Industry: Dental & Medical
Succession Planning: Preparing Your Practice for Sale
Preparing to sell your dental, medical, or professional practice? How to structure the sale to utilize the Lifetime Capital Gains Exemption.
A professional practice is often a practitioner’s largest lifetime asset, yet many approach the sale process as an afterthought. The difference between a well-structured exit and a rushed one is routinely six or seven figures of tax-capital that either funds your retirement or is unnecessarily remitted to the CRA. Effective succession planning is not just about finding a buyer; it is about "purifying" the corporation years in advance to ensure you keep what you’ve built.
Share sale vs. asset sale
The tension in any practice transition lies in the structure of the deal. Buyers and sellers have diametrically opposed tax incentives, making the negotiation as much about structure as it is about the headline price.
| Feature | Share sale | Asset sale |
|---|---|---|
| Seller preference | High - enables access to the LCGE. | Low - leads to immediate tax at high rates. |
| Buyer preference | Low - inherits historical liabilities. | High - "clean slate" and tax-deductible CCA. |
| Tax to seller | Capital gain (50% inclusion rate). | Mix of recapture, capital gain, and ordinary income. |
| Price impact | Typically 10–15% price discount. | Often commands a higher headline price. |
The three LCGE tests
To qualify for the $1.25M tax-free exemption, your corporation must meet the Qualified Small Business Corporation (QSBC) criteria:
- 0124-month holding test: You must have owned the shares for at least 24 months prior to the sale.
- 0224-month asset test: Throughout the 24 months, at least 50% of the fair market value (FMV) of the corporate assets must have been used in an active business in Canada.
- 0390% "at-the-moment" test: At the exact moment of sale, 90% or more of the FMV of the assets must be used in the active business.
Numerical Example: The LCGE Advantage
Consider a practice sale for $1,500,000 in 2026. Assuming a $0 cost base:
| Component | Share Sale (with LCGE) | Asset Sale (Inside Corp) |
|---|---|---|
| Sale Price | $1,500,000 | $1,500,000 |
| Exempt Amount | ($1,250,000) | $0 |
| Taxable Gain | $250,000 @ 50% | $1,500,000 (Mix) |
| Estimated Tax | ~$66,900 | ~$450,000+ |
*Note: Asset sale tax varies based on the split between goodwill and equipment recapture.*
The 90% test trap
A Professional Corporation (PC) that has been successful for 20 years often accumulates significant "redundant" assets-cash, stocks, or investment real estate. If the practice is worth $1.5M but the corp holds $1M in stocks, the active assets only represent 60% of the total value. The shares fail the 90% test.
A 5-year succession roadmap
Strategic exits require a timeline that respects both tax law and market cycles.
- 01Year 5: Establish or activate a Holding Company (Holdco); begin annual "purification" dividends to move surplus cash out of the PC.
- 02Year 3: Obtain a formal practice valuation; clean up financial statements; ensure all equipment leases and employment contracts are documented.
- 03Year 2: Monitor the 50% active asset test monthly. Review the shareholders’ register to ensure family members (if applicable) meet holding period requirements for LCGE multiplication.
- 04Year 1: Identify the buyer pool; engage a specialized broker; prepare a Confidential Information Memorandum (CIM).
- 05Sale Year: Final 90% test snapshot; execute T2057 elections for any necessary rollovers; claim the LCGE on your T1.
If you are considering a transition within the next 24 to 60 months, the time to structure your "purification" strategy is now. Contact us to begin a formal succession review.
The content above is for general informational and educational purposes only and does not constitute professional accounting, tax, legal, or financial advice. Tax rules change and outcomes depend on your specific situation - please consult us before acting on anything you read here.
Next Step
Start with a 30-minute diagnostic call.
Bring your last two years of T2, HST returns, and personal T1. We’ll review them in advance and use the call to flag the positions that won’t hold, the SBD grind you may be triggering, and the elections you may have missed - before you commit to anything.