END OF YEAR TAX PLANNING FOR DENTISTS
Sale of Goodwill before January 1, 2017 – Sale of Assets
Our dental clients have expended a considerable amount of effort in building the goodwill of their practice which in many cases exceed $1,000,000.00. On a sale of your practice (if you are selling assets not shares) the value attributed to goodwill is normally determined as the purchase price less the amount allocated to your hard assets being your equipment, leasehold improvements, furniture, etc.
For many dentists the actual cost to the practice for this goodwill may be nil if you set up your practice from scratch or very small if you had purchased your practice many years ago. The result may be that on a sale of goodwill valued for example at $1,000,000.00 the whole or a substantial amount may be fully taxable. The gain on Goodwill from a sale under the Income Tax Act, Canada (referred to as Eligible Capital Property or ECP) up to the end of 2016 is only taxed on 50% of the gain and therefore assuming a combined federal and Ontario corporate tax rate of 26.5% the effective corporate tax rate on the sale of ECB/Goodwill is 13.25% - on a sale of Goodwill/ECB with no original value and a sale price of $1,000,000.00 would therefore result in tax of $132,500.00.
However, starting January 1, 2017 the gain on Goodwill/ECB will be fully taxable (not 50% taxable up to December 31, 2016) and be treated as ordinary capital gains with the result that 50% of the gain will be taxed at the rate of 50.17% resulting in an overall rate of approximately 25% on the total sale of goodwill/ECB – the amount of tax payable commencing January 1, 2017 on the sale of $1,000,000.00 of Goodwill/ECB will therefore be $250,000.00 rather than $132,500.00 or virtually double the tax.
1. If you have already entered into an agreement to sell your practice and have not closed ensure that you do close in 2016 – do not postpone closing past December 31, 2016;
2. If you are contemplating selling take a serious look at whether you can actually sell and close prior to January 1, 2017;
3. If you are not thinking about selling yet but know you will be selling in the next few years you should speak to your tax advisors about crystallizing your gains prior to January 1, 2017 having the gains on Goodwill/ECB taxed at the current tax regime rather than double the rate commencing January 1, 2017 – on the million-dollar gain there would be a tax saving as noted above of approximately $120,000.00. Although you would over the long term save the tax if you crystallize the gain prior to January 1, 2017 you would have to pay the tax as well as the cost of your advisors. Another benefit of triggering the sale early is that you will be entitled to pay out one half of the gain to your personal hands.
Clean up your Professional Corporation if you are contemplating a sale of shares in the next few years
Again, if you are planning on selling the shares of your professional corporation in the next few years you have to ensure that the value of your passive assets (would include non-practice assets) is less than the value of your active practice assets – if your passive assets exceed the value of your active practice assets then you will have to wait 2 years after cleansing your professional corporation before you would be entitled to enjoy the $800,000.00 capital gains exemption. We would strongly suggest that you meet with your accountants to ensure you are “on side”. This blog is for informational purposes only and should not be construed as legal advice.