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It’s safe to say that Canada’s Pharmacists have never seen a cold and flu season like this one before. Pharmacists played an integral role in Canada’s COVID-19 strategy, delivering trusted advice, pharmaceutical care, and even vaccines. That’s why it’s especially important to acknowledge their tireless work during Pharmacy Awareness Month! In today’s blog post we’re going to highlight some of the taxation regulations, succession planning considerations, and ownership/sale implications for Pharmacy professionals.
Strategic tax savings
There are three different options for Pharmacists in terms of taxation. Each one has its benefits, and the choice of which is right will depend on the individual situation of the Pharmacist.
Staff Pharmacist
Staff Pharmacists who split their time between pharmacy locations will often wind up paying a lot of taxes at the end of the year, while also accruing lots of kilometres travelling to work. If this is the case, it may be beneficial to bill as a Relief Pharmacist instead. This way you could write off business expenses and reduce taxes.
Relief Pharmacist
Relief Pharmacists can charge as either a sole proprietor or corporation. The primary advantage to incorporating is that the corporate tax rate is lower than personal tax rates. The decision to incorporate is one that should be considered according to the specifics of the individual.
Pharmacy Owner
Utilizing the proper legal entity structure can save thousands of dollars, regardless of how many Pharmacy locations an individual owns. Additionally, harnessing the power of income splitting, and claiming allowable business expenses will allow you to reduce taxation even further.
Succession planning
The discussion of succession planning goes hand-in-hand with tax planning. Why? Because certain tax structures result in capital gains, while others influence dividend rates, and in some cases regular income could be fully taxed. It’s surprising to note though that 58%[1] of small business owners do not have a succession plan! While 78% say that they enjoy their job too much to think about moving on, it’s a discussion that needs to be had regardless.
There are a number of different considerations depending on whether the individual taking over the business is a family member, or a third party. Certain tax rules can limit tax planning abilities, so it’s critical to run your plan past a professional who has the subject matter expertise to align your financial goals with the best taxation strategy for your succession plan.
Purchase and sale
The decision to purchase a Pharmacy, or sell one you currently own, is an in-depth process worthy of careful consideration. The purchase of a Pharmacy can be broken down into two categories:
Asset purchase:
In this scenario, the Pharmacy is the new owner’s from scratch. Any negative history previously incurred by past owners is irrelevant to the new owner. The goodwill deduction allows you to save tax money for years to come. That being said, an asset purchase also comes with a great deal of initial work. The new owner needs to negotiate new accounts with suppliers, new credit, new leases, new ODB number, and new licenses through the Ontario College of Pharmacists.
Share purchase:
In a share purchase, the new owner may be able to use the previous owner’s losses against taxable income. The purchase also requires less negotiation since new leases, credit, employment agreements and ODB numbers can remain in place. But the new owner is not able to use the goodwill deduction and will also inherit any negative history from previous owners.
Similarly, the sale of a Pharmacy can be broken down into the same two categories:
Asset sale:
In an asset sale, losses from the business can be used against taxable income from the sale, or future income. The Capital Dividend Account allows you to take a portion of the gain on the sale-tax free. However, since the seller is unable to utilize the Capital Gains Exemption, taxes are higher. Additionally, all corporate filings and regulatory paperwork for the year of sale will need to be completed, even if the business has no activity.
Share sale:
In a share sale, it’s possible to utilize the Capital Gains Exemption, which could allow hundreds of thousands of tax-free income dollars on the sale of small business shares. Regulatory paperwork and corporate filings do not need to be completed for the year of sale. That being said, the seller cannot use the Capital Dividend Account for gains on the sale, and therefore cannot access that money tax-free. Further, the seller may be required to “cleanse” the company prior to sale, which is costly and time consuming.
An unprecedented year
If 2020 taught us anything, it’s to expect the unexpected. That’s why succession planning, and taxation strategy are so powerful: They set up your Pharmacy for success well in advance of any challenges that may come in the future.
The team at Zeifmans has decades of experience assisting Pharmacists in maximizing profits and minimizing taxation. To learn more about how we can help you achieve your financial goals, connect with us today and start a conversation.
[1] The Motley Fool, “Most small business owners lack a succession plan”, https://www.fool.com/careers/2018/08/03/most-small-business-owners-lack-a-succession-plan.aspx
