Thinking about selling your dental practice? Before you list your practice, there’s a critical—but often overlooked—step that can significantly impact your deal: corporate purification.
Many dentists overlook the hidden tax traps and other issues that can quietly build up inside their corporations over the years. Whether it’s excess cash, outdated legal records, or outstanding liabilities and receivables, these issues can create delays, trigger tax consequences, or even reduce your access to tax-saving strategies when you sell.
In this article, we’ll review why a “clean” corporation is one of your most important considerations when preparing to sell.
What Is Corporate Purification?
Corporate purification refers to the process of removing non-business-related assets or liabilities from a corporation before a sale. This is more than just a legal process—it’s a vital step to get your DPC ready for sale. A “clean” corporation reduces legal and financial complications, increases tax-saving opportunities and leads to a smoother overall transaction.
When it comes to preparing for a dental practice sale, the purification would focus on removing non-active business assets from your Dentistry Professional Corporation (DPC). Those non-active business assets may include excess cash, investments, life insurance, loans to related parties, and real estate in some cases.
Typical purification strategies include:
- Paying Out Dividends – Distributing excess cash to shareholders.
- Repaying Shareholder Loans – Settling any outstanding debts owed by the shareholders to the corporation.
- Transferring Investments to a Holding Company – Moving non-active assets, such as life insurance policies or real estate investments, to a separate corporation.
- Reinvesting in the Practice – Using excess cash to upgrade equipment, facilities, or technology to ensure assets remain active in the business.
In essence, purification is like cleaning out a house before putting it on the market. Not just for appearances but to ensure your corporation meets the strict tax and legal requirements that can maximize your tax savings when the deal closes.
Why Cleaning Up Your Corporation Matters
When it comes to selling your dental practice, the details behind DPC can significantly affect your after-tax earnings on the sale and can even make or break the deal.
Tax-Savings
To qualify for the lifetime capital gains exemption (LCGE), your professional corporation must meet the requirements of the Small Business Corporation (SBC) test under the Canadian Income Tax Act. One of the most vital is the 90% rule, meaning that at the time of sale, 90% or more of the corporation’s assets must be used in active business operations. If your corporation holds passive assets like excess cash, marketable securities, real estate not used in the practice, or even a shareholder loan, you may not qualify. So, you do a corporate purification to remove those assets from your DPC before you sell.
Asset Ownership
When you sell your practice, you only want to include assets related to the practice. However, when you sell your practice by selling your shares of your DPC, the buyer gets ownership of everything. So, if your DPC was also the owner of non-practice real estate, your life insurance policy, or other non-business-related assets, the new buyer would end up taking ownership of these assets as well by purchasing your shares. To maintain ownership of these assets you need to remove them from your DPC before you sell.
Alternatively, you could choose to sell your practice assets rather than shares of your DPC. If you can allocate most of the purchase price to the goodwill (a class of asset called eligible capital property), you can dividend yourself up to half of that amount tax-free as a capital dividend. And after paying capital gains tax on selling that asset class, your DPC could also get a refundable dividend tax when it declares taxable dividends. However, there may be additional tax on any leaseholds included in the sale, and the overall proceeds will not qualify for the LCGE. You will want to review the costs and benefits of this option very carefully to determine if it will outweigh those of purifying your DPC.
Buyer’s Confidence
Buyers aren’t just purchasing your equipment and patient lists; they’re inheriting your corporate structure, financial history, and any skeletons hiding in the filing cabinet. During the due diligence phase — when the buyer and their team scrutinize every inch of your dental business — anything unclear or inconsistent will raise concerns and could lower your practice’s valuation. It could even force you to change the deal from a share sale to an asset sale, often killing the sale altogether.
Common Pitfalls to Avoid During Purification
While purifying your DPC is crucial, it’s not always straightforward. Small oversights can lead to big consequences, from delays in closing to missing out on the LCGE altogether. Here are some of the most common mistakes to avoid.
Waiting Too Long to Start the Process
Purification often involves multi-step transactions and timing requirements — especially if you’re restructuring for tax purposes. Waiting until you’re close to signing a Letter of Intent can leave you with limited options and rushed decisions. Ideally, start 1–2 years before a potential sale.
Some passive assets are also harder to deal with than others. For example, transferring a life insurance policy out of your corporation can trigger unintended tax consequences or valuation issues, especially if the policy has cash value. These transfers and complications can take time to resolve, and if not addressed well before the sale, they could jeopardize your eligibility for key tax benefits like the LCGE.
Overlooking Legal Compliance
Outdated corporate filings, missing minute book entries, or improperly documented shareholder transactions can throw a wrench into due diligence. Buyers will scrutinize every detail, and legal gaps can erode trust or delay the transaction.
Not Coordinating Your Advisory Team
Purification touches on legal, tax, financial, and operational issues. Trying to DIY or working with disconnected advisors can create blind spots. Instead, build a team — typically a dental accountant and lawyer experienced in both corporate law and dental practice sales — who work together and understand what you are trying to achieve.
Being proactive and informed helps you avoid these pitfalls and positions your practice — and your corporation — for a clean, confident sale.
Bottom Line
Selling a dental practice is complex, and cleaning up your corporation before selling isn’t simply a box to check. It’s a critical step that requires careful planning, and waiting until you are about to sell can significantly affect your practice valuation, your tax bill, and how easily the deal unfolds.
At DMC LLP, we specialize in helping dentists maximize their sale value while ensuring a smooth transition. If you’re considering selling your practice in the next five years, reach out for a no-pressure consultation to review your corporation’s structure and determine the best purification strategy.
Contact us today to get started on your path to a successful practice sale.
