Sponsored by Evcor writen by Max Beairsto
After the federal government announced new taxation rules for capital gains in its April Budget, we received plenty of inquiries from pharmacist-owners about what it all might mean for them when they put up their pharmacy for sale. That’s understandable, because the new rules represent a significant change in the way and by how much people who sell their businesses will have to approach capital gains taxes. Plus, the new cap gains taxation legislation is rather complex, and before the government’s release of clarifications over the summer, it wasn’t very easy to answer the question, “What does all this mean for me?”
We can more confidently address that question now—or, rather, refer it to Mike Stannix, a Canadian and international tax expert at Accelerate LLP in Edmonton, whom I’ve worked with for many years. Mike shared his wisdom on the cap gains tax change in a recent episode of the Pharmacy Edge podcast, and we touched base with him again this fall to get an update.
The following discussion of the capital gains tax is based on Mike’s perspectives, but let me emphasize that this is not to be interpreted as specific tax advice. Every business and business owner’s situation is different, and anyone who wants to know how or whether the new rules apply to them specifically should consult their own accountant or tax advisor.
The capital gains inclusion rate
The big news out of the Budget was the hike in the capital gains inclusion rate from one-half to two-thirds. When this came out, some ill-informed online chatter claimed that the government had just hiked the capital gains tax rate to 66-2/3%, but that’s grossly misleading. What actually changed was the portion of capital gains that taxpayers must count as income that is subject to taxation. Before the Budget, that portion was 50%; after the Budget, it is 66-2/3%.
New Capital Gains Rules: What They Mean for You
The federal government introduced new rules for capital gains tax, raising questions from pharmacist-owners about selling their pharmacies. We sought expert advice to explain these changes.
Capital Gains Inclusion Rate
The inclusion rate for capital gains has increased from 50% to 66.7%. This means more of your profits from a sale will be taxed. For example, if Jane sold her pharmacy for a $1 million gain before June 25, she would have been taxed on half of that, but under the new rules, two-thirds is taxable.
$250,000 Exemption
Individuals can count the first $250,000 of capital gains at the old rate of 50%, which could reduce taxes by $21,000 in some cases. However, corporations and holdings cannot use this exemption.
Lifetime Capital Gains Exemption
The exemption limit increased to $1.25 million, which can offset the new inclusion rate impact. To qualify, your company must meet specific criteria regarding asset activity before the sale.
Canadian Entrepreneurs’ Incentive
A new incentive allows qualifying entrepreneurs to apply a one-third inclusion rate on up to $2 million in gains, combined with the lifetime exemption. However, it has specific criteria and is being phased in gradually.
Remember that these are theoretical examples, served up here only for illustration. Your own situation may well differ, so before considering your own corporate structure and whether to adapt it to the new rules, consult your tax advisor.
But there are provisos. The CEI is being phased in, starting at $400,000 per year until reaches the $2 million cap. And qualifying for the incentive means meeting some very specific criteria—for instance, it only applies to certain industries. Still, it’s yet another issue to discuss with your tax advisor.
Hopefully, the big message here is obvious: talk to a qualified tax professional about what the new tax rules mean for you, and do it well before you plan to sell.
Even if you’re not planning to sell right now, this year’s changes are a reminder that tax policy can and does change, usually without a lot of warning. So. having a tax advisor and making sure you discuss your tax position with them regularly is a smart way to keep yourself and your business prepared.
Max Beairsto received both his pharmacy degree and executive MBA from the University of Alberta. He also holds a certification as a valuation analyst with both the National and Canadian Association of Valuators and Analysts. His 28-year involvement in valuations began with the purchase of his first business in 1995, which he then sold in 2000. The Katz Group then recruited him, where he gained more valuation and acquisition experience and eventually became the Director of Acquisitions and Real Estate in Western Canada. Since 2005 through his company Evcor, he has been actively involved in valuations and business consulting, having completed hundreds of valuation assessments.