Selling your dental practice tax-free
If your dental practice is incorporated, it may be possible to sell it tax-free, provided certain conditions are met.
It is not automatic. Being incorporated does not, on its own, mean that you qualify. This page gives you a general overview of how it works and of the steps that need to be taken, ideally well before the day you decide to sell.
Every individual in Canada has a lifetime capital gains exemption
Since 1985, the Income Tax Act has allowed individuals who own a business through a corporation to sell its shares and realize a capital gain without paying tax on it, up to a certain amount. This is the lifetime capital gains exemption.
Every individual resident in Canada has access to it, from birth. You have one. Your spouse has one. Each of your children has one, including your minor children, and so do your parents. In the context of a business, it applies to the shares of a small business corporation. A dental practice is a business, and when it is operated through a corporation, its shares can qualify.
- It is indexed to inflation, so the amount is adjusted each year.
- It applies to shares of a private corporation that qualifies as a small business corporation. It does not apply to shares of public companies you may hold on the stock market.
- It can be reduced. Depending on your tax history, the amount actually available to you may be lower. We explain why below.
You sell shares, not assets
The exemption applies to a sale of shares. A sale of the assets of the practice does not qualify.
Which means being incorporated
Without a corporation there are no shares to sell.
And the shares have to qualify
Being incorporated is not enough. The shares must meet strict tests set out in the Income Tax Act.
“I'm incorporated, so I won't pay tax when I sell.”
This is the sentence we hear most often, and it follows naturally from what is above. It is partly right, which is exactly what makes it risky.
Being incorporated is what makes a tax-free sale possible. It does not, on its own, make the sale tax-free. Three points stand between the two.
The exemption has a ceiling
The exemption shelters a capital gain up to a fixed amount per individual. Any gain above that amount is taxable, unless the structure was planned in advance to cover it.
Your shares have to meet three tests
The exemption is not granted to every incorporated dentist. It is available on shares that meet the conditions of the Income Tax Act, two of which are measured over the 24 months before the sale.
An asset sale does not qualify
If the transaction ends up as a sale of the assets of the practice rather than a sale of the shares of your corporation, the exemption is not available.
What the Income Tax Act provides
The lifetime capital gains exemption is, technically, a deduction. It is set out in section 110.6 of the Income Tax Act, and Quebec's Taxation Act provides a corresponding deduction for Quebec tax purposes. Introduced in 1985, the amount has been increased several times; it was raised to $1,250,000 for dispositions made after June 24, 2024 and, being indexed from 2026, stands at $1,275,000 for 2026.
The rules rely on a series of defined terms. Understanding them is the key to understanding everything that follows.
- Capital gainSection 40
The amount by which the proceeds of disposition of a property exceed its adjusted cost base and the expenses of disposition. Half of a capital gain, the taxable capital gain, is included in income.
- Lifetime capital gains exemptionSection 110.6(2.1)
The deduction that an individual, other than a trust, who was resident in Canada throughout the year may claim in respect of a capital gain realized on the disposition of qualified small business corporation shares. It is cumulative: it does not have to be used all at once, and any unused portion remains available for a later disposition.
“In computing the taxable income for a taxation year of an individual (other than a trust) who was resident in Canada throughout the year and who disposed of a share of a corporation […] that, at the time of disposition, was a qualified small business corporation share of the individual, there may be deducted […]”Income Tax Act, subsection 110.6(2.1)
- Qualified small business corporation shareSection 110.6(1)
A share that meets three conditions: it is a share of a small business corporation at the time of the sale; it was not owned by anyone other than you or a person or partnership related to you during the 24 months preceding the sale; and during those 24 months, more than 50% of the fair market value of the corporation's assets was attributable to assets used principally in an active business carried on primarily in Canada. These are the three tests set out further down.
- Small business corporationSubsection 248(1)
A Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which is attributable to assets used principally in an active business carried on primarily in Canada, or to shares or debts of connected small business corporations. The Canada Revenue Agency generally interprets “all or substantially all” as 90% or more.
- Canadian-controlled private corporationSubsection 125(7)
A private corporation that is a Canadian corporation and is not controlled by non-residents or by public corporations. A dental corporation owned by Quebec dentists will generally meet this definition.
- Active businessSubsection 125(7)
Any business other than a specified investment business or a personal services business. The practice of dentistry is an active business. Holding investments is not.
The ceiling is the same for everyone, but the amount you can actually use depends on your own tax history.
What can reduce your exemption
- Amounts you have already claimed on a previous disposition of qualifying shares or other qualifying property.
- Allowable business investment losses deducted in the past, for example on shares of, or a loan to, a small business corporation that failed.
- A cumulative net investment loss, which arises when your investment expenses since 1988, such as interest on money borrowed to invest, have exceeded your investment income. While that balance exists, it reduces the exemption you can claim in the year of the sale.
How to find out how much you have left
Ask your accountant, ideally well before a sale. They can establish it from your past returns: Form T657 records each capital gains deduction you have claimed, and Form T936 tracks the cumulative net investment loss. The history of your claims is also kept in your file at the Canada Revenue Agency, and part of it can be consulted in your CRA My Account.
A cumulative net investment loss can often be reduced before a sale with some planning, which is one more reason to verify it early.
“Value” in the tax rules means fair market value
Every test that determines whether your shares qualify is measured in fair market value. So is the value of your practice when a family trust is introduced. It is therefore important to be precise about what the term means, because it is not the value you see on your financial statements or in your tax returns.
“The highest price, expressed in terms of money or money's worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm's length, neither party being under any compulsion to transact.”Canada Revenue Agency, Policy Statement P-165R. The Income Tax Act does not define the term; this definition reflects the position developed by the courts, notably in Henderson Estate (Federal Court, 1973).
What your financial statements show
- The historical cost of the assets, less the depreciation claimed
- Goodwill generally does not appear, or appears at a nominal amount
- Prepared by your accountant for accounting and tax reporting
What your practice would actually sell for
- Determined by a valuation, not by the balance sheet
- Includes the goodwill of the practice, which is often its largest asset
- Established by a qualified appraiser
This is why your accountant's financial statements are not enough to establish whether your shares qualify. When we carry out a reorganization or a pre-sale analysis, we work with dental practice appraisers, so that the fair market value of the practice, and of each asset within it, rests on a proper valuation.
If you are not yet incorporated
Because the exemption applies only to shares, a dentist who practices in their own name cannot claim it on the sale of the practice. That does not mean it is too late to incorporate, but the 24-month period in the tax rules is often misunderstood.
“My practice has to be incorporated for 24 months before I can sell it tax-free.”
The 24 months are a test applied to the shares of a corporation. They are not a minimum period of incorporation.
Paragraph 110.6(14)(f) of the Income Tax Act provides an exception for shares issued as consideration for the transfer of all or substantially all of the assets used in an active business carried on by the individual. In practical terms, a dentist who transfers all or substantially all of the assets of the practice to a new corporation in exchange for its shares is not subject to the 24-month holding period on those shares, and can, if the other conditions are met at the time of the sale, claim the exemption even when the incorporation takes place shortly before the sale.
So why incorporate now, rather than when a buyer appears?Because the options that matter most are only available with time.
If your gain will exceed your exemption
Incorporating at the time of the sale gives you access to your own exemption only. Using the exemptions of family members requires a family trust, and shares issued to a trust generally have to be held for 24 months before they can qualify. That time is not available if you incorporate when the buyer appears.
If something happens before the sale
On death, you are deemed to have disposed of your property at fair market value. A practice cannot be incorporated after death, and if it was not incorporated, the exemption cannot be claimed on that deemed disposition.
Because incorporation takes time
The practice must be appraised, the corporation authorized by the Ordre des dentistes du Québec and the assets transferred on a tax-deferred basis. Doing this under a buyer's timetable adds pressure and risk to the transaction.
The three tests your shares must meet
Being incorporated gives you shares. To be sold under the exemption, those shares must be qualified small business corporation shares, which means meeting the three tests in the definition. The first two apply throughout the 24 months immediately preceding the sale; the third applies at the time of the sale.
The principle behind all three is the same: the exemption is intended for active businesses. The corporation must therefore use its assets principally in carrying on your practice, rather than in holding investments.
Tests 1 and 2 apply throughout the 24-month period. Test 3 applies at the time of the sale.
Who owned the shares
Throughout the 24 months immediately preceding the sale, the shares must not have been owned by anyone other than you or a person or partnership related to you.
What the corporation owned over 24 months
Throughout that period, the corporation must have been a Canadian-controlled private corporation more than 50% of the fair market value of the assets of which was attributable to assets used principally in an active business carried on primarily in Canada.
What the corporation owns at the time of sale
At the time of the sale, the shares must be shares of a small business corporation: all or substantially all of the fair market value of its assets, generally interpreted as 90% or more, must be attributable to assets used principally in an active business carried on primarily in Canada.
Test 2 · Throughout the 24 months
More than 50% of the fair market value of the assets.
Test 3 · At the time of the sale
90% or more of the fair market value of the assets.
Shares and debts of certain connected corporations can also be taken into account in applying these tests, subject to additional conditions.
Which assets can contaminate your corporation
A successful practice generates more profit than its owner needs to live on, and that surplus tends to accumulate inside the corporation. This is the most common reason shares fail to qualify.
Over the years, the surplus becomes cash, investments or real estate. These assets are not used in the practice of dentistry. If their fair market value becomes too large in relation to the fair market value of all of the corporation's assets, including its goodwill, they can contaminate the corporation, and a dentist who has done everything right by saving inside the corporation can end up with shares that do not qualify.
Does your corporation currently hold any of the following?Investments
Shares, bonds, mutual funds, exchange-traded funds or other investment products held in the corporation.
Real estate not used entirely in the practice
A rental property, or a building in which part of the space is used by the clinic and the rest is rented to others.
Cash beyond the needs of the practice
Cash accumulated in the corporation beyond what is required to operate the practice.
Artwork and other valuables
Artwork, collectibles or other items of significant value paid for with corporate funds, even if they decorate the walls of the clinic.
Loans made by the corporation
Amounts lent by the corporation to you, to members of your family or to other companies.
Life insurance with a cash value
A life insurance policy owned by the corporation that has accumulated a cash surrender value.
A word on cash. Cash is not disqualifying in itself. Cash that the practice needs to operate is generally considered to be used in the business. There is no fixed rule on how much is acceptable; it depends on the practice and its actual needs. When cash accumulates well beyond those needs, it can contaminate the corporation.
This list is an indication only. Holding one of these assets does not, by itself, mean that your shares do not qualify; what matters is their fair market value in relation to the fair market value of all of the corporation's assets, over the 24 months before a sale and at the time of the sale. If you recognize your corporation in any of these items, your corporate structure should be reviewed by a tax professional. That analysis is what we do.
Purifying the corporation
When a corporation holds assets that could prevent its shares from qualifying, it may need to be purified. Purification is a legal and accounting process by which inactive assets, such as excess cash, investments or real estate that is not used in the practice, are removed from the corporation so that it holds what the practice needs.
The timing of purification is governed by the 24-month period in the tests. If the corporation did not meet the 50% test at some point during the 24 months before the sale, purifying it shortly before the sale will generally not be enough: the shares will not qualify until the test has been met throughout a full 24-month period. Even where the corporation has always remained above 50%, a purification carried out close to the sale leaves little margin and can have its own tax cost. Add to this the time needed to analyse the structure and carry out the steps with your accountant, and, where a family trust is part of the plan, the time it needs to be effective.
The suggested timing is our recommendation, not a rule of the Income Tax Act. The only period set by the law is the 24 months examined by the tests.
This is why we suggest reviewing the structure and, where needed, purifying the corporation five to seven years before the sale you have in mind, and ideally no less than four to five years before you intend to begin the sale process. Starting at that point leaves room for the 24-month period, for the unexpected, and, where a family trust is introduced, for the value of the practice to grow in the trust's hands. The work can often still be done later; it simply leaves fewer options.
The family trust
Your exemption covers $1,275,000 of gain. Many dental practices today are worth more. Every member of your family has an exemption of their own, and a family trust is the tool that can allow them to use it on the sale of your practice.
A legal arrangement with three parties
A family trust is created by a written deed. The settlor establishes it; the trustees administer it and make its decisions; the beneficiaries are the family members who may receive income or capital from it.
At incorporation or through a reorganization
The trust becomes a shareholder of your dental corporation. For a new corporation, this can be done at incorporation. For an existing corporation, it requires a corporate reorganization, generally an estate freeze.
Not the beneficiaries
The beneficiaries do not control the corporation; the trustees administer the trust. The structure must comply with the rules of the Ordre des dentistes du Québec on who may hold shares of a dental corporation, and it is designed accordingly.
Use 1 · Multiplying the exemption
When the shares are sold, the gain realized by the trust can be allocated to its beneficiaries, and each of them may be able to shelter their portion with their own exemption.
Use 2 · Ongoing purification
In the structures we put in place, the trust also allows the surplus of the dental corporation to be moved out regularly, so that the corporation keeps qualifying. We explain this in the next section.
Only the growth after the freeze belongs to the trust
In an estate freeze, the current fair market value of the corporation is fixed in preferred shares held by you, and the trust subscribes for new common shares that will carry the future growth. Only the value created after the freeze belongs to the trust. If the trust is introduced when the practice has already reached its value, there is little growth left to allocate to your family, and little benefit.
There is also the 24-month holding period. Shares newly issued by a corporation are generally deemed to have been owned by an unrelated person immediately before they were issued, so shares a trust subscribes for must generally be held for 24 months before they can meet the holding period test. This is why we suggest considering a trust when the value of the practice begins to approach your exemption, rather than when you decide to sell, and why having the practice appraised every few years is useful.
A practice sold with a capital gain of $3,000,000, without a family trust
Only your own exemption is available
The same sale, with an estate freeze and a family trust put in place in time
The practice was frozen at $1,275,000; the growth of $1,725,000 belongs to the trust and is allocated to your spouse and one child
Simplified illustration, assuming a nominal cost for the shares, exemptions fully available to each person and Quebec's highest combined marginal rate for 2026, before alternative minimum tax. The actual result depends on the structure, the cost of the shares, the exemption each person has available and each person's tax situation.
Being ready to sell at any time
Life does not always let you choose when you sell. A health issue, a family situation or an unexpected opportunity can bring the sale forward by years.
Whenever that moment comes, your shares should already qualify. That is why, whether we set up your structure from the start or review an incorporation you already have, the objective is not to qualify once, but to keep qualifying, year after year. This is what we call ongoing purification.
Dental corporation
- Equipment and leasehold improvements
- Goodwill
- The working capital the practice needs
Family trust
- Shareholder of the dental corporation
- Allocates what it receives to its beneficiaries
Holding corporation
- Investments
- Real estate
- Savings for retirement
Without a trust in the structure
The surplus has two places to go. It stays in the dental corporation, where it can contaminate it, or it is paid out to you personally and taxed, whether or not you need it to live.
With a trust in the structure
The surplus can be paid as dividends to the trust and allocated to the holding corporation, where it can be invested. The dental corporation keeps only what the practice needs, and remains in a position to qualify. These distributions are made within the limits that the tax rules impose, which is why the structure has to be designed and maintained with care.
Alternative minimum tax and the exemption
Claiming the exemption shelters the gain from regular income tax. It does not necessarily mean that no tax at all is payable in the year of the sale, because of a second set of rules called the alternative minimum tax, or AMT.
A parallel calculation
Each year, your tax is calculated under the regular rules and under the AMT rules, and you pay the higher of the two. AMT exists to ensure that individuals who benefit from significant deductions and preferential treatment pay a minimum amount of tax.
Part of the exempt gain is counted
Under the rules in force since 2024, 30% of a capital gain sheltered by the exemption is included in the income used to calculate AMT. Federal AMT applies at a rate of 20.5% on that income above a basic exemption of $181,440 for 2026, indexed annually. Quebec applies its own minimum tax, which generally follows the federal parameters, at a rate of 19%.
Often a timing cost
AMT paid can be carried forward for seven years and credited against regular tax in years in which regular tax exceeds AMT. Whether you recover it depends on your income in those years, which matters if you plan to retire after the sale.
In practice, a dentist who claims a large exemption in a year with little other income may owe AMT in the year of the sale even though the gain is exempt from regular tax. The amount depends on the size of the gain, your other income and the credits available to you. It should be estimated before the sale is concluded, and it can sometimes be reduced through planning, for instance in how and when the gain is realized.
What dentists ask us before they decide to act
I'm not planning to sell for ten years. Why should I deal with this now?
Because the decisions that matter most depend on time having passed. The tests look back over 24 months, a family trust only benefits from the growth that occurs after it is put in place, and its shares generally need to be held for 24 months. Ten years from now, the practice will likely be worth more, and the structure will either have been prepared for that value or not. Starting now costs you nothing in options; waiting can only remove some.
My accountant takes care of my corporation. Isn't that enough?
Your accountant plays an essential role, and we work alongside them. But financial statements are prepared at book value, while the tests are applied at fair market value, which requires a valuation of the practice, including its goodwill. Designing a reorganization, an estate freeze or a family trust is legal work. Many dentists with excellent accountants discover at the time of sale that their shares do not qualify, simply because no one had been asked to look at the question.
I'm already incorporated. Am I not already covered?
Not necessarily. Incorporation gives you shares; it does not guarantee that they qualify. If the corporation has accumulated cash, investments or other assets not used in the practice, the shares may already fail the tests. The only way to know is to review the corporation at fair market value.
Can't I just fix everything once I have a buyer?
Often, no. If the corporation failed the 50% test at any point in the last 24 months, a last-minute purification will generally not make the shares qualify in time. A family trust added at that stage will generally not allow your family's exemptions to be used on that sale. Buyers and their lenders work on their own timetable, and they rarely wait two years.
My practice is worth less than $1,275,000. Do I still need to plan?
Yes, although fewer elements may be needed. You still need to be incorporated, the shares still need to meet the tests, and the sale still needs to be a sale of shares. You should also confirm that your full exemption is available to you. And practices tend to grow in value: a practice below the threshold today may be well above it at the time of the sale.
I have investments in my corporation. Have I lost the exemption?
Not necessarily. What matters is the fair market value of those investments in relation to the fair market value of all of the corporation's assets, including goodwill, and over what period. In many cases the corporation can be purified, but the sooner it is reviewed, the more options remain.
Will purifying my corporation trigger tax?
It depends on the assets and on the method used. Some purification steps can be carried out without immediate tax; others have a tax cost that has to be weighed against what is at stake on the sale. That analysis is part of the work, and it is one more reason not to leave purification to the last minute.
Will I lose control of my practice if I set up a family trust?
No. The beneficiaries do not control the corporation. The trust is administered by its trustees, and the structure is designed so that you continue to direct your practice, in compliance with the rules of the Ordre des dentistes du Québec.
What if my family situation changes after the trust is in place?
A discretionary family trust gives its trustees the power to decide how income and capital are allocated among the beneficiaries, within the terms of the trust deed. The deed is drafted with that in mind. Family law considerations should be reviewed when the trust is put in place, which is part of designing it properly.
Can my minor children really use their exemption?
In the right circumstances, yes, through a family trust. The rules governing gains allocated to minors are specific: in particular, a gain realized on a sale to a person who does not deal at arm's length with the child can be treated as a dividend rather than a capital gain. These rules must be reviewed for each transaction.
What happens if I die before selling?
On death you are deemed to have disposed of your property at fair market value. If your shares qualify at that time, your exemption may be claimed in your final tax return. If they do not, or if the practice was never incorporated, the tax is payable on value for which no buyer has paid. The same planning protects you whether the practice is eventually sold or passed on.
Does the alternative minimum tax make the exemption less worthwhile?
No. The exemption shelters the gain from regular income tax, which is the large amount at stake. AMT may create a cost in the year of the sale, but it is generally recoverable over the following seven years, depending on your income. It is something to estimate and plan for, not a reason to forgo the exemption.
What do I need to provide to get started?
To begin, your most recent financial statements, your corporate tax returns and your minute book are generally enough. We will tell you if anything else is needed, such as an appraisal of the practice, and we coordinate with your accountant.
Pre-sale preparation
Everything on this page leads to the same conclusion: the result of your sale is largely decided long before a buyer arrives. Pre-sale preparation is how we make sure it is decided in your favour.
We review your practice the way a buyer, the buyer's advisors and the bank financing the purchase will review it, except that we do it years earlier, while there is still time to correct what we find. The work has two sides, and both affect what you keep at the end.
Confirming that you qualify, and that the sale can be tax-free
We review your corporate structure in full, at fair market value, and tell you plainly where your sale would stand, as things are today.
- Whether the practice is held in a way that allows a sale of shares
- Whether your shares meet the three tests today, and what is needed for them to meet the tests at the time of the sale
- Whether the corporation needs to be reorganized or purified, and how to keep it qualifying
- Whether the value of the practice calls for a family trust, and whether there is still time for it to be effective
- How much of the gain the exemptions available in your family can shelter, and whether the alternative minimum tax needs to be planned for
Identifying what could reduce your price or stand in the way of the sale
A sound tax structure is of little use if the price falls or the transaction does not close. We therefore also review what a buyer or a lender will question.
- The commercial lease: its term, the renewal options, and whether it can be assigned to a buyer
- The financial statements on which a buyer and their bank will rely, and whether they present the practice accurately
- The condition of the clinic and the equipment, and which improvements are worth making before the sale
- The corporate records and the minute book, which the buyer's lawyer will review
- The agreements with associates and staff, and the timing and transition you want
You leave knowing where you stand, what needs to be done, in what order, and by when.
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