Jan 19, 2022
As we advised in Tax Tip 20-04 , significant additional disclosure and filing requirements for trusts were announced in the 2018 Federal Budget and are scheduled to apply for trust’s 2021 and subsequent tax years.
“New rules allow for non-family members to be shareholders..”
In the Ontario Budget tabled on May 11, 2005, the Ontario government announced that family members will be permitted to hold non-voting shares in a physician’s or a dentist’s professional corporation.
This provides many income-splitting opportunities for doctors and dentists with children 18 years or older. Taxable dividends can be paid either through a trust or directly to a child who is at least 18 years old. The child would pay tax at his/her marginal tax rates. At present, a child could receive approximately $28,000 of dividends tax-free if he/she has no other income. A dividend paid by a professional corporation to a minor child would be subject to the Kiddie Tax Rules and tax would be payable on the dividend at the child’s top marginal tax rate.
In situations where a professional corporation already exists, consideration should be given to reorganizing the share capital to allow children aged 18 and over to become shareholders of the corporation either directly or as beneficiaries of a trust. In cases where the doctor or dentist does not own a professional corporation, consideration should be given to transferring his/her business assets to a professional corporation and allowing family members to become non-voting shareholders.
Consideration should also be given to the value of the goodwill being transferred to the corporation. If the goodwill is transferred at fair market value, the tax rate on the gain will be approximately 23% in Ontario. The doctor or dentist would pay these taxes immediately rather than at a future date. However, if the doctor’s or dentist’s cash flow will allow, he/she can withdraw funds at a 23% tax rate instead of the regular dividend.
Perhaps other professionals will be allowed similar opportunities in the near future.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.