The Federal government is looking for new sources of tax revenues to pay for proposed spending and it has decided that the business community, including physicians that are incorporated, would be a good source of tax revenue.
The proposed change to the Income Tax Act (Canada) is to make any capital gains generated by a Corporation such as a Medical Professional Corporation (“MPC”) taxed on 66.6% of any capital gains earned after June 25, 2024, instead of the 50% inclusion rate that had been in effect for years.
Simply put, if my MPC purchased 1,000 shares worth $100 a few years ago, and I decide to sell them on June 26, 2024 or thereafter, for say, $300/share, my side-by-side results are:
| CURRENT | NEW | |
| Adjusted cost base of shares | $100,000 | $100,000 |
| Proceeds of disposition of shares | $300,000 | $300,000 |
| Capital gains | $200,000 | $200,000 |
| Taxable capital gains | $100,000 (50%) | $133,200 (66.6%) |
| Investment Income Tax or MPC | $50,200 (50.2%) | $66,866.40 (50.2%) |
| Net cash available post tax | $249,800 | 233,133.60 |
| Loss of cash due to new rule | n/a | $16,666.40 |
| Ratio of loss to capital gain | n/a | 8.3% |
That’s the Bad news. The good news is that when an MPC sponsors a pension plan and makes contributions to it offsetting corporate tax deductions become available to the MPC.
Let’s take another example. MPC sponsors a pension plan and the pension plan requires the MPC to contribute $200,000.
Using the same example in terms of share purchase price, what happens?
| Adjusted cost base of shares | $100,000 |
| Proceeds of disposition of shares | $300,000 |
| Capital gains | $200,000 |
| Taxable capital gains (new rules) | $133,200 |
| Investment Income Tax | $66,866.40 |
| Deduction for pension plan | $200,000 |
| Taxes owed by MPC | $0.00 |
| Tax losses | $133,133.60 (can be used against previously paid taxes to get refunds of taxes) |
| Capital Dividends Account credit $66,600 (Physician can pay him/herself $66,600 from the $100,000 of free cash left and pay no personal taxes) |
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In other words, not only did the MPC pay no corporate taxes at all (minimized taxes by $66,866), the physician is enjoying tax-free income of $66,600.
There may even be some tax losses that can be used against future corporate income ($133,133.60).
What a difference!