One of the many challenges for dentists when running a dental practice is determining how best to organize the practice and, more specifically, the assets of the practice. Assets in your practice may include equipment, property, and goodwill. If you are a dentist who owns your dental practice assets personally, a corporate rollover could work to your advantage.
What is a Corporate Rollover?
A corporate rollover is a tax rule in Section 85 of the Income Tax Act (“ITA”), which allows for the transfer of assets (usually from a person to a corporation by way of a sale) to be done on a tax-deferred basis. Typically, if a person sells their assets for more than they paid for them, they must pay capital gains tax on the proceeds of the sale. However, with a rollover, no capital gains tax is payable until there is a subsequent sale of the assetsAlso known as a triggering event.
For example, say you personally own the assets that make up your dental practice (equipment, patient records, etc.). You then decide to sell them to your Dentistry Professional Corporation (DPC) in exchange for shares of that corporation. Your personal assets would “roll over” into the DPC, and any capital gains tax resulting from the sale is not payable until the DPC later sells those shares.
Why Deferring Capital Gains Tax Is A Good Idea
The ITA is kind enough to give taxpayers a break on capital gains tax via the Lifetime Capital Gains Exemption (“LCGE”). The LCGE provides a dollar amount (indexed annually based on inflation) that is exempt from qualifying capital gains tax throughout a taxpayer’s lifetime. In 2023, taxpayers can earn up to $971,190 worth of qualifying capital gains without being required to pay capital gains tax. You can learn more about the LCGE in our previous blog post here.
Dentists can benefit significantly from the LCGE when selling their dental practice. First, however, it is necessary to understand the requirements for the LCGE. Expressly, to qualify for the LCGE, shares must be sold by a qualifying small business corporation (QSBC), meaning that if you sold a practice you own personally, you would not qualify for the LCGE. However, if you rollover your assets into a qualifying DPC, you could benefit from this significant tax exemption when receiving a capital gain from the sale of your DPC shares – provided you meet other eligibility requirements (set out below).
How Do I Know If A Rollover Is Right For Me?
Rollovers can be available to dentists who personally own the assets which are used for their practice of dentistry. However, there are specific eligibility requirements in the ITA that you’ll need to consider to see if a rollover might be an option for you.
The basic conditions in determining whether you meet the ITA’s eligibility requirements for a Section 85 rollover are:
- The transferor is either an individual, corporation or trust.
- The transferee is a taxable Canadian corporationa corporation that was incorporated in Canada.. Note: if the RCDSO authorizes your DPC, it will meet this criterion.
- The asset(s) rolled over is eligible propertyExamples: capital property, investments, and real estate.. Note: most assets needed to practice dentistry will qualify, as opposed to investments held in a corporation, which would not qualify.
- The consideration must include at least one share. Note: the shares received will be that of the DPC.
- Lastly, there must be an elected amount filed by the prescribed deadline. Note: your lawyers and accountants will take care of this, so you won’t have to worry.
Really, the only noteworthy difficulty does not come from the rollover eligibility requirements but rather from the LCGE eligibility requirements. The ITA sets out a 24-month share ownership rule that says you must have held the shares for at least 24 months to qualify for the exemption.
If you do not mind waiting two years to sell your practice, the 24-month rule won’t matter much to you. However, if you want to sell your practice right away, do not be discouraged, as an exception is available. The 24-month rule will not apply if the shares are sold immediately after the rollover and weren’t owned by anyone other than you.
So, as you can see, a corporate rollover is an excellent option for dentists who want to capitalize on one of the most valuable tax benefits when selling. If you believe your circumstance would allow you to benefit from the rollover tax rule, or have more questions about corporate rollovers, reach out to a DMC lawyer by email or by calling us at 416-443-9280 at any time. We are here to help guide you through the process for whatever option is best for you.