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Secure Your Legacy: Navigating New Laws On Passing Your Dental Practice to Family

By June 20, 2024June 24th, 2024Selling A Practice

Are you prepared for the latest changes in intergenerational transfer laws? Whether you plan to pass your dental practice to your child or another trusted family member, understanding these new regulations is crucial. Intergenerational transfers are a cornerstone of succession planning, ensuring your legacy continues smoothly. Let’s dive into what’s changed in 2024 and what you need to know to ensure a smooth transition.

Understanding Intergenerational Transfers

An intergenerational transfer of a dental practice involves passing ownership of the business from one generation to the next, typically from a parent to a child or grandchild. In Ontario, both parties involved in this transfer must be registered dentists as per the requirements of the Royal College of Dental Surgeons of Ontario (the RCDSO). This type of transfer is most commonly done through the sale of shares.

Intergenerational transfers can be immediate or gradual. Immediate transfers involve a direct and complete change of ownership, while gradual transfers allow the parent dentist to phase out their involvement.

What’s Changed?

Recent legislative changes have introduced new rules that could impact how these transfers are executed, particularly concerning tax implications and eligibility criteria.

In 2021, the government introduced Bill C-208 to facilitate a genuine succession of a dental practice to another generation and rectify the unequal tax treatment between intergenerational transfers versus sales to arm-length parties. However, concerns arose that the bill’s broad wording could be exploited for tax avoidance through what is known as “surplus stripping.” Surplus stripping involves the extraction of profits from a corporation while paying less tax by converting what would be a dividend into capital gains for tax benefits. So, the federal government announced in its 2023 budget that it would amend Bill C-208. The amendments aim to tighten the rules by introducing conditions that must be met to qualify for the tax benefits of a genuine intergenerational business transfer.

Here’s a breakdown of the amendments:

  • Definition of ‘Child’: The amendment expands the definition of ‘child’ to include adult nieces, nephews, grandnieces and grandnephews.
  • Transfer of Control: The parent must transfer both control and ownership of the dental practice to the child. This means that after the share transfer, the parent cannot have legal control or economic influence over the dental practice. This rule is intended to ensure that a child is actually taking over the running of the dental practice rather than just holding shares in their name.
    • Immediate transfers – No legal control and economic influence by the parent after the share transfer.
    • Gradual transfers – The parent cannot have legal control but can have some economic influence within ten years of the share transfer.
  • Management Test (Active Involvement): The child must be actively involved in the dental practice post-transfer. The involvement must be substantial and continuous, reflecting true management and operational responsibilities.
    • Immediate transfers – The transfer of management must occur within 36 months of the share transfer.
    • Gradual transfers – The transfer of management must occur within 60 months of the share transfer.
  • Engagement Test (Duration of Ownership): The child must retain ownership and control of the transferred shares for a specified period, ensuring a long-term commitment and involvement in the dental practice.
    • Immediate transfers – the child must remain actively involved for 36 months after the share transfer.
    • Gradual transfers – the child must remain actively involved for 60 months after the share transfer.

These changes, part of Bill C-59, were passed on June 20, 2024.

The Impact on Dental Practice Owners

For dental practice owners, these changes may mean reassessing your plan to transfer your practice to the next generation. It’s not enough to just change the name on the door or to simply transfer ownership of your business shares. To properly transfer your dental practice to the next generation of your family, there must be a genuine transition of control and active involvement in the business. This requires detailed planning and preparation to meet the new legal requirements. Here are some tips to help.

Clarify Interest and Commitment

Engage in open and honest conversations with your child/grandchild about their interest in and commitment to taking over your dental practice. Even though they may share your interest in dental work, their career goals may not include owning or managing a practice of their own. If they aren’t interested or prepared to take over the practice, you may need to consider alternative options such as nieces or nephews or selling to an external third party.

Prepare for the Transition Early

Start planning the transition well in advance. Ensuring your successor is well-prepared is vital for a successful transfer. This involves training, mentorship and outlining a timeline.

  • Running a dental practice means running a business, which is likely something your successor hasn’t done before. Document the other areas of responsibility you manage within the practice. This documentation can serve as a training program that reviews all aspects of running the practice, from patient care to financial management.
  • As an owner yourself, you know better than anyone that it takes more than technical knowledge to succeed. Share your experience in dealing with the emotional side of managing a business and balancing the responsibilities of being both a business owner and practitioner.
  • Work together on a timeline for the ownership transition and management duties. A gradual increase in responsibilities can help decrease feelings of overwhelm once the ownership transfer occurs. A clear timeline will also help you both when making future plans.

Preparation and a clear plan will ensure the ongoing success of your practice.

Consult Professionals

Don’t try to manage the transfer on your own. Navigating the complexities of intergenerational transfers requires a team of experts who understand both the dental industry and the specific legal frameworks involved.

You will want to speak with a financial or tax advisor to help structure the transfer. Someone well-versed in available tax credits and deductions, such as the Lifetime Capital Gains Exemption (LCGE), will be vital in reducing your tax liabilities and ensuring a deal that benefits everyone involved.

You will also need to ensure the transfer is legally sound. Using a lawyer who specializes in dental practice transitions and understands the ins and outs of the new intergenerational transfer requirements above is critical. They can provide tailored advice while ensuring that all legal aspects of the transaction are handled correctly.

Intergenerational transfers blend the personal and professional, which can bring challenges. Working with a professional outside of the family can provide a neutral perspective, someone to help clarify the process and address any concerns or issues that may arise between you.

Bottom Line

Navigating the new legislative changes around intergenerational transfers can seem overwhelming, but with the proper preparation and guidance, you can ensure a smooth and successful transition. By understanding the implications of these changes and taking proactive steps, you can protect your legacy and set your dental practice up for continued success under the next generation.

And remember, you’re not alone in this. Contact us today for a personalized consultation on how these legislative changes affect you and your intergenerational transfer plans. Our team of experts is here to help you navigate these complexities and ensure your practice remains in good hands. Reach out to us now, and let’s safeguard your legacy together.

The Content of this post is provided for informational purposes only. It is not intended to be legal, financial, tax, or other professional advice of any kind. You are advised to contact DMC (or other counsel) to seek specific legal advice concerning your individual situation.

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