CORPORATE STRUCTURE FOR DENTAL PROFESSIONALS
It is never to early or too late to benefit from the advantages offered by incorporation. To benefit from such advantages, your corporate structure should have three different components: a professional corporation, a family trust and a holding company. The professional corporation allows the professional the possibility to practice his or her profession, receive payments from patients or directly from the RAMQ and pay tax at a rate of 19% in the corporation. Family trusts allow for the multiplication of the capital gains exemption as a holding company permits sheltering surplus income to ensure better protection from creditors. For more information regarding incorporating your practice, please see our section on incorporation of healthcare professionals.
LIFETIME CAPITAL GAINS EXEMPTION
The lifetime capital gains exemption introduced in 1986 has helped numerous business owners save tax when selling shares of their business. In summary, it allows selling dentists to shelter a certain amount of capital gains income when selling shares of their clinic if certain conditions are met. If the selling dentist disposes of his assets rather than shares, the lifetime capital gains exemption will not apply and taxes will be owed.
QUALIFYING FOR THE CAPITAL GAINS EXEMPTION
To qualify for the exemption, three tests must be met at the time of disposition:
Small business corporation (SBC) test: At least 90% of the fair market value of the dental corporation’s assets must be actively used in the business carried on primarily in Canada. Assets also include the value of goodwill even if not included on the corporation’s balance sheet.
Holding period test: The disposed share must not have been owned by anyone other the shareholder or a related person throughout the 24-month period prior to the disposition.
Basic asset test: Throughout the 24 months prior to the disposition, the corporation was considered a Canadian-controlled private corporation and more than 50% of the dental corporation’s assets were actively used in the business.
Having the right corporate structure from the beginning can make it easier for a dentist to qualify in the case of an eventual sale and can even allow for the multiplication of the capital gains exemption through the use of a family trust. For the selling dentist, this could mean that the full sale price is non-taxable by claiming not only his or her exemption but also claiming the exemption of family members such as a spouse, parents or even minor children.
The July 18, 2017 federal proposals aimed at curbing income splitting by business owners but they did not have any direct impact on the use and multiplication of the lifetime capital gains exemption.
Proper planning at least 2 years before selling a practice is necessary in order to maximize tax savings but in our experience, we would even recommend starting the process 5 years out. The concept of incorporation may seem simple but dentists and their accountants can easily be derailed by the intricacies of taxation. Working with a tax professional can minimize unexpected consequences for both the sellers and the buyers.