Are you ok with giving half of your corporation to CRA?

Ok I get it… that title sounds a bit extreme, but the simple reality is that for incorporated business owners or professionals including dentists, you have worked very hard throughout your career. When you ultimately sell your practice, or your business, a large portion of the value may need to be paid in taxes… but it doesn’t necessarily have to be that way. Through proper planning, there are a number of solutions which are available which can mitigate your tax liability upon sale, leaving more money for you and your family to enjoy.  Let’s start simple by looking at the Lifetime Capital Gains Exemption (LCGE).

Lifetime Capital Gains Exemption

When you have capital gains related to selling the shares of your corporation, the LCGE is a tool that could spare you from paying taxes on all or part of the profit you have earned. In 2022 the LCGE is $913,630 which means if you sell the shares of your corporation, $913,630 of capital gains (sale price minus adjusted cost base of your shares) will be tax exempt. Looking at an example: if you sold your company and incurred a capital gain of $970,000, without the LCGE benefit you would have to pay taxes on 50% of your gain or in other words, you would be taxed on $485,000. Thanks to the LCGE, utilizing the full benefit you would reduce your capital gain to $56,370 ($970,000-$913,630) which means that you will only be taxed on $28,185 (50% of $56,370).

Individual Pension Plans (IPP)

An individual Pension Plan is another extremely effective tool at shelter your money from tax liabilities, not just throughout your working career but also potentially upon sale of your business. Owners of a corporation will be able to accumulate significantly more retirement savings to provide for their lifestyle in retirement, due to having the ability to contribute far more money into the plan vs. traditional RRSP’s. In addition the annual contributions, it is often overlooked but the IPP can also offer significant benefits upon the sale of your business through a mechanism called terminal funding. Terminal funding is the opportunity to make additional contributions into your IPP, once you have retired. Upon retirement, there is an actuarial calculation done to determine additional contribution room in your pension plan based upon your actual information instead of just assumptions. This terminal funding level can be estimated in projections and often can amount to hundreds of thousands of dollars in deductions being created.

An additional benefit of an IPP is it also can present a unique opportunity for intergenerational wealth transfer, especially when you have other family members who are working within your corporation, even if only part time. IPP members are able to transfer family and corporate wealth to the next generation without any tax consequences as the assets never form part of an estate.

The sale of a business can be a difficult time for many. In many cases it is the culmination of nearly a lifetime of hard work and passion… all to be summed up in a dollar value. On top of that, it will likely generate the highest tax bill you will ever face, but the good news is, with proper planning, you can keep more of your legacy in your control. But it pays to start early on that planning, don’t wait until you are already in the selling process. To explore the opportunities available to you I strongly encourage you to seek out professional advice.

- Grant White, CIM®, CFP®

Grant White is a Portfolio Manager/Investment Advisor at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families. This information has been prepared by Grant White who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth.

The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.