It can be a real challenge getting cash out of your dental corporation with dividend tax rates as high as 48%. It’s never fun giving almost half of your practice cash flow to the CRA after you’ve made the draw from the dental corporation.
For some practice owners, it may be time to tap into the tax-free portion of the practice’s goodwill.
The amount you could save depends on the market value of the goodwill and your personal circumstances. The average tax savings are:
| Goodwill | Net tax savings |
| $500,000 | $90,000 |
| $750,000 | $140,000 |
| $1 million | $180,000 |
To access the tax-free portion of the goodwill, all you need is a new dental corporation (Newco). Your current corporation, Dentalco, sells all the dental equipment and the goodwill to Newco. A special tax election is filed to avoid paying tax on the value of the equipment.
When goodwill is sold by a corporation, only 50% of its value is taxable. The other 50% is non-taxable and can be paid out as a tax-free capital dividend to shareholders of the corporation. On $1 million of goodwill, that’s a tax-free dividend of $500,000, resulting in personal tax savings of about $180,000!
The tax benefits don’t stop there. Because Newco purchased the goodwill, it can now depreciate $500,000 of the goodwill ($1,000,000 X 50%) at 5% per year. Assuming the 27% corporate tax rate, this transaction translates to tax savings over a number of years totaling about $135,000.
If you want to know more about tapping into the tax-free portion of your goodwill, contact a Purtzki Johansen & Associates advisor.
