No longer able to sprinkle company dividends among family members in the low tax bracket, many doctors are bracing themselves for a big hike in personal taxes on their dividend income from their corporations.
There is a tax strategy that lets doctors convert the dividend into a capital gain generating significant savings. This tax gem was hidden in the latest corporate tax refrain. While taxpayers focused on the income splitting and tax hikes on companies with investments, the capital gains gift did not get any press.
To illustrate, the capital gains tax on $200,000 of income from the corporation is about $24,000, compared to a tax of $54,000 on dividend income. A tax saving of $30,000! If you double the income to $400,000, the dividend tax is $141,000 while the capital gains tax is $66,000. A saving of $75,000! As you can see in the table, the more you take, the more you save.
| Income tax | |||
| Payout | Dividends | Capital gains | Savings |
| $ 100,000 | $ 15,622 | $ 8,191 | $ 7,431 |
| $ 200,000 | $ 54,191 | $ 23,402 | $ 30,789 |
| $ 300,000 | $ 97,922 | $ 43,661 | $ 54,261 |
| $ 400,000 | $ 141,654 | $ 66,561 | $ 75,093 |
| $ 500,000 | $ 185,386 | $ 91,228 | $ 94,158 |
| $ 600,000 | $ 229,117 | $116,128 | $112,989 |
The capital gains method of removing funds allows you to reduce your personal taxes on funds you need for living expenses, or make a lump sum payment on your mortgage. With getting the cash out of the company at such a low tax rate, you may also want to consider putting money into the TFSA (Tax-Free Savings Account).Each eligible family member, who has never contributed, can put $57,500 into the TFSA. A huge boost for your retirement nest egg!
We recommend that you act on the capital gains plan very soon to reduce your personal taxes for 2018. Tax strategies that good will not be around for long!
