On June 30th, 2021, the Canadian Government passed Bill C-208. This Bill allows share capital restructurings and inter-generational transfers within a family unit, which two notable anti-avoidance provisions can catch in the Income Tax Act (ITA), Sections 55 and 84.1.
But what do the changes mean for dentists looking to restructure their business or transfer their practices to family members?
Section 84.1 Amendments
Section 84.1 of the ITA was implemented to put restrictions in place, so it was harder for children to use a corporation to buy shares of small businesses, such as dental practices, from their parents. In doing this, parents were able to claim lifetime capital gains exemption on the sale. But if the shares were sold to a non-arm’s length (related) corporation for cash or a promissory note, it could lead to larger income tax payments.
Under the new rules, Bill C-208 will allow a sale to non-arm’s length purchasers but resulting in a capital gain and allowing them to use capital gains exemption to reduce the income tax.
Section 55 Amendments
In Section 55 of the ITA, dentists would also be able to capitalise on changing rules. The current rule is an anti-avoidance rule intended to prevent converting an amount that would normally be a taxable capital gain into a tax-free intercorporate dividend.
Under Bill C-208, it allows for siblings to be related for purposes of these rules. This will enable certain corporate reorganizations involving sibling shareholders to be accomplished efficiently.
So what do these two rule amendments mean for dentists?
For families that want to transfer their dental practice to the next generation, this is excellent news. The new rules will make it easier for you to make adjustments and receive significant tax breaks.
However, the Bill has been delayed until January 2022 over concerns that it creates an opportunity for tax avoidance “that undermines the equity of Canada’s tax system.” It is to be expected that changes to the wording of the legislation may be made before next year.
Are you looking to change your corporate structure?
If so, Dental Tax can help.
We have a mission to help dentists save money, make money and save time.
Our team of professional and experienced accountants comes from a family of dentists, so we know just how demanding your job can be. When you plan ahead, you’re more likely to reach your goals. Allow Dental Tax to take on all your accounting needs so that we can help you pay fewer taxes and increase your net worth.
We offer accounting services such as tax preparation, tax planning, bookkeeping and business planning so that you can get back to what is most important – the health and happiness of your patients and family.
Book your FREE tax assessment today by clicking here to find out how much you could save each year.