One of the key benefits for members of Doctors of BC is the Contributory Professional Retirement Savings Plan (CPRSP). This plan reimburses eligible physicians for contributions to an RRSP or TFSA each year.

The annual CPRSP amount is based on eligible billings and length of service, and typically ranges between $8,000 and $12,000. Benefits must be claimed by March 31 of the third year after the claim year.  For example, the 2023 CPRSP benefit must be claimed by March 31, 2026, or it will be permanently forfeited.

To claim your CPRSP funds, you must make a contribution to your RRSP or TFSA either in the year of the claim, just prior to submitting your claim, or within two weeks after receiving the CPRSP funds.

To make the claim, log in to your member benefits page on the Doctors of BC website and look for the link to claim your CPRSP benefits.

Depending on your personal situation, an RRSP or TFSA may be more advantageous. Contact an advisor at PJ&A and they can help you evaluate your options to ensure you maximize this benefit.

Tip: You can submit your claim on March 31, 2026, and still have two weeks to make your eligible contribution. Don’t miss out on this valuable retirement benefit!

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Multi-clinician practices often assume that medical services are GST-exempt — and generally they are. But how a clinic structures its internal fee arrangements can unexpectedly trigger GST on overhead payments.

Medical services are generally exempt, but administrative services are taxable.  When a clinic charges an overhead fee to a doctor, it has to collect the GST on those fees – GST the doctor is unable to recover, effectively increasing overhead costs by 5%.  Properly documented fee arrangements can avoid this issue.

The 2025 case MedSleep Inc. v. The King (2025 TCC 70) illustrates the topic.  MedSleep ran clinics where contracted sleep physicians could diagnose patient sleep disorders. MedSleep provided the physical premises, administrative and technical staff, supplies and equipment, and so on.

The clinic had agreements with the sleep physicians under which MedSleep kept a portion of the professional fees earned (often around 20%), and the doctors kept the remainder.

The question was whether the sleep physicians were operating under a fee-sharing arrangement with MedSleep, or whether MedSleep was providing a separate supply of administrative services to the doctors.  The tax department took the position that the portion retained by MedSleep was essentially payment for administrative or management services provided to the physicians — and therefore a taxable supply requiring GST collection.

Fortunately for the sleep doctors, the Tax Court disagreed.  The judge had to determine whether MedSleep was charging the physicians 20% for a separate supply of administrative services, or whether the parties were simply sharing GST-exempt medical revenue.

The judge found that MedSleep had well-documented agreements with the physicians that at no point referred to the amounts payable to MedSleep by the physicians as fees payable for services.  The agreement instead simply outlined the split of professional fees collected from patients.  Further, the judge found the services provided by MedSleep were so interwoven with medical services that they could not be sensibly separated from the patient’s overall care package, indicating a single exempt supply.

For doctors and practices structured around fee-sharing arrangements, this provides some reassurance that GST may not apply simply because the clinic retains a portion of fees. If your agreement is genuinely a fee split with no separately priced admin services being sold to doctors, the risk of a CRA reassessment for GST could be reduced.

For physicians in multi-clinician settings, the key questions are:

• Is your arrangement truly a fee split?
• Are administrative services separately identified or priced?
• Does the documentation reflect the actual commercial reality?

The post GST for mixed service clinics – the MedSleep case appeared first on Purtzki, Johansen & Associates.

Doctors of BC recently sent out their annual reminder to claim your CPRSP benefits.  This is a great time to revisit whether contributing to an RRSP or TFSA makes the most sense for you.

Many incorporated physicians are working hard to save their money for retirement.  RRSPs and TFSAs are both excellent tools that complement your corporate savings structure.  Here are the key features of each.

RRSP

• Full tax deduction on contributions
• Tax-free growth until withdrawal
• Contributions limited to 18% of the previous year’s earned income (maximum $32,490 for 2025)
• Money can be used towards a first home purchase (maximum $60,000)
• Must be converted to a RRIF by the end of the year you turn 71, after which minimal annual withdrawals commence
• Full amount taxable in the year of death (if there is no spouse)

TFSA

• Contributions are from after-tax dollars (no tax deduction)
• All investment growth is completely tax-free
• Annual contribution limit of $7,000 ($102,000 lifetime as of 2025)
• Withdrawals are non-taxable and won’t impact your government benefits during retirement

The RRSP, along with your corporate savings, can be a great tool.  It can often make sense to maximize your RRSP annually if you are in the top tax bracket and saving significant funds in your corporation already.  Not only does the contribution grow tax deferred for years, but doing so will also allow you to keep your “passive” income in the corporation, lower year after yea,r which creates some tax benefits for you in the future.  There are some drawbacks, though.  For example, once money is in your RRSP, you cannot easily access it for large outlays, like a car or a lump-sum mortgage payment.

Whether to invest in a TFSA can be a bit more complex.  As you don’t get a tax deduction for the contribution, you are starting with less money to invest.  For example, if you are in the top tax bracket, you would need to draw an additional salary of $15,000 in order to invest $7,000 in the TFSA each year.  The rate of return on your investments and the type of investment income you are earning will have a significant impact on deciding whether it is worth drawing out the funds from the company, and paying the tax now, or just investing further inside the corporation.

Remember that for both the RRSP and TFSA, there are rules about what investments you can hold inside each.  For example, direct ownership of real estate or shares of your own private corporation would not qualify.

When it comes to the CPRSP contributions, if you don’t already maximize your RRSP and TFSA each year and you are in the top tax bracket, then generally speaking, you should prioritize the RRSP.  As the CPRSP benefit you receive is fully taxable in the year you receive it, the deduction from the RRSP contribution creates a wash. If you don’t put the funds in your RRSP, there will be a tax liability equal to as much as 53.5% of the benefit received.  If, however, you have a lower taxable income, you may want to consider the TFSA as the up-front tax hit will be less and you can take advantage of long-term tax-free growth.

The are many factors that need to be considered when deciding between RRSP and TFSA.  No one strategy works for everyone.  The decisions are dependent on your personal financial situation, goals, and investment strategies.  Please reach out to your PJ&A advisor to discuss your financial plan and which strategy makes the most sense for you.

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The end of 2025 is near; however, there is still time for some tax planning tips for year-end tax savings!

Trigger Capital Losses

The markets were high in 2025, and you may have triggered capital gains in your personal non-registered investment portfolio.  Review your investments to see if you have any unrealized losses which could be triggered before the end of the year. The losses would offset the gains, thereby reducing (or even eliminating) your capital gains tax.  You may also be able to carry back current-year losses to recover capital gains tax paid in any of the three previous years.  This works best if you had a high marginal tax rate in the year the gain was incurred.  The higher your tax rate, the bigger the savings from triggering losses.  Losses must be used against current year capital gains first before any can be carried back to the previous three years, or carried forward.

If your investments are held within a corporation, there are additional tax planning considerations.  Speak with your Purtzki Johansen advisor first to ensure triggering losses is still beneficial.

Should you decide to trigger losses, remember the “superficial loss” rules will require you to avoid repurchasing the same investment for at least 30 days.

First Home Savings Account (“FHSA”) Contributions

If you are planning a first home purchase, do not miss out on the FHSA benefit.  Contributions are tax-deductible, but withdrawals are not taxable if used to purchase a first home.  The deadline to contribute for 2025 is December 31, 2025. FHSA contribution room of $8,000 per year is only created once an account is opened (even if a contribution isn’t made). You carry forward unused contribution room each year. For example, if you contribute $3,000 in year one from the $8,000 of annual contribution room, you can contribute up to $13,000 in year two ($5,000 of unused room carried forward from year one plus $8,000 of participation room from year two).  For this reason, if you qualify but you don’t already have an FHSA, make sure you open an account in 2025 even if you won’t make a contribution this year.

Registered Retirement Savings Plan (“RRSP”) Withdrawals

If your retirement planning projects your mandatory Registered Retirement Income Fund (“RRIF”) withdrawals at age 72 to be significant, one planning tip is to consider withdrawing from your RRSP early to help limit the RRIF income. This could help avoid higher tax brackets in the future or worse, clawback of your Old Age Security (“OAS”) pension.  This strategy is sometimes called the “RRSP meltdown.”

For incorporated doctors, if your spouse has an RRSP account but a relatively low income, consider annual RRSP withdrawals prior to age 65 when corporate dividend income splitting is no longer restricted.  The personal tax on the spouse’s RRSP withdrawal may be lower than the tax on a dividend from the corporation to the practice owner.

Lastly, if you are 65 and without any other forms of pension income, consider converting a portion of your RRSP into a RRIF now.  RRIF income is considered pension income and is eligible for the $2,000 pension tax credit.  RRSP income does not qualify.

Donations

If you are feeling charitable, consider making any donations before December 31, 2025, to access a tax credit for 2025. If you have any investments that have grown in value in your non-registered investment account, consider donating those securities instead of cash for twice the tax benefit. Not only do you get a donation tax credit, but you also do not pay any capital gains tax on the gain.  Securities donated by your corporation can provide an even larger benefit.

Registered Education Savings Plan (“RESP”) Contributions or Withdrawals

Take advantage of the $500 Canada Education Savings Grant (“CESG”) by making a $2,500 contribution to your child’s RESP. If you have missed a previous year, you can double the contribution and receive a CESG payment of $1,000.

If your child is already attending post-secondary education and has an RESP, consider making an Education Assistance Payment (“EAP”)  withdrawal in your child’s name. If your child has little or no income, this otherwise “taxable” withdrawal will end up being completely tax-free.

The post Five Tax Planning Tips before the End of 2025 appeared first on Purtzki, Johansen & Associates.

• There are two portions to be claimed: Basic Benefit + Length of Service (“LOS”) which increases annually based on years of service.
• The max 2024 claim is $12,600
• The funds must be contributed into a Tax-Free Savings Account (“TFSA”)/ Registered Retirement Savings Plan (“RRSP”)/ Registered Pension Plan (“RPP”)/ Individual Pension Plan “IPP”)
• No matching payment is required
• Proof of contribution is not required at the time of application for TFSA/RRSP however receipts must be kept for at least 2 years for potential audit
• You may claim for contributions already made earlier in the applicable year otherwise you must contribute within 2 weeks of receipt of funds from the Doctors of BC
• Lack of proof of contributions will result in future benefits being clawed back
• Funds must remain in your registered investment account until retirement (exceptions are withdrawals for the Home Buyers’ Plan (“HBP”)/ Lifelong Learning Plan (“LLP”)
• Ensure the benefits are paid to you personally and not your corporation. You will be issued a personal T4A tax slip for this payment and therefore if the funds are deposited into your corporation there is risk of double taxation (an exception to this is if your corporation contributes to RPP/IPP and you have applied under this basis)
• Contributions to a spouse’s RRSP or TFSA directly do not qualify however you may contribute to a Spousal RRSP account. Multiple years may be claimed at once
• Benefits expires after 3 years on March 31 of each year
• March 31, 2025 is the deadline to claim benefits for the 2022 year
• Benefits are taxable in the year of receipt

To make your claim visit www.doctorsofbc.ca to log into your account. Under the My Account heading select My benefits/Claim CPRSP/See Details.

Don’t miss out on claiming this free money and ensure you speak with your trusted Purtzki Johansen & Associates advisor if you are ensure which registered account is most suitable to contribute to.

The post Don’t Forget to Claim Your CPRSP Benefits appeared first on Purtzki, Johansen & Associates.

The end of 2024 is near, however there is still time to take care of some tax planning items to ensure you don’t miss out on year-end tax savings!

Capital Gain Loss Harvesting

In previous years, a common tip was to consider selling any stocks with losses prior to December 31st and to apply the losses against any gains that may have occurred during the year or in the previous three years. With corporations, in particular, and the new capital gains inclusion rate increasing from 50% to 66.67%, care should be taken when to realize these losses and whether they should be carried back to one of the previous three years or carried forward to eliminate future capital gains tax.   Triggering losses before the end of 2024 may result in you only saving tax at the 50% inclusion rate whereas the losses may be better utilized if they are triggered in 2025 or beyond and used to reduce the tax at the higher 66.67% inclusion rate.

A different analysis is required for individuals because of the lower inclusion rate on the first $250,000 of capital gains, as discussed below.

Should you conclude in your analysis that is to your benefit to trigger losses, the superficial loss rules will require you to avoid repurchasing the same stock for more than 30 days.

Capital Gain Triggering

On June 25, 2024 new capital gains tax rates were introduced.  For individuals, the first $250,000 of capital gains are subject to a 50% inclusion rate and any gains in excess of this amount subject to a 66.67% inclusion rate.  Most planning to trigger capital gains happened prior to that date.  However there is now a potential incentive to consider triggering capital gains annually for individuals with larger investment portfolios. Triggering capital gains up to the $250,000 inclusion rate could help avoid future capital gains at the higher 66.67% inclusion rate. To allow trades to process on time ensure any trades are completed by December 30^th. There are no “superficial gain” rules, therefore you may immediately repurchase the stock sold without waiting for 30 days as is required with losses.

First Home Savings Account (“FHSA”) Contributions

The deadline to contribute is December 31, 2024 to be able to deduct the contribution on your 2024 tax return. FHSA room is only created once an account is opened (even if a contribution isn’t made). You may carry forward up to $8,000 of unused contribution room each year. For example, if you contribute $3,000 in year one from the $8,000 of annual contribution room, you can contribute up to $13,000 in year two ($5,000 of unused room carried forward from year one plus $8,000 of participation room from year two).

See previous articles discussing the program in more detail.

Registered Retirement Savings Plan (“RRSP”) Withdrawals

If your retirement planning projects your mandatory Registered Retirement Income Fund (“RRIF”) withdrawals at age 72 to be significant, one planning tip is to consider withdrawing from your RRSP early to help limit the RRIF income. This could help avoid future higher tax brackets or Old Age Security (“OAS”) clawback.

If your spouse has an RRSP account but relatively low income, consider annual RRSP withdrawals prior to age 65 when dividend income splitting becomes available.  The personal tax on the spouse’s RRSP withdrawal may be lower than the tax on a dividend from the corporation to the practice owner.

Donations

If you are feeling charitable, consider making any donations before December 31, 2024 to be able to apply them as a tax credit in 2024. If you have any public company shares sitting in a gain position in your non-registered investment account, consider donating those shares for twice the tax benefit. Not only do you get a donation tax credit, but you also do not pay any capital gains tax on the gain.

For large donations, be wary of the new Alternative Minimum Tax rules that took place on January 1, 2024 that may limit some of the benefit of the donation.

The post Five Tax Planning Tips before December 31 appeared first on Purtzki, Johansen & Associates.

Most doctors are familiar with the Tax on Split Income (“TOSI”) rules that limit the ability to split income with spouses or other family members. There are a few common exemptions where TOSI does not apply such as when the family member worked more than 20 hours per week for the practice or once the doctor has achieved the age of 65, they can income split with their spouse. However, for many these either are not an option or are too many years away to be utilized. Fortunately, there is another income splitting technique available for doctors that have accumulated a significant investment portfolio.

Second Generation Investment Income

Dividends that are received by a family member from a related business are subject to TOSI unless a specific exemption applies. However, if the practice income is later reinvested and produces a second level of income (known as second generation income) that is no longer considered to be income earned from the original related business. For example:

Dr. Smith earns $400,000 per year in his medical practice and knows that because his spouse is not active in his business he cannot pay a dividend to her from his practice income without TOSI risk. However, over the years he has accumulated a significant corporate investment portfolio of public company shares worth $2,000,000 in his holding company which he and his wife are 50/50 shareholders. In the most recent tax year for his company, the investments produced $50,000 of eligible dividends and $30,000 of interest income. Rather than simply reinvesting those proceeds back into more public company shares, he chose to pay $80,000 out of the portfolio as a dividend to his spouse.

Fortunately, pursuant to CRA interpretation 2018-0771861E5, second generation investment income is not considered to be derived directly from the related medical business. The $80,000 of dividend income to his spouse triggers only $2,300 of tax whereas Dr. Smith who is in the top tax bracket would have paid $32,900. Therefore simply paying out the investment income to his spouse saves over $30,000 in one year alone!

Traps to be aware of!

1. Pay the dividend

While it may be possible to declare the dividend as payable to the spouse to be paid at a later date, the safer approach is to fall within the CRA interpretation parameters and actually pay the cash from the investments returns to the spouse.

2. Don’t mix medical income with investment income

Ensure there is a clear linkage to the fact that it is the investment income that is paid to the spouse and not the medical income flowing through the holding company and out to the spouse. Contact your investment advisor to instruct them to pay this investment income, often referred to as a “sweep” where periodically they clear out of the investment returns from the corporate investment cash account to the spouse.

It would even be wise to have two separate investment cash accounts. One that has the medical practice cash flow paid into it before later investing in the stock market. The second cash account is for any distribution of the investment income paid out as part of the “sweep” as noted above. This avoids the medical practice cash mixing with the investment income paid out.

It should be noted that the goals in this strategy can be obtained even if the investment portfolio is inside the medical practice company itself. A holding company isn’t required to meet this test.

3. Is the holding company operating an investment business?

The CRA interpretation notes that the second generation income exemption does not apply if the holding company is considered to be operating a business itself. The business being that of earning investment income. While it is a question of fact whether or not an investment business exists, it should be noted that the tax court has generally held a very low bar for what may be considered a business. As a result, to mitigate risk it would be prudent to have another exemption available to protect from TOSI. Being actively engaged on a regular and continuous basis in the activities of holdco can potentially create another exemption to rely upon. Therefore, if you have a managed investment portfolio ensure the spouse is equally involved in all investment decisions, meetings, email correspondence and signing off on any filings.

The Takeaway

While it does involve being a little more diligent to ensure your investment income returns are managed carefully and any payment to your spouse cannot be tied back to the medical practice, doing so can easily save tens of thousands per year in personal taxation.

The post Income Split Your Corporate Investment Income appeared first on Purtzki, Johansen & Associates.

On Monday the Liberal government introduced a Notice of Ways and Means Motion to implement the proposed capital gains tax changes announced in the Spring Federal Budget. The motion passed with the support of the NDP and Bloc Quebecois. The Conservatives (who are leading polling in advance of next year’s Federal election) voted against the motion.

The notice contained few changes from the initial proposals and pave the way for the actual legislation to be written and passed into law. Regardless of when the law ultimately achieves Royal Assent the effective date will still be June 25^th, 2024. An actual disposition of capital assets will therefore need to occur prior to that date to pay tax at the current rates.

See below for links from our previous three-part series discussing the tax implications.

Part 1: Planning for the increase in capital gains tax

Part 2: Accessing the tax free capital dividend account

Part 3: Planning for the capital gains tax on your real estate holdings

Ensure you have reached out to your Purtzki Johansen & Associates advisor as soon as possible if you are unsure if you should be triggering gains in advance of June 25^th or not.

The post Capital Gain Tax Changes Coming June 25th Pass Vote appeared first on Purtzki, Johansen & Associates.

This is the final article of our three-part series on planning for the increased capital gains tax.

Our first article outlined the upcoming changes to the capital gains tax and considered if you should pay that tax now or defer it into the future.  In the second article, we reviewed whether or not it could be beneficial to trigger gains to access tax-free capital dividends from the company’s capital dividend account.

Lastly, let’s review how the proposed changes may affect your decisions on capital gains tax associated with your real estate holdings.

Pay now or pay later?

As we outlined in part one, if you’re going to be retaining the real estate holdings for the long-term, perhaps five years or more, you likely don’t want to be paying any additional tax at this time and would rather defer that tax into the future.  However, if the property is going to be sold in the next couple of years, it is attractive to pay 25% tax now rather than 34% in the next few years.

How much to pay?

It is simple with your stock portfolio, where you can simply choose to sell as many or as few stocks as you desire and realize as small or as large of a capital gain as you desire.  You can then simply repurchase those stocks.

With your real estate holdings, it’s a little more complicated to trigger the capital gain before the tax rates change on June 25^th.

The T2057 Section 85 tax election

In order to trigger the capital gain on real estate you will have to sell the property to a related party or another related company. Our comments will assume your real estate holdings are already being held in a company.

The T2057 tax election allows you to transfer the property at anywhere between cost and fair market value, allowing you to select the amount of capital gain that you wish to realize.

The deadline to submit the T2057 tax election to the CRA is the earlier of the tax deadlines of the two parties involved in the transaction.  As an example, if your company has a June fiscal year-end, the deadline to submit the tax election is December 31, 2024. On the other hand, if your company has a May 31^st fiscal year-end and you implement the transaction in June 2024, the tax election doesn’t have to be filed with the CRA until November 30, 2025.

As a result, if you’re unsure of the value of the property, the ultimate sale price, or the amount of tax you want to pay, you have until at least December 31, 2024 and at the latest November 30, 2025, depending on your fiscal year-end, to determine the amount of capital gain you would like to report.

An outline of the transaction is as follows:

• Incorporate a new company (“Newco”)
• The existing company (“Holdco”) will sell the property to Newco for its fair market value prior to June 25^th.
• In consideration, Newco will issue shares to Holdco.
• Newco and Holdco will jointly elect on the T2057 Section 85 election for the transfer to take place at anywhere between the cost and the fair market value.

Property transfer tax

In B.C., property transfer tax applies when there is a change in the legal owner of the property.  The property transfer tax is payable by the purchaser.  To avoid the property transfer tax, Holdco and Newco will enter into a bare trust or nominee agreement which will state that Holdco will remain on the legal title and Newco will become the beneficial owner of the property.  As a result, the property transfer tax will not be payable until the property is ultimately sold to a third party.

GST

You also have to plan for the GST.  Used residential property is generally exempt from GST.  Commercial property is subject to GST.  However, if Newco is a GST registrant, GST will not apply to a transaction involving commercial property.  Newco will need to collect and remit GST to the CRA on any commercial rental income collected from the date of acquisition until the date the property is ultimately sold to a third party.

Recaptured depreciation

Generally, when you sell a property for more than its original cost the sale proceeds in excess of the cost will be taxed as a capital gain.  However, a portion of the sale proceeds is attributed to the land, and a portion is attributed to the building.  Land is not depreciable property, but the building is.  You’ve likely claimed depreciation on the building, referred to as capital cost allowance or CCA for income tax purposes.  If the sale proceeds attributed to the building are greater than the depreciated cost of the building, the excess up to the original cost of the building is taxable as recaptured depreciation and not a capital gain.  While only 50% of the capital gain is included in income, recaptured depreciation is fully taxable.

If the property was used in your practice the recaptured depreciation may be taxed at your regular practice tax rate of either 11% or 27% depending on your level of income.  However, if the property has not been used in your practice and is being rented to an unrelated party, the income tax on the recaptured depreciation can be as high as 50%.

These are complex tax estimates that will need to be calculated by your accountant.

Anti-flipping rule

Be careful of the anti-flipping rule.  The anti-flipping rule only applies to residential property and not commercial property.  The anti-flipping rule applies if you sell or transfer the property and owned the property for less than 12 months.  If the anti-flipping rule applies, the gain on the sale of the property is fully taxed as income and not as a capital gain.  As a result, for residential property, you need to be certain of the following:

• the property was owned for at least 12 months before transferring it to Newco
• if Newco sells the property within 12 months of the transfer, you must elect at the full sale price on the T2057 tax election or as close as possible to the estimated sale price if the ultimate sale price is not known at the time of filing on the T2057 tax election
• if you are only going to elect to pay tax on a portion of the gain on the transfer to Newco, Newco must hold the property for at least 12 months before it is ultimately sold to a third party in order for the remaining profit to be treated as a capital gain

Let’s look at a couple of examples:

Doug and Bob are both physicians and meet regularly for Wednesday morning breakfast before they start their busy practices.  Doug is going to retire in the next two years and owns his own clinic real estate in his holding company.  Bob has several years ahead of him and owns a residential rental property in his holding company.

The tenants in Bob’s rental property have been challenging and the property is getting older.  It won’t be long before the roof needs to be replaced. In light of the increase in capital gains tax, Bob listed the rental property for sale immediately after the budget was released.  However, Bob is concerned there is no way he can get a deal closed before the tax rates change on June 25^th.

Bob’s rental property is listed for $900,000.  He purchased it many years ago for $500,000.  Bob knows that the ultimate sale of the property is going to cause the passive income grind (as discussed in part two), but that can’t be avoided, it’s time for him to divest himself of his real estate holdings.  Although he’s going to experience the passive income grind, access to the company’s capital dividend account will help alleviate that tax burden. However, Bob’s anxious about paying 34% capital gains tax rather than 25% on the $400,000 capital gain, which will be an extra $36,000 of tax.  Bob called his accountant hoping they could help.

Bob’s accountant explains he can transfer the property to a new company prior to June 25th to trigger the capital gain.  Bob’s accountant knows that he can’t pinpoint the ultimate sale price so he will rely on the Section 85 election to limit the amount of capital gain. Bob’s accountant lays out the steps as follows:

• Incorporate Newco
• On June 24th Holdco will sell the property to Newco for $900,000.
• In consideration for the sale of the property, Newco will issue shares to Holdco.
• Newco and Holdco will enter into a bare trust agreement stating that Holdco will remain on legal title to avoid the property transfer tax.
• Newco and Holdco will jointly elect on the T2057 section 85 election for the transfer of the property to take place at anywhere between the cost of the property of $500,000 and the fair market value of $900,000.

Bob’s holding company has a December year-end. The deadline for submitting the T2057 tax election is June 30, 2025.  Bob’s accountant explains that if later this summer the property finally gets an accepted offer and ultimately sells for $850,000, the T2057 tax election will be filed electing the transfer to take place at $850,000 rather than $900,000 so that Bob’s holding company only pays capital gains tax based on $850,000 rather than the original estimated value of $900,000.

If Bob really struggles to sell the property because interest rates remain high and he doesn’t want to decrease the sale price and instead decides to keep the property, he can always elect in June 2025 for the transfer of the property from Holdco to Newco to take place at tax cost and no tax will be payable on the transaction.  Bob would’ve only incurred some accounting and legal fees as a form of insurance to ensure that he had access to lower tax rates.  If he does change his mind, Newco will need to own the property for at least 12 months before selling it to avoid the anti-flipping rule.

Bob outlines the transaction to Doug at breakfast that morning. Doug is excited at the possibility that he too may be able to pay the tax on his practice real estate now rather than in the next two years at the higher rate.  Doug calls his accountant and is delighted to hear that he can perform the same transaction on his practice real estate and pay the 25% tax rather than the 34% tax.  Doug can pick the amount of tax he wishes to pay by filing the tax election as he ultimately doesn’t know what the property will sell for two years from now and as result will elect at a lower value to ensure that he is not overpaying the tax at this time.

Doug is even more excited to hear from his accountant that the gain on the real estate will not grind down his small business tax rate because it is not considered a passive asset as it is actively used in his medical practice.

Conclusion

That wraps up our three-part series on planning for the increase in capital gains tax.  As you can appreciate, there are a lot of moving parts and a lot of complexity in whether or not it makes sense to pay any tax now or defer the tax to the future.

As outlined in our first article, no one can predict the future and it’s difficult to know what the tax rules may be a few years down the road.  Also, keep in mind the capital gains tax rate change is not yet law.  If you’re going to execute any pre-emptive planning, consider waiting until closer to the deadline when there is more certainty there aren’t going to be additional changes.

If you’re uncertain how these rules may apply to your circumstances, give us a call.

The post Planning for the Capital Gains Tax on your Real Estate Holdings appeared first on Purtzki, Johansen & Associates.

This is part two of our three part series on planning for the increased capital gains tax.

Our last article outlined the upcoming changes to the capital gains tax. We outlined whether or not you should pay that tax now at the lower 25% rate or defer it into the future at the 34% rate.

However, perhaps you’re in the second category we outlined in that article, capital gains tax is not your biggest problem.  You’d love to be able to access some of your corporate funds in order to fill up the TFSA, pay down the mortgage, plan for the acquisition of a new home or family recreational property, or simply to reduce your personal tax liability on your drawings from the company.

Perhaps that can be accomplished by realizing capital gains within your corporation.

The Capital Dividend Account

Currently, the capital gains inclusion rate is 50%, meaning you include 50% of the gain in income.  The budget proposes to increase the inclusion rate to 66.67%.  At the current inclusion rate, the non-taxable portion or the remaining 50% of the capital gain can be distributed to the shareholders as a tax-free capital dividend from a notional tax account referred to as the Capital Dividend Account “CDA”.  After the proposed June 25^th change in the inclusion rate, the tax-free capital dividends will only be 33.33% of the capital gains rather than the current 50%.

As a result, it may be worthwhile to trigger some capital gains now as the benefits may be twofold:

• you lock in the gains on your investments at the current 25% tax rate and avoid paying capital gains tax in the future at the 34% rate
• you have the ability to withdraw the non-taxable portion of the capital gain from the company as a tax-free capital dividend

It doesn’t work for everyone

Accessing tax-free money sounds great but be aware it doesn’t work for everyone.  Like most things, there are side effects.  If you trigger capital gains income in order to access the tax-free dividends from the capital dividend account, your corporation may experience the passive income grind.  We will not go into detail on the passive income grind in this article as the effect of the grind is summarized in our previous article located here: Planning for the increased capital gains tax

Generally, those wishing to access the capital dividend account can be summarized into three categories:

1 – No grind – you won’t experience the passive income grind from the realization of the capital gains income.  Either you don’t have access to the small business tax rate, or the gains will not be large enough to cause your small business tax rate to be ground down below the amount you are saving in your company each year.

2 – Some grind, but recoverable – the capital gains income will cause your medical corporation’s small business limit to be ground down, but it is manageable as you can recover the increased tax through eligible dividends.

3 –   Some grind and not immediately recoverable – the capital gains income will cause your medical corporation’s small business limit to be ground down and you cannot recover the increased tax through eligible dividends in the foreseeable future.

Refundable tax

In order to avoid double taxation, some of the tax on investment income is a refundable tax that is credited back to the corporation when dividends are declared to the shareholders.  At the current tax rates, 15% of the total capital gains tax of 25% is a refundable tax.  If sufficient dividends are declared to the shareholders, the net corporate capital gain tax may be as low as 10%.  However, the tax to the shareholder on the dividend may be higher than the tax recoverable by the corporation and as a result, it is not always beneficial or easy to recover this refundable tax.

Now that we’ve set the framework, let’s have a look at a few examples:

No Grind

Tom is a family physician practising through a medical corporation.  He is generating $450,000 in medical income, after paying practice overheads of $100,000 a year, he is left with $350,000.  Of the $350,000, he draws a salary of $180,000 to obtain the maximum RRSP deduction limit, and additional dividends of approximately $70,000 per year to fund family expenses.  The remaining $100,000 is taxed and saved in the medical corporation.  Tom has diligently accumulated a reasonable investment portfolio inside the medical corporation with accrued capital gains of approximately $150,000.  Tom has a sizable mortgage but fortunately, he will enjoy paying only 2% interest on this mortgage until it matures in late 2025.  Because Tom is taxed in the highest marginal tax bracket, he has been reluctant to draw any additional funds from the corporation and as a result, his TFSA is empty.

Because the increase in capital gains tax is on the horizon, Tom has come to the conclusion it would be best for him to trigger the $150,000 of capital gains and pay the tax at the current lower tax rate and also have access to the company’s capital dividend account. As a result, of the $150,000 of capital gains, $75,000 will be included in his corporation’s taxable income and $75,000 will be added to the notional capital dividend account.  The $75,000 of capital gains income will grind the small business tax rate from $500,000 down to $375,000.  However, fortunately Tom does not experience any passive income grind as he is only saving $100,000 per year before tax in the corporation.

Tom files a special tax election to declare the $75,000 capital dividend as a tax-free capital dividend and draws $75,000 out of the corporation to make the contribution to his TFSA.

In 2025 when Tom’s mortgage comes up for renewal, Tom will review his investment returns and mortgage renewal options and make the tough decision of whether or not he will leave the $75,000 in the TFSA or withdraw it and make a lump sum payment on the mortgage based on interest rates at that time.

The end result is Tom has $75,000 in his TFSA and only incurred an additional $15,000 in corporate tax.

Some grind but recoverable with eligible dividends

Strong markets have been good to Jennifer’s corporately held investment portfolio and she’s sitting on $400,000 of accrued gains inside her medical corporation.  However, living expenses and private school education costs for her three children results in an extra $200,000 of drawings from the corporation annually, which are taxed at the highest marginal tax rate, leaving her with only $102,200 per year to fund the expenses.

Jennifer heard from her colleagues that she should use the capital dividend account to gain access to some tax-free money within the corporation.  However, because of the sizable stock portfolio, Jennifer has been concerned about the effect of the passive income grind on her corporate tax if she triggers any sizable capital gains within her corporation.

Fortunately, Jennifer’s accountant has crunched the numbers and lays out a plan for how Jennifer can benefit from the CDA.

Jennifer sells only the securities with gains and immediately repurchases them so that she can stay invested in the market. The transaction triggers a capital gain of $400,000 of which only 50% is taxable and $200,000 is added to the capital dividend account.  The large capital gain grinds down her small business tax rate and as a result, in her December 31, 2025 fiscal year-end her corporation will pay the general rate of tax of 27%.  Fortunately, based on Jennifer’s income the additional corporate tax from the loss of her small business deduction is recovered by her corporation declaring eligible dividends to her rather than regular dividends.

However, the savings from the $200,000 tax-free capital dividends are not immediately felt in her cash flow.  While Jennifer does save the personal tax in 2024, the transaction does trigger corporate capital gains tax almost equivalent to the personal tax saved on the tax-free capital dividend. However, the combination of the tax-free capital dividend and eligible dividends results in overall tax savings in years 2025 through to 2028 inclusive with her income tax returning to almost a normal level in 2028 as illustrated in the table below:

Providing there are no significant legislative tax changes over the next few years affecting Jennifer’s plan, her overall savings of paying the tax on the capital gains now is $80,500 and she also gets to take advantage of paying 25% tax now rather than paying 34% capital gains tax in the future!

Grind and eligible dividends not currently recoverable

Kyle started his ophthalmology practice in a corporation many years ago.  He was fortunate to pay off his mortgage in the early years of his career and being debt-free allowed him to accumulate a significant investment portfolio within the company.  However, his recent acquisition of the family cottage has resulted in a large personal mortgage that he would really like to eliminate.  His buy-and-hold strategy in the stock portfolio has allowed the portfolio to accrue significant gains of $300,000 and also allowed Kyle to avoid too much of the passive income grind in the corporation.

Because Kyle didn’t have a mortgage, he’s made significant savings in his corporation.  His corporate income has been well in excess of the $500,000 small business tax rate many times over the years.  As a result, his corporation has paid the 27% general rate of tax and has accumulated a pool of eligible dividends that could be declared to him out of the corporate income.

In light of the looming capital gains tax rate proposals, Kyle meets with his financial planner who suggests he should check with his accountant, but perhaps he should trigger the capital gains within his corporation so that he can access the capital dividend account before the rates change, allowing him to make a lump sum payment on the cottage mortgage.  Excited about the opportunity to pay down his debt, Kyle calls his accountant.

Unfortunately, Kyle’s accountant advises if he triggers the $300,000 of capital gains within his corporation, his corporation will experience the passive income grind which will cause him to lose the 11% corporate tax rate on his first $500,000 of income and pay the 27% corporate rate instead for the following year.  The extra 16% on $500,000 would result in Kyle paying approximately $80,000 in additional corporate tax.  As a result of the gain, Kyle would have access to $150,000 of tax-free CDA.  However, this $150,000 tax-free CDA could have normally been distributed as an eligible dividend, the tax rate of which is only 36.54% or approximately $55,000.  As a result, Kyle would be paying an additional $80,000 in corporate tax and only receiving $55,000 of personal tax savings.

Like Jennifer, Kyle can recover the additional corporate tax paid in the form of lower personal tax when he extracts eligible dividends from his corporation in the future.  However, unlike Jennifer, Kyle has a significant pool of eligible dividends already available and continues to generate income adding to the eligible dividend pool.  As result, the recovery of this additional corporate tax would be many years down the road, likely into retirement.

Summary

The changes in the capital gains tax will affect everyone differently.  Before you act, ensure you understand how the proposals will affect you and analyze whether or not you should take action before the new capital gains tax rates come into effect.

Stay tuned, more to follow on how to plan for the gains on your real estate holdings…

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