The time to plan for the sale of your practice is usually several years before the actual sale, since most sellers want to sell shares of their professional corporation (PC), not assets. This is because sellers of shares often qualify to get the first $750,000 of profit tax-free under the capital gains exemption (CGE) rules, with tax savings up to $174,000. Here are some things to consider if you plan to sell shares:
- Even if you are fully sheltered by the CGE, you may have to pay the alternative minimum tax (AMT). Because AMT paid one year can be offset against taxes due in the following seven years, it is closer to a prepayment of future taxes than a real tax, but can still be an unwelcome cash flow hit in the year it first comes due.
- If you can organize the PC to include more shareholders than just the dentist, you can multiply the CGE, but this can take several years’ planning.
- Even dentists who have not incorporated their practices during their career can, with proper planning, set up a PC before selling the practice, and benefit from the CGE rules; however, the CGE cannot be multiplied in this case.
- Some dentists have transferred their hygiene/technical services to a new hygiene/technical services corporation (HSC), to be owned by another family member, in order to multiply the CGE, since the new HSC must be sold at the same time as the PC. Again, the HSC must be set up at least two years prior to the sale in order to qualify for the CGE.
- Before you sell your PC/HSC shares, non-practice assets such as cash, investments, insurance policies and sometimes real estate must be removed. This also takes careful advance planning in order to minimize taxes payable when these assets are removed from the PC/HSC.
There are often other provisions which can be included in the sale contract which will benefit the seller:
- If the seller’s spouse was getting salary from the practice before 1995, there may be scope to pay the spouse a “retiring allowance”, which is tax-deductible to the PC but can be transferred tax-free into the spouse’s RRSP.
- The seller may own the premises, and become the buyer’s landlord, so the terms of the lease agreement, and possible option or first right of refusal to buy the building in the future, must be carefully structured. The lease should address questions such as the renewal options, and who bears the risk of future increases in insurance, property taxes, etc.
- The seller can arrange to have payment for his services as an associate paid to his new PC, with ownership perhaps shared with a spouse to allow for future income-splitting.
- Even if the seller is not staying as an associate, there may be scope for setting up a training or transition administration contract, with payments fully deductible to the buyer, and payable to the seller’s new PC, which could offer further income-splitting opportunities.
- The buyer will usually insist on a restrictive covenant in the agreement, covering where and for how long the seller may not set up a competing practice, which the seller should review with a lawyer.
Contracts for sales of shares generally include extensive warranties given by the seller, since when buyers take over shares, they are also assuming any debts or legal obligations attaching to the PC. One legal issue which you should discuss with your lawyer at this point is who bears any liability for severance or retirement payments for staff who do not fit the buyer’s staffing needs. The seller must be alert to what future commitments are made in the agreement. Sellers should also review any possible extra payments/penalties required to terminate equipment leases.
The sale may be structured as an asset purchase, either because the seller has used the CGE already (or intends to in future), or because it is more tax advantageous to do so. Most buyers prefer asset purchases, since assets can be written off over time for tax purposes, whereas the price paid for shares cannot. Sellers of assets should review carefully the allocation of the sale price to the various assets being sold, given the very significant implications for both buyers and sellers in how this allocation is made. Although most dental PC’s are not registered for HST, this still can be an issue in asset sales: for example, sales of leaseholds are subject to HST, so the buyer may want to minimize allocations to this asset class.
For most dentists, their practice is their biggest asset, and selling their practice is a huge financial, and emotional issue. For that reason, dentists will often spend years to secure their own financial future, and ensure their patients’ long-term needs are well taken care of. It only makes sense to begin well in advance to think about good tax planning to be sure you keep as much as possible of what you are paid for your practice.