Are you a dentist with a practice? If you are, you know there are few harder decisions than selling your business. After all, you have put your money and effort into building your reputation. There are also complications involving sales, such as finding a buyer and minimizing tax. Dentists simply cannot afford to sell without knowing all the facts. For more information, please visit KPMG: Ready to sell your business? Plan ahead to reduce your tax bill.
In this article, we will look at the implications of selling a Dental Practice in Ontario. Because your specific situation is unique, please consult your accountant and legal counsel for specific advice. For a CNBC article on how to sell your business at peak price, visit 5 ways to sell your business at a peak price in 2014.
If you are a sole proprietorship or partnership, you should consider incorporating before you sell. If you do, you will be able to take advantage of benefits like tax deferral and the Lifetime Capital Gains Exemption (LCGE). Incorporating does come with a cost, however. For example, there are certain limits on corporate activities and ownership structure. If you would like additional tips on incorporation, please visit our resource: Tips for Incorporation Canada.
Further, there are specific applications that you need to to lodge with the Royal College of Dental Surgeons. One example is obtaining a Certificate of Authorization. To be fully aware of legal implications of incorporation, please consult your legal counsel. If you have a sole proprietorship and are converting to a corporation, don’t miss our resource: Converting a Sole Proprietorship to a Corporation.
Tax implications of selling a Dental Practice in Ontario – Sale of shares vs. sale of assets
Next, let’s take a look at the two most common ways you can sell your business.
- Sale of shares
- Sale of assets
Sale of shares
If you sell shares in your corporation, you will trigger a capital gains tax to the owner of the shares. Because of this, owners usually prefer to use the LCGE. If you’re disposing of qualified small business corporation (QSBC) shares, it allows $800,000 of capital gains to be exempt from tax. To be considered a QSBC, you must meet the following criteria:
- Throughout the 24 months immediately before the disposition, the shares must not have been owned by anyone other than the individual or a related party.
- Throughout the 24 months immediately before the disposition, more than 50% of the fair market value of the assets of the corporation must have been used principally in active business in Canada.
- At the time of disposition, 90% or more of the fair market value of the assets of the corporation must have been used in active business.
Active assets are those used in the daily operations of the business. Resources that are not necessary for daily operations are considered non-active or redundant. These commonly include cash, marketable securities, and non-trade receivables.
If the seller does not meet any of the above criteria, the seller is not eligible for the LCGE on the disposition of their shares. A company can take steps (called purification) for their business assets, to make sure the shares are eligible. However, this process can be time-consuming. Therefore, you should approach your tax account well before having any sales agreement in place.
Sale of assets
Sellers also have the option of selling the assets of their practice. Unlike shares, the LCGE is not available here. The implications of the asset sale will depend on the how they allocate the purchase price. Based on this, the assets being sold may realize a capital gain and be subject to capital gains tax. Your accountant can help you review the purchase price allocation. Then, you can determine whether a reallocation is needed to optimize tax implications of the proposed allocation.
When the proceeds of the sale are given by a corporation to shareholders, the owners will incur personal tax on the distributions (i.e. dividends). The tax deferral opportunity offered by this alternative may be beneficial to certain sellers.
Often, sellers and buyers have different interests. Therefore, you should always consult your accountant and lawyer to guide you through the selling process. It is never too early to make the most of your tax situation and start planning. With the proper preparation, they can get you ready for the eventual sale, so you’re not left unprepared during stressful negotiations. For more information, please visit the CRA’s website: selling a business.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.