Financial Planning for Dentists: PART ONE

April 12, 2022

I also cover this in a YouTube video. Click here to watch!

I have good news.

I’m starting to see a number of dentists – from all across Canada – reaching out to connect with me via LinkedIn and YouTube. So, I thought I would dedicate my next three articles to – as the title suggests – Financial Planning for Dentists. Because developing a financial plan for a dentist is very different from developing a financial plan for a doctor.

So here’s the thingthere is a key difference between dentists and doctors

Almost 100% of dentists can sell their practice, but when it comes to doctors, the numbers flip around and 99% of doctors do not get a chance to sell their practice. Usually, family doctors wind down their practice and most often the patients need to find their own replacement doctor.

So for dentists there needs to be extra care involved in structuring – and then implementing – the financial and retirement plan.

Now this is critical

Ideally a dentist will want to sell the “shares” of their corporation to the incoming buyer so that they can take advantage of the $850K+ Lifetime Capital Gains Exemption. Meaning that the first $850K of the purchase price is 100% tax-free money to the Dentist. 

However, when somebody purchases the shares of a Dental Corporation, they are also purchasing any potential hidden issues that might not be apparent at the time of the sale. So, sometimes, incoming buyers of a dental practice would prefer to pay for the “assets” of the Dental Corp. If this happens there is still a way to structure the sale so that some of the money is received in a more “tax-preferred” way by using an accounting term called “Goodwill”.

Now, personal goodwill can be present when the dentist’s reputation, expertise, skill, knowledge, and relationships with customers are critical to the business’s success and value.

Think about it this way

Personal goodwill may be deemed as an asset of the corporation where the shareholder – in this case the dentist – has transferred the goodwill to the corporation through employment, or other agreements with the corporation.

Here is another key point

A sale of corporate assets and personal goodwill should be planned carefully and executed to establish that personal goodwill exists – that it is being sold in a separate transaction from the sale of the assets of the corporation.

Now, as a result, you might also be able to negotiate a higher sale price so the after-tax proceeds of an asset sale are similar to a share sale.

Because a dentist is most likely to sell their dental practice, you also have to be very careful in the period of time leading up to the sale of the practice.

If you have investment assets inside the Dental Corporation – and they are not being used to run the practice – then they are considered “Passive Assets”.

If at the time of the sale there are passive assets inside the corporation – such that less than 90% of assets are being used to run the business as a dental practice – then you may have to restructure or “purify” your corporation prior to sale. This is to ensure that the business qualifies for the Lifetime Capital Gains Exemption.

Now, some provinces across Canada allow dentists to actively “purify” their assets on a regular basis, while other provinces are not supportive of this accounting procedure. You will need to work with a Licensed Financial Planner and a Certified Accountant to determine how you will plan for the sale of your dental practice.

Here is something else to know and remember

If you do sell the assets of your corporation instead of the shares, then you do get to keep the corporation; if you decide to give up your license to practice dentistry, then the corporation will no longer be a Dental Professional Corporation, but it will turn into an Investment Corporation. The proceeds of the sale would then go into the Corporation and you could continue to pay yourself dividends out of the Investment Corporation in retirement.

In summary

We have covered the structure of the dental practice and the difference between selling the shares of your corporation versus selling the assets of your corporation. In my next blog, I will get into the importance of protecting you and your family if life throws you a curveball. We will also get into the importance of having a second Corporation.

Now, in some provinces your Dental Association frowns upon you having a Holding Company… but I will overview why it is important for you to have this second Corporation and how we get around any issue with regards to having a Holding Company.

If you are interested in developing a comprehensive written Financial & Retirement Plan, contact me at the coordinates below to apply to become my client. Thanks for reading and always remember: when we design financial plans for our clients, we make sure that your money outlives you in retirement.

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By John Moakler, BMath, CFP, CLU

President and Senior Executive Financial Planner

Moakler Wealth Management

1 416 840 8544