The Royal College of Dental Surgeons of Ontario (RCDSO) has established different rules for Dentistry Professional Corporations (DPCs) from those that apply to non-dental small businesses in Ontario. Most small business owners have a holding company (Hold Co or a corporation without active business operations) that directly owns the shares of their Operating Company. This structure has a number of advantages, including significant tax savings at the time of the sale of the corporation.

Unfortunately, this structure is not allowed by RCDSO. In this article we’ll discuss the common workaround to this restriction.

What is Purifying?

A practice owner who has savings inside their DPC would benefit from moving those assets to a Hold Co. Typically, this is done through a tax-free inter-corporate dividend. This allows the owner to defer personal income tax and preserves the ability to invest in non-active business-related assets without disqualifying the shareholder from using the lifetime capital gain exemption.

What is the lifetime capital gains exemption?

Every Canadian is entitled to an exemption on the first $1,016,836 of capital gains on the sale of shares of a small business. This is a savings in tax of approximately $272,156 on the sale of business. If there are multiple family members as shareholders, they are each entitled to this exemption. However, an accumulation of passive assets (aka investments) inside the corporation can disqualify a person from using the capital gains exemption. The company must pass two tests with respect to its assets in order for the exemption to apply:

1.     For the entire two-year period prior to the sale, no more than 50% of the total assets of the corporation can be passive.

2.     On the date of the sale, passive assets must be no more than 10% of the total assets of the corporation.

Since DPCs don’t generally hold significant operating assets, investing assets within the corporation can quickly lead to exceeding these thresholds.

It is important to regularly assess your DPC’s assets to ensure you are onside with the rules around the lifetime capital gains exemption. You never know when an offer too good to pass up could come around, or you could suffer an illness (or death), forcing you into disposing of your practice.

Using the “weekend” solution to stay on side with the Lifetime Capital Gains exemption and take advantage of investing inside a corporation

To circumvent RCDSO’s rules against a Hold Co owning a DPC, many dentists will employ the “weekend” solution, aka “one-day” or “midnight” solution. This solution is a series of legal and accounting steps that cause a Hold Co to be a shareholder of your operating company for one day on a weekend. On that one day, dividends (cash) are transferred to the Hold Co and then its ownership in the operating company is immediately retracted. The argument here is that the dental practice was not operating at the time of the transaction and therefore was not in contravention of its license.

To our knowledge the RCDSO has not endorsed this maneuver but we are also unaware of any moves against it.

Summary

Using your corporation to invest is an effective and tax-efficient strategy. Unfortunately, RCDSO rules make this a little more complicated. But by periodically purifying your DPC, you can ensure that you obtain those benefits without risking the loss of the tax-savings associated with the triggering the capital gains exemption when you sell your practice and DPC. For more information on the optimal timing of this maneuver it’s best to reach out to your accountant or lawyer. At the heart of our mission lies your DPC’s success—let us navigate the complexities together. Connect with us for personalized support.