Do you want to use corporate assets to pay off your mortgage, build a cottage, or buy a second practice? The taxes on major withdrawals can be huge—but there are strategies to minimize the tax burden. For amounts of $1 million or greater, the most tax-efficient way to do this is to use capital gains planning, which enables you to withdraw money from your corporation at capital gains rates instead of dividend rates.
Time Is Running Out
Experts worry that upcoming legislation could eliminate this opportunity. It’s a complicated process so if you want to take advantage of it, you need to get started right away.
How much can you save?
Withdrawals from a corporation are typically in the form of dividends, but this planning, when executed properly, allows you to pay tax at the capital gains rate of approximately 25% instead of the dividend rate of approximately 45%. While these rates vary by province or territory, on average you can save approximately 20%, or $200,000 on a $1,000,000 withdrawal.
How much does it cost?
This is a very complex and detailed process. The combined legal and accounting fees to set up the appropriate corporations and do the necessary transactions are typically around $35,000. This means your net tax savings in this case are approximately $165,000! But these fees don’t change for a larger withdrawal. So, for example, a $2M withdrawal would result in $365,000 in savings.
What other factors should you consider?
- Do you pay tax at the top marginal rate? If not, there is still a benefit, but it would be slightly less.
- The shares of your operating company must have the value that you are taking out. It doesn’t need to be strictly in cash or investments but could be represented by goodwill in your practice.
This strategy can be for a one-time cash need, or it can be taken over several years.
- Once you’ve paid the tax on the capital gain, you have a pipeline to cash that you can draw on, tax free.
- You will need to have access to enough cash to pay the capital gain liability (approximately 25% of the withdrawal amount) within 12 months of implementing the strategy.
The first step is to contact an Investment Planning Advisor from CDSPI Advisory Services Inc. to determine if this strategy is right for you. An advisor can put you in touch with the right professionals to help you save considerable tax on a withdrawal of funds.
Book a meeting with an Investment Planning Advisor to get started.
Looking for other ways to save on tax? Read our Six Tips for Tax Savvy Dentists.
The information in this article outlines several strategies, not all of which will apply to your particular financial situation and should not be considered tax advice. While the content has been obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed. You should consult a professional tax advisor to obtain advice about your individual situation. None of CDSPI, CDSPI Advisory Services Inc., or any other person accepts any liability arising out of any use of such information.