Owning a dental practice is not only about providing dental services to patients – it also requires managing a business. Operating your practice through a dentistry professional corporation (DPC) can be complicated, and it’s not always easy to be confident that you have the proper corporate structure. Depending on your situation, this is where corporate reorganizations can come into play.
Corporate reorganizations can help dentists optimize tax benefits, protect assets, and prepare for the future, whether you’re planning to sell your practice in the near future or simply looking for more efficiency. This blog will give you a high-level breakdown of corporate reorganizations and how they may apply to you.
What is a Corporate Reorganization?
A corporate reorganization is essentially a restructuring of your business to better align with financial, legal, and tax strategies. Businesses are often structured in a way that works well initially, but as the business grows, tax laws change or circumstances evolve, restructuring may be extremely beneficial.
Dentists can use corporate reorganizations to roll over assets into a corporation, purify their DPC, perform an estate freeze, or restructure assets and share ownership for better tax benefits. This could be done for several reasons, including:
- Preparing for Sale
If you’re thinking about selling your dental practice, whether in the short or long term, a corporate reorganization can help maximize tax advantages. Some strategies need to be implemented years in advance to fully benefit, so it is a good idea to look into them as soon as possible.
- Tax Efficiency
Different corporate structures come with different tax treatments. Many dentists implement a corporate reorganization to take advantage of lower corporate tax rates and become eligible for the Lifetime Capital Gains Exemption (LCGE).
- Risk Management
As your practice grows, so do your liabilities. A well-structured DPC or holding company can help limit liability and protect assets.
- Bringing in Family Members
Some dentists involve family members in their practice and take advantage of certain tax benefits. This is within the rules set out for DPCs by the Royal College of Dental Surgeons of Ontario (RCDSO), which allows spouses, children, and parents to be non-voting shareholders.
Corporate Reorganization Strategies
Not every reorganization fits a single mould. While some strategies — like rollovers, purifications, and estate freezes — are common, dentists may also use other legal and tax tools to fine-tune their corporate structure, meet RCDSO compliance requirements, or plan for long-term transitions. Often, these strategies are used in combination with other approaches and could include:
- Share Issuances
- Share Exchanges
- Deemed Dividends
- Stock Dividends
- Redemption or Buy-Back of Shares
- Transfer of Assets (e.g., Asset/Share Purchases)
There’s no one-size-fits-all solution, but let’s look at those most common strategies dentists use to realign their corporate structure.
Rollovers: Transferring Assets Into Your Dentistry Professional Corporation
If you’re operating your dental practice as a sole proprietor, you may benefit from incorporating a dentistry professional corporation and rolling over certain assets into the DPC. This is done under Section 85 of the Income Tax Act (the “ITA”), which allows you to transfer the assets (under certain conditions) without triggering immediate tax consequences. This type of rollover must follow specific rules and documentation requirements, such as:
- The value of the assets transferred cannot exceed the market price.
- Assets must be considered “eligible property” under the ITA.
- Consideration must include shares of the DPC receiving the assets.
Deferring tax implications allows you to benefit from corporate tax rates and exemptions, which an individual taxpayer would not have access to.
A Section 85(1) rollover can be a smart first step when transitioning to a corporate structure—but the process must be done right to avoid pitfalls. For a more in-depth look at how dentists approach rollovers during incorporation, check out our post: Why Dentists Should Consider A Corporate Rollover.
Purifications: Keeping Your Corporation Eligible for the LCGE
A huge reason dentists operate their dental practice under a DPC is to qualify for the LCGE, which can exempt capital gains tax when selling shares. However, if a DPC owns too many non-dental assets (i.e., real estate, excessive cash, etc.), it may not be eligible. Purification strategies could include transferring non-business assets to a holding company and/or paying out excess cash as dividends.
Purifying your DPC can be essential in saving hundreds of thousands in taxes when you sell. But these steps aren’t always intuitive, and timing matters. Dive deeper into the purification process in our post: Purifying your Dentistry Professional Corporation – Why It Matters.
Estate Freeze: Locking in Value to Pass on Future Growth
If you’re looking ahead to retirement or succession planning, an estate freeze might be a smart move. An estate freeze is used when a dentist wants to lock in the current value of their practice and allow for future growth to benefit family members or successors. This strategy can minimize tax liabilities on future capital gains. An estate freeze typically involves the dentist exchanging certain shares for fixed-value preferred shares and issuing new shares. This allows dentists to pass on the value of their practice without triggering immediate tax consequences.
An estate freeze helps you secure today’s value and strategically direct future growth, but the setup needs to align with your bigger picture. To learn more about estate freezes, take a look at our post: Smart Tax Planning for Before Selling Your Dental Practice.
No matter which corporate reorganization strategy you choose, each comes with distinct legal and tax implications and should align with your broader business goals. What works for one dentist might not make sense for another. At DMC, we work closely with your accountant and tax advisors to craft a reorganization plan tailored to your practice, your priorities, and your future.
Bottom Line
Reorganizations can be complex, but with the right advice, they become a powerful tool for building a secure and profitable future. The right strategy depends on several factors, including the size of your practice, retirement plans, family involvement, and financial situation.
Whether you’re preparing for a sale, optimizing tax efficiency, or safeguarding assets, a corporate reorganization could be your next best step. If you are interested in exploring your options, please reach out to us today. We work closely with you and your financial advisors to ensure your corporate structure is set up for success.
