Sean Robertson BHSc DDS

John Moakler BMath, CFP, CLU, CSC

Rick Goldring BA, CFP, CLU, ChFC

Choose Your Own Adventure: The “Perms and Combs” of Career Investing and Practice Sale Strategies

Remember those “Choose Your Own Adventure”
books in elementary school? They involved a
character who experiences a different journey
and eventual outcome based on the options
created by the author and chosen by the reader. Also
known as “Secret Path” books, the same one could yield
different journeys for their characters, even with some
of the same choices made by the reader. Based on the
number of choices, there were different permutations
and combinations that created a different story. For a
young, developing mind, these stories gave a sense that,
to some degree, the reader could control the outcome,
and that choices have consequences. Sometimes, these
consequences could be anticipated, while other times
they could not.
Then, in high school, finite math involved the study
of permutations and combinations, often abbreviated
as “perms and combs.” Permutations are mathematical
sequences where the order of the number set matters.
Combinations are sequences where order does not affect
the outcome. Perms and combs could be thought of as a
mathematical model of the choose your own adventure
When we look at “real life” from a financial perspective,
there are an infinite number of choices with consequences
and benefits, and with dynamic, external
influencers. Even when we control for external influencers
and changes in the economic climate, every dollar
earned can have a different legacy based on the strategy.
In essence, the perms and combs of a financial strategy
are endless, but they matter for the lead characters
in your life. For dentists, investment strategies and practice-sale considerations have an effect on retirement
outcomes, and are influenced by the climate of the stock
market and practice marketplace.
This article will review six financial options for a dentist’s
financial “adventure.” Three are presented from
the perspective of career investing, and how different
long-range approaches can result in different retirement
savings outcomes. The other three are presented from
a practice-sale perspective, showing how different strategies
of practice-sale considerations can yield different
after-tax, take-home profits. By no means are these scenarios
exclusive or exhaustive, but they give pause for
consideration of how dentists can strategize and choose
their own path.

A career of investing
As a dentist, you are an associate or practice owner. As
a practice owner, you have both challenges and benefits.
Owning a practice requires not only investing in
your clinical skills but also investing in your team and
the practice to support patient care and meet current
standards. The investment in practice ownership can
offer a rewarding career, but it requires staying on top
of clinical technologies, administrative responsibilities,
infection prevention and control protocols, and
patient-management considerations. Continued learning
and relearning are critical for any clinician to maintain
and grow a practice. Being an entrepreneur in dental
practice ownership can be demanding, invigorating and
satisfying — sometimes all in a single day.
The early years of practice ownership often require
focus on practice growth, but some consideration should also be given to a retirement plan. A dentist retiring at
age 65 should expect that she and/or her spouse will have
at least another 30 years of life to enjoy, with the majority
of that time doing the things they want, when they
want. In essence, dentists spend the first third of their
lives preparing for a career in dentistry, the next third
practicing dentistry, and the final third in retirement.
To maximize that final third, it is critically important
to plan and prepare for retirement early on in a dental
career. There are a number of options to consider in planning
for retirement through a career of investing that can
yield vastly different outcomes; we will highlight three
theoretical options.
The first common, simple and straightforward
approach to investing is a T4 salary approach. This can
be effective in creating retirement savings but may also
require contributions to the Canada Pension Plan (CPP),
which can have a negative return on the funds contributed.
This scenario of career investing may result in an
“RRSP trap,” where the investor is forced to contribute to
RRSPs in order to reduce the tax bill during her working
years, only to find that tax is deferred to the final third
of her life.
A second option could be a blend of T4 salary and T5
dividends for the dentist’s paycheque, where one could
minimize the amount of T4 salary to coincide with any
government-support programs (child care, tax credit,
etc.). This would permit the reduction or elimination in
CPP contributions, saving up to $8,000 per year. In this
scenario, creating a portfolio of real-estate properties to
generate rental income that is then used to pay down
debt and increase wealth could be considered.
A third career-investing strategy could follow the second
option presented but use the dentist’s professional
corporation or a newly created real-estate holding company
to invest in a “Whole Life Par Policy.” This could be
designed with immediate access to cash value. Designing
such a policy would mean the policy holder would pay
the insurance premium on a Monday and on a Tuesday
a lending institution would provide the owner with 90
to 100 per cent of the premiums back at a prime rate
of interest. These borrowed premiums could be used to
reinvest in the practice or in real estate. 

This option permits attaining life insurance coverage for the client to protect her family at the cost of pennies on the dollar.
Insurance companies in Canada reward each Whole
Life Par Policy with an annual dividend. Insurers have
been paying dividends for more than 150 years, with the
current dividend at six per cent. These polices can be
designed with immediate access to cash value, which is
not common knowledge. As such, we have found many
policy holders have policies that, although they were designed for them, limit access to the cash value for at
least 10 to 14 years. A customizable approach is always
necessary to achieve the best outcome in the interest of
the client.

When it’s time to sell

The first option here considers that dental practices can be sold as shares in a dentistry professional corporation,
or sold as an “asset sale.” In the case where a dentist was
not incorporated or had already taken advantage of the
available lifetime capital gains exemption (LCGE) at the
time of sale, an asset sale may be chosen over a share
sale. If we choose the path of an unincorporated dentist
who is ready to appraise and sell her practice, we know
that the seller cannot take advantage of the LCGE as in a
share sale. In an asset sale, a seller is taxed on the various aspects of the practice, including the hard assets and the goodwill at the time of sale. For a purchaser, buying a practice as assets rather than shares presents an opportunity to depreciate the purchase according to the cost of capital allowance as set by the Canada Revenue Agency (CRA). What this means is that a buyer can “write off” the goodwill and hard assets of the purchase over decades of ownership through the allowance of depreciation that does not exist in a share purchase. Therefore, at the same valuation, an asset sale has the benefit going to the buyer and the disadvantage to the seller. Because of this, it has been argued that for a seller to end up with the same net result on an asset sale as she would with a share sale, the valuation of the practice would have to be increased by more than 30 per cent (1). Often, this can be justified by an appraiser with the consideration of allowable depreciation for the buyer. The challenge is that buyers often look at practice value as a percentage of gross revenue, and the optics of this in the marketplace can create a tougher sell. Additionally, the increase in valuation has to come from the goodwill, since the hard assets of the practice cannot change in value. In accordance with Canadian tax law, goodwill is depreciable at five per cent of the total value annually, whereas many hard assets can be depreciated at 20 per cent annually. With this in mind, and in our experience, buyers and lenders may be more reluctant in today’s climate to permit an asset sale at an inflated value. With a practice at the same valuation as a share sale, our theoretical seller could end up losing up to 30 per cent of realized profit to taxes when her practice sells as an asset sale.
In imagining a second scenario where the same practice
owner had incorporated her practice three years prior
to her appraisal and intended sale, the outcome looks
very different at the same valuation. When the practice is
sold as a share sale with a single dentist as a shareholder in her own dentistry professional corporation, the first
$883,384 is exempt from taxes due to the LCGE. At a
comparable valuation, this creates a clear advantage to
the seller. Although the buyer does not have immediate
benefit from the purchase of the share sale, they are
permitted to sell the practice down the road in the same
A third scenario involves incorporation with the addition
of a spouse as a shareholder. Imagine our theoretical
dentist incorporated and registered her dentistry professional corporation in 2008, when she graduated. She was
recently married and has decided to add her spouse as
a non-voting shareholder to her dentistry professional
corporation for future tax advantages. In light of the
current climate and the shut-down period attributable
to COVID-19, her practice has a three-month window
where she was unable to practice dentistry in the past
year. She has had her practice appraised; it reflects a
reduced valuation due to the effects of the pandemic on
her practice’s revenue, the reduced capacity for treatment
using aerosolizing procedures, and increased caution
in the dental practice marketplace. With the resultant
lower practice valuation, she can now add her spouse
as a shareholder to the corporation and take advantage
of the practice’s recovery moving forward. As the LCGE
increases with inflation and the practice value increases
with growth and inflation, so too does the ability for her
spouse to take full advantage of the capital gains upon
practice sale. In the year 2038 when this dentist decides
to sell her practice and retire, both she and her spouse
will be able to take advantage of the LCGE as shareholders,
which could shelter half or more of the practice value
from taxes, resulting in a significant tax advantage as
compared to the other two scenarios of sale reviewed.

A happy ending
As the adage goes, “knowledge is power.” A comprehensive,
personalized approach taking into account your
career and retirement goals should include options and
strategies that help you get where you want to go — these
are your co-authors on your financial adventure. The
scenarios presented in this article are theoretical and not
exhaustive, but are intended to emphasize the idea that it
is not what you make in your career of earning, investing
and later selling your practice, it is what you keep. OD