Five Tax-Saving Strategies to Consider during Tough Times

Dentists have a choice - complain about tough times or save taxes during tough times. Here are five tax-saving strategies dentists should consider:

1. Dropping Stock Prices
‍Sell losing stocks in your portfolio to offset any current “winners”. Alternatively, you can donate the “losers”. Any losses on the losing stocks can be used to offset past, current or future gains. If your corporation owned and sold “winners”in the past, determine your corporation’s Capital Dividend Account balance (the untaxed or tax-free portion of the stocks that did well). Your corporation can pay this out to you as a tax-free capital dividend.

2. Rising Stock Prices
‍Donate these promising stocks to a charity. Any gains on these winners will not be taxed. Additionally, you will also receive a donation tax credit for the prevailing stock price at the time the donation was made, not the original cost of the stock.

3. COVID-19 Tax Savings
During COVID-19, tax measures which favoured purchases of equipment, hardware, software, and most office renovations were introduced to encourage capital investments. The full purchases of these items, made after April 18, 2021, and before 2024, are 100% tax-deductible.

Also, any cars purchased for business purposes during the same period are also eligible for a 100% tax deduction in the year of purchase. However, the deduction must be pro-rated based on business usage. For example, if the car is used for business 50% of the time, the tax deduction in the year of purchase will be 50% of the cost of the car.The best time to buy these items is shortly before the fiscal year-end of your corporation, partnership or proprietorship.

4. Automobile Savings
Consider buying a fully electric car as there are tax-savings that may be realized. Consider the following example, based on 2022 rates.

If fully electric car costs more than $59,000 (before HST),the tax rules treat the purchaser as having paid only $59,000 for the car to determine the amount of amortization/depreciation that can be claimed.

In comparison, for all other types of cars, including hybrids, if the cost of the car is more than $34,000 (beforeHST), the tax rules treat the purchaser as having paid only $34,000 for the car to determine the amount of amortization/depreciation that can be claimed.

If any type of car is leased, the tax rules limit the deduction of the monthly lease payment to $900/month(before HST).

Driving directly between the home and office is not considered for business purposes, and therefore, not tax-deductible. Only indirect driving is tax-deductible.

If your professional corporation owns the car, and the car is driven less than 50% for business purposes, a full standby charge applies to you as the shareholder. This means that 2% per month (or 24% per year) times the original cost of car will be added to your personal income like salary and is considered a taxable benefit. From a money perspective, if you drive many kilometres each year (over 24,000 km) then you should consider buying and owning your vehicle as opposed to leasing it. Essentially, if you drive more than 50% for personal purposes, the car should be owned by you and not your professional corporation.

How should business kilometres be documented? Maintain a logbook showing the date, the number of kilometres driven and, the purpose of trip.

When the car is owned personally and driven only occasionally for business, a car allowance of 61 cents/km for the first 5000 kilometres driven is applied and 55 cents/km for each additional kilometre thereafter. “This amount is tax deductible to the payor, professional corporation, and tax free to the recipient.”

5. Staffing Shortages
‍Consider having your practice (corporation, proprietorship) employ your family (children, parents, spouse) to work int he practice. The practice can pay your family a reasonable, market value salary and receive a tax deduction. The family member will still pay taxes, but if they are in a lower tax bracket, they will generate overall net tax savings. A market value salary would be what would be paid to an unrelated employee for the same or similar work.

NB: At salary of about $14,000, assuming no other income, no personal taxes are paid.

Traps to Avoid:

• Pay your family member at the same frequency as unrelated staff. They will be on the payroll and subject to standard withholds (taxes, CPP and EI, as applicable).
• Family members should deposit their salary in their own separate bank account.
• Create a written job description to document the services he/she is providing to the practice.

“Given the fact that taxes are dentists’ biggest expense, decreasing tax hits will increase professional profit ability and net personal income during tough times.”

Given the fact that taxes are dentists’ biggest expense. Decreasing tax hits will increase professional profitability and personal income during tough times.

Please send comments to david@dcy.ca.

This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca /louise@dcy.ca / basil@dcy.ca / eugene@dcy.ca. Visit our website at www.dcy.ca. This article is intended to present ideas and is not intended to replace professional advice.