Here’s the idea: you have a dental practice that you own PERSONALLY and you now want to transfer it to your new professional corporation. You don’t want to trigger any income or capital gains taxes on the sale of the assets (e.g. furniture, fixtures, goodwill, computer hardware/software, etc.). But you want to take full advantage of all the tax benefits from having a dentistry professional corporation, which I’ve previously blogged about. So HOW and WHEN should you do the transfer so as not to trigger any capital gains taxes?
By way of background, a rollover occurs when there is a dentist who enters into a purchase and sale agreement with their professional corporation for the purchase of certain assets. In exchange for those assets, the corporation gives the dentist SHARES that are worth whatever the assets are worth. This way, there is no immediate income or capital gains taxes to pay: that’s because the dentist received in value (i.e. the value/cost of the shares at the time of the transfer) what they gave (i.e. the value of the assets at the time of the transfer).
So, in what follows, I’ll take a look at the two main examples of when dentists do rollovers.
First, if you’re just starting out as an associate, making money, and want to defer paying taxes, etc., it might make sense to have a dentistry professional corporation. Do you need a rollover? Perhaps. Some accountants are very cautious and want associates to transfer their “Associate Goodwill” and any hand instruments they own to their corporation pursuant to a rollover. Some accountants question whether there are any assets to “roll in” to the corporation and simply forgo this step entirely. I guess it comes down to this: what’s your specific situation and what’s your risk tolerance? If you are associating at multiple practices, have your own instruments, have your own patient records, etc. then a rollover of those assets to your professional corporation would definitely make sense. If you’re simply using a professional corporation to earn associate income and that’s it (you have no other assets related to the practice of dentistry, etc.), then it might not make all that sense.
Preparing to Sell
If you’re 2-5 years out from selling, you’ll have enough time to transfer the practice that you personally own to your professional corporation (on a tax-deferred basis) and then ultimately SELL the shares of your professional corporation and hopefully qualify for the lifetime capital gains exemption. Keep in mind that there’s a 24-month share ownership rule that a shareholder (e.g. a dentist) must meet in order to generally qualify for the lifetime capital gains exemption. If the dentist wishes / needs to sell their practice sooner than 24 months, then they should incorporate AND only do the rollover immediately before the sale to the new dentist; this is an exception to the general rule and will allow the dentist to still qualify for the lifetime capital gains exemption.
Are there really no tax consequences?
If done properly, there will be no immediate income or capital gains tax consequences to the dentist when he or she transfers their practice assets to their corporation and takes back shares in exchange. A section 85 election is then filed by the parties.
One thing that often comes up is this: what if the value is attributed to the assets and shares? Well, sometimes accountants will do this, but they generally prefer to leave that to appraisers (like getting a letter of opinion from Matt Bladowski of Dental Strategy). What if they get the number wrong? What if the Canada Revenue Agency deems that the practice assets are, on a fair market value basis, actually different in value from what they’ve been represented as in the paperwork? That’s what a “price adjustment clause” is for. This is built into the asset purchase agreement and basically says that if the parties (dentist and professional corporation) get the value attributed to the assets WRONG and the CRA says OTHERWISE after the fact, then the amount will be retroactively adjusted (higher or lower) to reflect the CRA’s number.
That said, there may be HST payable on the value of any real estate or leaseholds. That’s because, in an asset sale, the parties can elect not to pay HST on the sale of assets but this doesn’t apply to real estate and leaseholds. Read this blog for more information.
After the Rollover
Once the rollover is completed, the dentistry professional corporation now owns the assets of the practice (not the dentist).