Over the last year we have been working with many dentists to minimize the drastic increase in personal taxes as a result of the Tax On Split Income (TOSI) rules. Here are four strategies that allow you to still income split with family members in lower tax brackets.
- The 20 hour per week exemption.
This is a big one. If your spouse worked at least 20 hours per week this year or for 5 previous years, then TOSI rules do not apply. To qualify for the exemption, your spouse needs to prove he or she worked at least 20 hours per week. These years do not need to be consecutive. Exempt spouses are entitled to receive any discretionary number of dividends.
CRA has clarified it will generally accept time-sheets, payroll records, schedules or logbooks as sufficient proof to establish spousal employment.
It is very important then, to keep your payroll records for at least five years.
The CRA says it will consider the following factors when deciding whether a spouse qualifies for this exemption:
- The type of duties performed as they relate to the clinic’s activities;
- The spouse’s education, training and experience;
- Any particular knowledge, skills or know-how possessed by the individual.
- Reasonable remuneration
It is interesting that TOSI rules do not apply to salaries paid to family members for actual work performed, provided the salaries are reasonable. A good test of reasonableness is to pay the family member what you would have paid to a third party.
- The age exemption.
The government did not want to upset retirement planning for dentists who are in the sunset of their dental careers. If you are 65 years or over in 2018, you can income split with your spouse without any restrictions. The spouse’s age does not matter.
- The lifetime capital gains exemption
With practice values at an all-time high, many dentists are cashing in million-dollar cheques when they sell. And they pay no tax!
When you sell a practice, which may include the clinic real estate, by selling the shares of the corporation, you will benefit from the $848,252 lifetime capital gains exemption. However, this exemption only applies in the event of a share sale. The exemption extends to all company shareholders. If you have a family trust, with four family members as beneficiaries, your total entitlement will be $3,393,000.
Make sure you qualify for the exemption.
To access this capital exemption, the shares must be Qualifying Small Business Shares and meet the following three conditions.
- At the time of sale, 90 per cent of the fair market value of the corporate assets must be used in an active practice.
- During the 24 months prior to the sale of the shares, 50 per cent of the fair market value of the corporation’s assets must have been used in an active business.
- You must have owned the shares 24 months prior to the sale.
