year end, then the Canada Revenue Agency may deem such transactions to be “a series of loans or other transactions and repayments” – for which the shareholder would need to include the amount as income under s. 15(2).
Oh yeah… and let’s not forget about the interest-free part of the loan. Section 80.4(2) of the Income Tax Act says that, where a person is a shareholder of a corporation and gets a loan, then that person will be deemed to have received a taxable benefit (i.e. must pay tax on) equal to the difference of the interest they paid in the year and the interest they should have paid in the year (i.e.a prescribed rate).
Bottom line: it’s probably better to pay a small amount in interest (e.g. 3%) to a third party creditor instead of trying to borrow money from your corporation and pay no interest. If you screw things up, you might be on the hook for paying income tax on BOTH the principal and the interest on the loan!
A few years ago, I was invited to play the Tobey golf tournament (a tournament for professionals helping dentists). The problem was: the tournament was the very next day. I had never played golf before. I said ‘yes’ and thought to myself: how bad could it be? I went to Golf town and bought some golf attire. I went to my dad’s place and picked up his retirement clubs (Wilson steel shaft clubs – brutal and unforgiving!). I then watched some Youtube videos on how to play Golf. Boy, was I in over my head. The next day, they paired me with the best golfers in the tournament – a bunch of salesreps from Patterson.
Suffice to say: I did not have an enjoyable experience. I made physical contact with the golf ball two (2) times. Yup. Brutal. I hated golf that day. But I hated sucking at golf even more. So I was determined to get better. Real fast. I took lessons, bought the proper gear and golfed as much as I possible could. I’ve had 4 instructors over the years and here’s what I’ve learned:
1. The Ball Gets In The Way Of Your Swing
It’s not about hitting the ball at all. Pretend as though the ball isn’t there. It’s just about having a damn good looking swing (with all the proper mechanics) and letting the ball get in the way. If you keep trying to hit or help the ball, you’re going to screw things up. Focus on your swing.
2. Focus on a Dimple
When you’re looking down at the ball, focus on a dimple. Don’t look or think about anything else. Even when you swing through, keep your head down and keep staring at that dimple. Then, after you’ve made physical contact with the ball, and your right shoulder (if you’re a righty) pushes your chin to look up, then you can look up. But don’t try to look up before then. Don’t try to watch your ball. Let everyone else watch your ball. You focus on that dimple and only when your shoulder forces your head up, then you can see where your ball went.
3. With Your Iron: Hit Behind the Ball
Your hips should be the first thing moving when you’re on the downswing. Then your shoulders. Your arms and the golf club should be the last thing moving towards the ball. So it’s only natural that your hips will be fully twisted, your shoulders rotated, and your hands BEHIND the ball when you make physical contact with the ball. That’s the elastic feeling you get when you’re unwinding. That’s completely different from when you’re driving (see next point).
4. With Your Driver: Hit In Front of the Ball
With an iron, your hands need to be behind the ball when you make contact. With a driver, you need to position the ball a few inches behind your left foot (if you’re a righty) and your swing should bottom out in front of you and make contact with the ball on the way up. You’re almost stretching your hands out to get in front of you when you do make contact. Don’t try to hit the ball when you’re driving as you would with an iron.
5. When In Sand: Hit Sand
If you get stuck in sand, don’t get concerned. You only have 2 options: hit the ball normally if you’ve got a long ways to go OR if you need to just punch it out because you’re close to the pin, do a FULL SWING and hit the sand underneath the ball. Don’t be afraid to hit the sand. And don’t stop when you’re doing so. You can get it out in 1 swing. Remember etiquette: no touching the sand with your club until you’re taking your swing.
6. Less is More
People have a tendency to lean back, swoop down, shift weight and twist, and then lift their bodies up when they’re swinging. But believe me (because I used to top the ball all the time when I did these things): less is more. Don’t move those body parts! Control yourself! I like to think about how good the older men and women are who regularly play and enjoy golf and who have a lot less power than I do but who are better than me: they aren’t trying to do anything fancy with their bodies. They aren’t lifting up or leaning back and then forward, etc. You just need to think about where you start (with the club behind the ball) and do the minimum in order to get back there from the down swing. If you start doing fancy things with your wrist at the top of your swing, you may not make it back to the ball OR you may top it OR you may hit the ground, etc. Remember: control your body and do less!
7. Where’s the Power?
The power that’s going to crush the ball (called your smash factor) is in your legs and hips (and some would also argue in your forearms, but I’m not a fan of that theory). If you can coil and uncoil your body and HIT THE BALL with your BODY, then you’ll have a wonderfully long shot. Your arms can only do so much. Try it: stand up straight and hit the ball. Now try it with your body. See the difference?
8. Maintain Triangles
If you’re using your hips and legs and back to hit the ball, that’s one thing. But you also need your arms, shoulders, wrists to be beautiful triangles throughout the shot. I used to have something contorted which my golf coach said looked like a chicken wing. It took yards off of all my shots. Because I was sabotaging my body from hitting the ball with full force (that’s what happens when you introduce bends in the elbows and wrists). So keep it straight. Make it look like a triangle throughout and you’ll be amazed at how far you’re hitting it. This also supports the golden rule for golf: everything is connected (feet, knees, hips, shoulders, arms, hands, etc.).
9. 2 Feet In Front | Behind The Ball
Your back swing doesn’t really matter. Neither does your finish (so long as you’re finishing). The only thing that determines if you hit a good shot is the 2 feet before and after the ball. What angle were you coming in at? How fast was the club head moving? Was the face open, closed, or perfectly square? This is where you should concentrate on improving your game.
10. Practice, Practice, Practice… Then KILL THE BALL on the course
This one is controversial. I’ve been told by many people: relax, slow down, slow your swing down, have a nice rhythm, etc. But my current coach has the opposite advice (and it seems to be working). Take your time with your practice swings (think: hit 60 balls in 1.5 hours!) but when you’re on the course, try to destroy the ball. Get ANGRY with the ball. Try to rip the skin off that ball. Try to make that “Callaway 2” logo drop. It’s no longer time for thinking; it’s time for action. So get out there and destroy the ball!
Have Fun Out There!
You’ve heard about how bad unionization is. You are told that more and more dental offices are becoming unionized. And, you’re scared.
Don’t worry, we’re here to help! Here are some practical tips on how to avoid unionization at your dental practice or how to deal with staff if they start talking about unionization without landing yourself in hot water.
Think of your employees as assets, not liabilities. They make your business run smoothly and many patients return because of them. So, what’s the best way to treat your employees? Well here are some tips:
Communication with your employees is absolutely vital at every stage of the game. And before there is even whispers about unionization you have to ensure your employees are informed and feel like they are heard:
If you find yourself in the unenviable position of having your employees begin to organize, then there are still measures you can take to try and dissuade unionization which don’t involve the illegal tactics of “union busting”:
You might think that most of this is common sense. And it is, for the most part, but even the nicest and most well meaning dentists may have trouble managing their employees in a way that avoids unionization. Navigating unionization (before and after a unionization vote) is tricky business.
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you have any questions about unionization or need advice about your rights/responsibilities as an employer, please contact me (Ljubica Durlovska), Jonathan Borrelli, David Mayzel or Michael Carabash. We are your legal dental team.
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.
Bottom line: 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!
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.