If you’re thinking about selling your dental practice – whether that’s next year or ten years from now – tax planning should be part of the conversation long before your practice goes on the market.
One question I’m often asked is, “What’s changed this year?” The honest answer is: not much. There hasn’t been a major tax change that’s completely reshaped dental practice sales. But that’s not what concerns me most.
After helping dentists buy, sell and transition practices for years, I continue to see the same costly tax mistakes come up during transactions. Some reduce the value of your practice. Others delay closing. And some result in tax consequences that could have been avoided with earlier planning.
In this article, I’ll walk through four mistakes I still see regularly—and explain why they’re worth paying attention to if you’re planning a practice transition.
Mistake 1: Assuming You’ll Automatically Qualify for the Capital Gains Exemption
One of the biggest misconceptions I still hear is, “I’ve owned my professional corporation for years, so I should qualify for the Lifetime Capital Gains Exemption.”
Unfortunately, it’s not that simple.
Qualifying for the Lifetime Capital Gains Exemption (LCGE) depends on much more than how long you’ve been incorporated. Your corporation must meet several technical requirements, the right shareholders need to own the right shares, and the corporation’s assets need to satisfy specific tax rules before the sale.
I’ve seen situations where dentists assumed everything was in order, only to discover during the sale process that important planning had been overlooked. In some cases, that meant scrambling to fix problems before closing. In others, the opportunity to claim the exemption had already been lost.
The tax consequences can be substantial. With the LCGE now exceeding $1.25 million per qualifying individual, failing to qualify could cost hundreds of thousands of dollars in unnecessary taxes. If family members are expected to claim the exemption as well, the stakes become even higher.
Many of the issues aren’t complicated, but they do require time to address. For example:
- making sure the appropriate shareholders own the correct class of shares;
- reviewing whether excess cash or other redundant assets should be removed from the corporation;
- ensuring transactions between related corporations are properly documented; and
- confirming your corporate records accurately reflect what has happened over the years.
These aren’t the kinds of issues you want to discover after accepting an offer on your practice.
Learn more about qualifying for the capital gains exemption:
- How to prepare your corporation to qualify for the exemption
- Using corporate reorganizations to support tax planning
- How dentists can use the Lifetime Capital Gains Exemption
Mistake 2: Assuming the Purchase Price Allocation Is Just a Formality
Once you’ve agreed on a purchase price, it’s easy to think the difficult negotiations are behind you. In reality, one of the most important discussions may just be beginning.
When you’re selling assets from your professional corporation, the purchase price doesn’t simply appear on a closing document as one lump sum. It needs to be allocated across the various assets being sold, such as equipment, goodwill, leasehold improvements and inventory. That allocation can have very different tax consequences for you and the purchaser.
The buyer will often prefer to allocate most to capital equipment because there’s a 20% annual write-off/depreciation rate for assets in that class. As the seller, you may prefer a greater allocation to goodwill (patient records) or other assets that receive more favourable tax treatment after the sale.
Because of these competing interests, the allocation is rarely just an accounting exercise. It becomes part of the overall negotiation and should reflect the commercial reality of the transaction.
There are other considerations as well. Depending on the assets being sold, HST may apply to certain portions of the purchase price, particularly leasehold improvements. Your accountant and dental lawyer should also review whether the proposed allocation is consistent with your financial statements, appraisal and other transaction documents.
Getting this right can help avoid unnecessary disputes, unexpected tax consequences and last-minute renegotiations.
For a closer look at purchase price allocation:
- How purchase price allocation affects your tax bill
- How tax planning influences purchase price negotiations
Mistake 3: Waiting Until Due Diligence to Address Employment Issues
Employment issues aren’t top of mind for most dentists preparing to sell their practice. But one of the first questions sophisticated purchasers ask during due diligence is whether your hygienists are truly independent contractors or employees. If someone you’ve treated as an independent contractor should legally be considered an employee, the purchaser may inherit payroll tax risks, Employment Standards Act obligations and potential CRA assessments.
That doesn’t automatically mean there’s a problem. But it does mean buyers will want to understand the relationship and assess the risk before moving forward.
It’s also worth remembering that just because you say ‘independent contractor’ in your agreement doesn’t necessarily make it so. Courts look beyond the legal paperwork to gauge whether a hygienist is a contractor or an employee.
If you’re planning to sell your practice in the coming years, it’s worth reviewing those relationships early. Even if no changes are needed, you’ll have confidence that a buyer isn’t likely to uncover surprises during due diligence.
Learn more about employment issues during a practice sale:
- How your sale structure can affect employee liability
- Key employment issues in dental practice transactions
Mistake 4: Assuming a Family Sale Is Simpler Than Selling to a Third Party
You may assume that selling a practice to a son, daughter or other family member will be simpler than selling to an unrelated buyer. From a business perspective, that may be true. From a tax perspective, it’s often the opposite.
After January 1, 2024, changes to the tax rules have made legitimate intergenerational transfers more practical than they once were, but they haven’t made them simple. There are still detailed requirements that must be met, and the Canada Revenue Agency expects these transactions to reflect a genuine transfer of ownership and management rather than a sale in name only.
One area that’s become increasingly important is documentation. A proper valuation of the practice, the transfer of decision-making authority, financing arrangements and the ongoing role of the parent after closing may all be reviewed to support the transaction if questions arise later.
I’ve also found that many families focus on agreeing to a purchase price without spending enough time discussing how the transition itself will work. Who will make business decisions after closing? Will you continue practising? How will patients, staff and suppliers experience the change? These practical considerations often become just as important as the tax planning.
A successful family transition is about more than transferring shares. It’s about demonstrating that ownership, management and control have genuinely passed to the next generation.
Further reading on family practice transitions:
- Understanding today’s tax rules for family practice transfers
- Preparing your practice for a tax-efficient transition
Bottom Line
The tax rules surrounding practice sales can be complex, but many of the most expensive problems aren’t caused by the rules themselves. They’re caused by assumptions that only come to light once a transaction is underway.
Most of these issues don’t arise overnight. They’re identifiable, manageable and, in many cases, avoidable with the right planning and advice.
Understanding where these issues typically arise can help you approach your practice sale with greater confidence—and fewer surprises.
Wondering how these issues could affect your own practice sale?
Every transaction is different. See how DMC helps dentists prepare for successful practice transitions.
