How recent tax changes impact professionals and professional practice owners

Proposed tax changes for 2023 and 2024

General Anti Avoidance Rule (GAAR)

Canada’s General Anti Avoidance Rule (GAAR) aims to prevent potentially abusive tax planning by scrutinizing transactions that challenge tax rules contrary to their intended purpose. Starting from January 1, 2024, the proposed legislation revisions set a lower bar. The onus will now be on you to prove that obtaining a tax benefit wasn't the main purpose of your transaction.

While intentional planning options such as Tax-Free Savings Accounts (TFSAs) remain exempt from GAAR assessments, be cautious about certain previous planning strategies targeted under the revised legislation. Penalties can include a 25 percent penalty on the tax benefit and an extended reassessment period of up to six years unless the transaction was previously disclosed to the CRA.

Alternative Minimum Tax (AMT)

The 2023 federal budget proposes changes that may directly impact you if you realize a significant capital gain, sell your business with a lifetime capital gains exemption, or plan substantial charitable giving in 2024 and beyond. These changes may create additional upfront income tax based on the alternative calculation and the changes in the calculations.

Trust reporting rules

The 2018 budget introduced tax changes requiring more trusts to file T3 returns, disclosing detailed information about the parties involved. These changes will affect trusts created years ago that were previously exempt from annual filings. The new rules include extended requirements for disclosing individual information about trustees, beneficiaries, settlors, and parties influencing trustee decisions.

Bare trusts, involving a separation of legal and beneficial ownership, are now required to file returns. This affects various legal arrangements, including real estate, partnerships, and assets for which individuals or corporations may have been added to the title for legal purposes only. Ensure you review your trust structure to determine your filing requirements as significant penalties apply for missed filings. If you need assistance, reach out to your MNP advisor for guidance.

Tax planning considerations

Immediate expensing

Immediate expensing allows for a full deduction of depreciation on newly acquired eligible property, including equipment, furniture, leasehold improvements, and computer hardware and software. Ensure the property is acquired and available for use before January 1, 2024, with a maximum limit of $1.5 million per taxation year for you and any associated group of companies.

Estate planning

Estate planning goes beyond a simple will. It involves careful business succession planning and asset protection. Essential legal documents like wills and power of attorney should be part of this process, overseen by your lawyer and MNP advisor to mitigate potential tax implications.

Sale of your professional practice

When considering the sale of your professional practice, you have various potential purchasers, including associates, family members, or external investors. The sale structure impacts the overall tax implications and after-tax cash, whether a share sale, asset sale, or combination of these options. Earnouts can also be included to secure additional proceeds based on future performance. Ensure the sale structure maximizes your after-tax cash proceeds.

Evaluate whether you and your family qualify for the lifetime capital gains exemption, considering the 2023 limit is $971,190. Test your current corporate structure and assets to ensure you qualify for the exemption. Transferring most assets well before the sale can help avoid immediate income tax implications, but some assets, like life insurance, may require additional planning due to valuation and income tax complexities.

Canada Digital Adoption Program

The Canada Digital Adoption Program (CDAP) has emerged as a significant initiative available to help small and medium-sized businesses adapt to an increasingly digital-first business landscape. This program offers a grant of up to $15,000 to help you retain a digital advisor who will help you plan your transformation journey.

It also offers up to $100,000 in interest-free loans to help you purchase the necessary software, hardware, and equipment to put those plans into action. The right digital transformation strategy can help you streamline operations, enhance client experiences, and improve overall efficiency.