In April, the federal government presented Budget 2024. One of the proposals in that budget was to increase the lifetime capital gains exemption limit, raising it to $1.25 million as of June 25, 2024. Currently, the maximum for this exemption is $1,016,836. It was also proposed that the lifetime capital gains exemption would be indexed to inflation thereafter.
Taxes on Capital Gains
Capital gains are the profits you achieve when you sell an asset for a higher price than your purchase cost. These gains are ‘recognized’ only when you sell the asset, meaning that although an asset may appreciate over time, you won’t be taxed on that increase in value until you sell the asset and make a profit. This makes capital gains different from investment sources like dividends or interest income.
Stocks and the sale of real estate, such as commercial properties or dental practices, can trigger capital gains, which may be taxed. Capital gains also can apply to the sale of small business shares, such as when you sell portions of your dental practice.
The lifetime capital gains exemption can apply to transactions like these, to allow the proceeds to be exempt from regular capital gains taxation.
More Important Than Ever
This increased limit comes at a time that is especially beneficial, as another proposed change to increase capital gains inclusion rates has been included in Budget 2024.
For corporations and trusts, the inclusion rate on all capital gains is proposed to increase from one-half to two-thirds. This means that a larger portion of any capital gains realized by these entities will be subject to taxation.
For individual taxpayers, the inclusion rate on capital gains will also rise to two-thirds, but this higher rate will apply only to annual capital gains exceeding $250,000. For capital gains up to this $250,000 threshold, the current inclusion rate of one-half will remain in effect.
Dentists and dental practice owners, when taxed as individuals, will be able to take advantage of this structure. They will benefit from the lower inclusion rate of one-half on their capital gains up to the $250,000 annual limit. Any gains beyond this threshold will be taxed at the increased inclusion rate of two-thirds. This provides a significant tax advantage for dental professionals with capital gains that do not exceed $250,000 annually.
Overall, for individuals with capital gains over that $250,000 threshold and for businesses, this means that the extra room in the lifetime capital gains exemption will be helpful. With the LCGE limit increasing from $1,016,836 to $1.25 million, dentists and dental practice owners can shield a larger portion of their capital gains from taxation when they sell their practice or otherwise generate capital gains.
Structuring Practices for Eligibility
Small Business Corporation Status
To qualify for the LCGE, dental practices must meet the criteria of a small business corporation. This includes ensuring that over 50% of the practice’s assets have been used in an active business for at least 24 months prior to the sale. Dentists might need to reorganize their practice structures to meet these requirements.
Dentists operating as sole proprietorships or partnerships may wish to consider incorporating their practices if they want to benefit from the LCGE. This might involve a detailed analysis of the costs and benefits of incorporation.
Principal Residence Exemption
The lifetime capital gains exemption increase doesn’t affect the principal residence exemption, which allows individuals to sell their primary homes without triggering capital gains. These sales do still need to be reported, even if they are exempt.
Dentists with real estate investment properties or recreational properties like cabins, need to account for potential capital gains on these assets under the new rules when they are sold. The increased lifetime capital gains exemption can be used to reduce the tax impact on these.
Tax-Advantaged Investing
So you don’t use up your lifetime maximum sooner than necessary, and to preserve it for crucial occasions like selling your practice, prioritize using tax-sheltered investments, such as RRSPs and TFSAs. This strategy ensures that your lifetime exemption remains available for times when you need it most.
Timing of Sales
Given the changes in the inclusion rate for capital gains, strategic timing becomes essential. Dentists might prefer to sell shares in smaller increments over multiple years to maximize the benefit of the lower inclusion rate on gains up to $250,000 annually, rather than rely completely on the tax sheltering of the lifetime capital gains exemption.
Reinvesting Tax Savings
Dentists can gain even more impact, by reinvesting the tax savings into their practice, including expanding services, upgrading equipment, or enhancing marketing efforts. Alternatively, investing in diverse asset classes, such as stocks, bonds, or real estate, can spread risk and optimize returns.
The increase in the lifetime capital gains exemption and its indexing to inflation provide significant opportunities for dentists to maximize their tax savings. By strategically structuring practices, timing sales, using exemptions effectively after maximizing tax-sheltered avenues of investing, and reinvesting tax savings, dentists can grow their practices and achieve better financial stability. The experts at DentalTax can help you with these strategies, tailoring them to fit your unique needs, and maximizing your advantages.
Adam has an MBA from the Richard Ivey School of Business in London and also holds a Chartered Investment Manager designation.
