As always, an annual financial checkup with your financial planner, investment adviser and your accountant is essential to your financial health. One major retirement asset is the dental practice you own. Did you include your dental practice as part of your annual financial checkup? Through planning, analysis of your practice and implementation of suggestions for practice improvement, you may be able to secure a higher price for your practice. Tax planning is essential if you wish to minimize the taxes upon the sale of your practice.
Except in an unforeseeable circumstance such as a sudden death, you should plan for the sale of your practice three to five years in advance. Aside from financial reasons, you have to prepare yourself for the retirement days to come. Why? Because with a better understanding of what retirement means and careful planning, you will likely enjoy it more. You need to determine what you plan to do during your retirement years– whether you will be working a couple of days a week, traveling, volunteering or taking up some new hobbies. Of course, these decisions also affect how much money you will need to retire.
From a financial aspect, the income tax factor will be a big part of this process. Are you selling a portion of your practice gradually over time or are you selling it all at once? Are you selling shares or assets? When selling your practice, which option works best for you financially? What does it mean in terms of the after tax dollars in your pocket?
You may sell assets if you operate your dental practice as a sole proprietorship or a professional corporation, and possibly a hygiene/technical corporation. However, you can only sell shares if you have or will have a professional or a hygiene/technical services corporation (PC/H/TSC). The life time capital gains exemption of $750,000 may be available only if you sell shares but not assets. A $750,000 capital gains exemption equates to a tax saving of $174,000 for a top tax bracket Ontario resident. Your advisor will have to review the PC/H/TSC financial statements and the shareholder’s (i.e., you and your family members) tax history to determine if you and/or your family qualify for the exemption.
There are other advantages and disadvantages of selling assets and shares which you should also consider:
- No extra legal and accounting fees in setting up a PC/H/TSC prior to the sale.
- If you have a PC/H/TSC, you may continue using it for investment purposes after the asset sale and income split with your family over future years; appropriate annual dividend may be paid.
- If you have a PC/H/TSC, you, the shareholder, may decide to sell assets and be entitled to receive tax-free dividends from the PC/H/TSC as a result of the assets sold.
- You can select which assets are to be sold especially if you own more than one dental practice or have other investment assets.
- You are responsible and liable for collecting and remitting any applicable HST due on the sale. Canada Revenue Agency could assess you for any unpaid taxes on the sale.
- If you have a PC/H/TSC, you may have to incur extra legal and accounting fees to dissolve the PC/H/TSC should you decide to discontinue/wind up the corporation. If you continue using it as an investment corporation, there will be annual accounting and legal fees to maintain the corporation.
- It could result in a higher tax bill
- Any resulting capital gains may be sheltered by the lifetime capital gains exemption if certain conditions are met, thereby reducing your taxes on the sale.
- The life time capital gains exemption may be multiplied if you have other shareholders owning shares of PC/H/TSC and they qualify for the life time capital gains exemption. E.g., if your poor mom, dad and spouse are also shareholders of your PC, in addition to you, potential capital gains of $3 million generated on the sale of your practice could be virtually tax free.
- You have to incur legal and accounting fees to set up the PC/H/TSC.
- You have to plan ahead to make sure you and your family members qualify for the life time capital gains exemption. We suggest at least two years planning prior to the sale.
- Your selling price may have to be reduced to compensate the purchaser for reduced future tax deductions. This depends if it is a vendor’s or purchaser’s market. Normally, purchasers prefer to buy assets. In many markets where there is a shortage of practices for sale or there is a high demand for practices, the shares of a dental practice command a premium price or more than the appraised asset amount.
- Any inactive assets (for example, life insurance policy, cash or investments) must be paid out to you or other shareholders prior to the sale unless you are selling these as well. The distribution of these inactive assets could result in taxes in the recipients’ hands.
- If you operate more than one practice via a PC/H/TSC, you might need a complex tax maneuver to separate the practices prior to the sale.
Whether you are selling assets or shares of your dental practice, you should have an appraisal prepared by a qualified professional. It provides information purchasers will require including, but not limited to, the number of patients, your office hours, employment and salary history of your staff, your financial information and lease premises details. Consult with your tax and accounting advisor three to five years prior to selling your dental practice as this will save you taxes.