Succession Planning: Preparing Your Practice for Sale

For many professionals — dentists, physicians, accountants, lawyers — their practice is their most valuable asset. Extracting value upon retirement requires years of advance planning. A poorly structured sale can result in the loss of hundreds of thousands of dollars to the CRA.

The Lifetime Capital Gains Exemption (LCGE)

The LCGE allows an individual to shelter a significant amount of capital gains from tax when selling shares of a Qualified Small Business Corporation (QSBC). As of 2024, the exemption limit exceeds $1.25 million. If a dentist sells the shares of their DPC for a $1.25 million profit and the corporation qualifies as a QSBC, the dentist pays zero tax on that gain.

Share sale vs. asset sale

To use the LCGE you must sell the shares of the corporation — not the assets (patient list, equipment, leasehold improvements). Buyers generally prefer asset sales because they can depreciate the purchased assets and avoid the historical legal liabilities of your corporation. Sellers strongly prefer share sales to access the LCGE. Negotiating a share sale often requires compromise on price, but the tax savings usually far outweigh the concession.

Qualifying as a QSBC: the purification process

Three strict tests:

• 24-month holding test: You must have owned the shares for at least 24 months before the sale
• 24-month basic asset test: Throughout the 24 months before sale, at least 50% of the fair market value of the corporation's assets must have been used in an active business in Canada
• 90% asset test at time of sale: At the exact time of sale, at least 90% of the FMV of assets must be used in an active business

The 90% test is where many professionals fail. Over a long career, a PC often accumulates significant passive assets — cash, GICs, mutual funds, real estate not used in the practice. If these exceed 10% of the corporation's value, the shares do not qualify.

To fix this, the corporation must be "purified" — removing passive assets, typically by paying them out as dividends or transferring to a holding company. Because the basic asset test looks back 24 months, purification must begin at least two years before you intend to sell.