Writing Off Dental Destination Courses
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
What dentist wouldn’t want to combine getting continuing education courses, traveling somewhere exotic, and expensing the whole thing for tax purposes? The dentist taxpayer believes that the amounts they’ve spent were incurred for legitimate business reasons and therefore can be used to reduce their taxable income and income taxes payable. But is that true? Is it legal? Well, there are a number of laws that COULD apply to this situation. And the laws are NOT ALWAYS clear. So without further adieu, let’s get into it, shall we?
Section 18: Deducting Business Expenses Generally
The first general limitation on deducting expenses comes from section 18 of the Income Taxt Act. That section imposes two (2) very important limitations on a taxpayer’s ability to deduct costs related to a business.
First, section 18(1)(a) says that a taxpayer cannot deduct an expense related to a business unless that expense was “made or incurred by the taxpayer for the purpose of gaining or producing income from the business”. In other words, expenses incurred for personal reasons (e.g. leisure, recreation, socializing, etc.) are not deductible.
Second, section 18(1)(b) says that a taxpayer cannot deduct an expense that is a “capital outlay or loss” against their business income. So an expense incurred to acquire or develop a long-standing benefit (e.g. skill, network connection, knowledge, qualification, etc.) is not a deductible expense against business income.
Bad Law: Griffith Case
Now it is time to review a bad decision that dealt with these laws in the context of a doctor trying to deduct expenses incurred for attending a convention. In the case of H. Griffith v. M.N.R.,  C.T.C. 47, the Exchequer Court of Canada held that convention expenses incurred by a professional person COULD NOT be considered to have been incurred for the purposes of earning income and, as such, were disallowed. In that case, the taxpayer – a medical doctor specializing in the field of anesthesia and one of the outstanding specialists in that field – had deducted expenses incurred for attending conventions at which he delivered addresses and presented lectures. The deduction was disallowed on the basis that the expenses were not incurred for the purposes of earning income. The Court agreed with the government and disallowed the expense on the basis that the expenses were not incurred with the object of obtaining actual or immediate gain or profit, but were rather “of a capital nature” and, as such, not deductible under (what was at the time) sections 18(1)(a) and (b) of the Income Tax Act.
The Courts Partially Reject Griffith!
NOW THANKFULLY, the Exchequer Court’s decision in the Griffith case concerning section 18(1)(a) of the Income Tax Act has since been rejected. As the Tax Court stated in Shaver v. Canada  T.C.J. No. 3:
29 However, the restrictive approach taken by the Exchequer Court with respect to paragraph 18(1)(a) of the Act has since been rejected by the courts. An expense may thus be incurred for the purpose of gaining or producing income from a source referred to in paragraph 18(1)(a) of the Act, even though it is not incurred with the object of obtaining actual or immediate gain or profit. As long as an activity is undertaken by a taxpayer in pursuit of profit and it is not a personal endeavour, there is a source of income and the profitability of the activity to which the expense relates does not affect the deductibility of the expense if that expense is reasonable in the circumstances (see Stewart v. Canada, 2002 SCC 46, at paragraphs 51-58).
So we now have a more relaxed (or easier to meet) test when it comes to expenses incurred for the purpose of gaining or producing income: the expense must be undertaken in pursuit of profit and must not be a personal endeavour. This is much easier to prove than what the Court in Griffith said (i.e. that an expense was incurred with the object of obtaining actual or immediate gain or profit). So that eases up a dentist’s ability to deduct a convention expense with respect to section 18(1)(a) of the Income Tax Act. Basically, if they can show that expenses to attend a convention were incurred in pursuit of profit, then it would be fully deductible as a so-called “current expense” and not a “capital one”.
But what about section 18(1)(b)? This whole non-deductibility of capital expenses thing? What’s that all about? Well, the idea is that, if an expense is incurred to obtain a long-term benefit, then it is a capital expense and therefore not deductible as against business income because of section 18(1)(b). In Griffith, the Court found that the expenses incurred to attend business seminars were more like post-graduate courses in that those who attended them increased their knowledge and therefore the expenditures made by them were of a capital nature (i.e. long term benefit instead of a one time benefit). Hence, they were not deductible. In Graves (G) v. Canada,  1 C.T.C. 357 (F.C.T.D.), the Court found that the awareness gained by attending certain meetings was a CAPITAL ASSET, and therefore the deductibility of those expenses against business income was prohibited under section 18(1)(b). Similarly, in Wees v. Canada,  T.C.J. No. 1192 (Q.L.), and in Roche v. Canada,  T.C.J. No. 105 (Q.L.), travel expenses incurred by Amway distributors to attend several Amway meetings were considered by the court as having been incurred to develop long-term assets and therefore as being capital expenses. As a result, they were denied under section 18(1)(b)!.
AND Section 20(10) comes to the rescue!
So is that it? Does this mean that a dentist who incurs capital expenses to attend a convention and gains a capital asset (e.g. long-term skills, awareness, network connections, etc.) will not be able to deduct those capital expenses against their business income? Well, not quite… thankfully, we have section 20(10) of the Act that gives SOME relief. Here’s what it says:
20 (10) Notwithstanding paragraph 18(a)(b), there may be deducted in computing a taxpayer’s income for a taxation year from a business an amount paid by the taxpayer in the year as or on account of expenses incurred by the taxpayer in attending, in connection with the business, not more than two conventions held during the year by a business or professional organization at a location that may reasonably be regarded as consistent with the territorial scope of that organization.
So even though section 18(1)(b) could be devastating (because it denies the deductibility of any capital expenses against business income), section 20(10) says that a taxpayer CAN deduct expenses incurred in connection with a business for attending up to two (2) CONVENTIONS per year. Now, while that may seem to be the light at the end of the tunnel that we were all looking for, there are rules and restrictions built into section 20(10) that need to be reviewed in detail to understand when and to what extent those CONVENTION-related expenses can be deducted.
So by this point, the following statement should make absolute sense: In order for a taxpayer to be able to deduct an expense of any kind he /she must come within either section 18 (this section allows a taxpayer to deduct expenses that are incurred for the purpose of earning income) or section 20(10) (this section covers inter alia convention expenses, and a taxpayer is limited to two a year) of the Income Tax Act. Now let’s get into section 20(10) in further detail shall we?
Who is eligible to use section 20(10)? What is the extent of the deductions that can be claimed?
Who is Eligible?
This deduction is only eligible for a self-employed taxpayer who is carrying on a business or practicing a profession. So dentists would qualify
What is a Convention?
When definition a “convention”, a few points are worth mentioning:
- The word “convention” is not defined in the Income Tax Act. Courts have relied upon dictionaries and commonsense to interpret the word “convention”. For example, in Griffith, the Court said that conventions “are gatherings of people in the same calling, profession or trade who meet to discuss matters of common interest, exchange opinions on recent discoveries liable to affect their field of action and consider the problems raised by the constant evolution of science and the demands of modern living. These conventions make it possible for those who follow the discussions to acquire new knowledge, or at least to increase that they already have, thus putting them in a better position to meet the needs of those they have chosen to serve in their respective fields.”
- The government has said that a convention is a formal meeting of members for professional or business purposes: see Income Tax Interpretation Bulletin, No. IT-131R2 (Date: November 24, 1989), “Convention Expenses”.
- In Graves v. M.N.R.,  F.C.J. No. 277, the Court held that: “It is my opinion that whether or not the meeting or conference can be a convention within section 20(10) depends upon an assessment of the nature of the meeting and its relationship to the taxpayer’s business rather than upon the particular standing of the taxpayer or his status in relation to others who may attend.”
- In Spectron Computer Corp. v. Canada (Minister of National Revenue),  T.C.J. No. 700, the Court held that “if any assembly or gathering portrays a commonality of purpose… and a commonality of participants … it will, prima facie, be a convention”.
- Conventions (an assembly of persons for a common purpose) can be distinguished from a conference (a formal interchange of views or meeting of two or more persons for discussing matters of common concerns). Conventions will include conferences, but the reverse is not necessarily true.
- In Shaver v. Canada,  T.C.J. No. 3, the Court noted the distinction between training costs and costs incurred in connection with attending a convention as per Interpretation Bulletin IT-357R2. In that bulletin, it is explained that some training costs are deductible as current expenses if they are not capital in nature. Expenses are considered to be capital in nature where the training results in a lasting benefit to the taxpayer, i.e. where a new skill or qualification is acquired. Where, on the other hand, the training is taken merely to maintain, update or upgrade an already existing skill or qualification, the related costs are NOT considered to be capital in nature (and may be deducted against business income). The distinction between a training course and a convention and between a training course and business meetings is made in paragraphs 9 and 10 of IT-357R2 as follows:
9. A training course should be distinguished from a convention, which may be described as a formal meeting of members of an organization or association for professional or business purposes. Unlike a training course which generally has a classroom format for teaching a subject in accordance with a formal course of study, a convention does not normally have a classroom format and those attending are normally not expected to study text-books, prepare assignments or take tests. A convention does not become a training course when some of its sessions take the form of workshops. It is a question of fact whether a “seminar” is a convention or a training course. While conventions usually result in the acquisition of knowledge by those attending them, the deduction of convention expenses is specifically covered by subsection 20(10) and is subject to the limitations contained in the provisions of that subsection (see the current version of IT-131).
10. A training course should also be distinguished from a meeting of a group of employees or owners of a business where no formal training occurs. An employer’s costs incurred in connection with employee meetings of this nature are usually allowable, as are costs of similar meetings of the owners of a business, provided that such costs are reasonable in the circumstances and are incurred for the purpose of carrying on the business.
So now you should have a better idea of what a convention is. And section 20(10) allows deductions for expenses incurred by dentists in attending a convention. But there is also a territorial restriction that needs to be addressed.
Conventions in Exotic Locations
A taxpayer will only be able to use section 20(10) if the conventions are held by a business or organization at a location that may be reasonably regarded as consistent with the territorial scope of that business or organization. So what about conventions that occur in exotic locations abroad? Well, that’s where we need clarification in respect of the term “territorial scope”. The aforementioned government Interpretation Bulletin has the following to say in this regard:
The term “territorial scope” refers to the geographical area in which the particular organization ordinarily conducts its activities. Accordingly, this generally requires that a convention sponsored by a Canadian business or professional organization be held in Canada where the organization is national in character, or in the particular province, municipality or other area in Canada where the activities of the organization are limited to such an area. Consequently, expenses incurred in attending a convention held outside the geographical limits of the sponsoring Canadian organization will normally not be deductible in computing income and, for this purpose, a convention held during an ocean cruise is considered as being held outside Canada.
If the business that is organizing the convention is international in scope (i.e. no discernible territorial limits or geographical boundaries) and whose main purpose and function is to promote, organize and manage conventions, then that would arguably be OK under section 20(10).
Limitations on Deductability of Expenses
Now, even though section 20(10) of the Income Tax Act allows deductions for convention expenses, it’s not a free-for-all. That section is subject to additional restrictions found in section 67 and 67.1(1) of the Income Tax Act.
Section 67 says that: “In computing income, no deduction shall be made in respect of an outlay or expense in respect of which any amount is otherwise deductible under this Act, except to the extent that the outlay or expense was reasonable in the circumstances.” This basically means that the expense must be REASONABLE in the circumstances.
Section 67.1(1) of the Income Tax Act says that business expenses related to meals and entertainment will only be 50% of the lesser of what was paid or what reasonably should have been paid in the circumstances. So meals and entertainment are not 100% deductible. That’s the starting position. But then section 67.1(3) goes on to say that, with respect to conferences / conventions / seminars or similar events, if the amount that is paid for meals and entertainment cannot be identified (e.g. because it’s an all inclusive price that was paid), then the taxpayer will only be able to deduct up to $50 per deal for meals and entertainment. Thus, $25 per day of the convention fee becomes non-deductible. And the fee for the event shall be deemed to be the actual amount paid minus the amount deducted for meals and entertainment.
Finally, the Interpretation Bullet says the following about combining a vacation with a convention:
5. A taxpayer who combines attendance at a convention, wherever it is held, with a vacation trip must allocate expenses on some reasonable basis to eliminate those that are essentially for vacation purposes. A reasonable basis is considered to be one that allows the taxpayer to deduct the cost of travel (i.e., transportation and necessary meals and accommodation en route) from the taxpayer’s place of business to the convention and back by the most direct route available, and the costs and accommodation while participating in the convention. All such costs must be reasonable as required by section 67 and are subject to the restrictions in section 67.1.
6. It should be noted that expenses incurred by or for a spouse or children accompanying the taxpayer to a convention or a combined convention and vacation trip are normally considered to be personal and, as such, are not deductible.
Hmmm… So, overall, there appear to be a number of restrictions on dentists looking to write off traveling with their families abroad to attend a convention.
Caselaw Concerning Conventions
Now that we have a better sense of section 18(1)(a), 18(1)(b) and section 20(10) of the Income Tax Act, it’s time to see those sections in action… and interestingly enough, practically all of these cases have to deal with Amway distributors trying to deduct expenses for conventions and other trips…
In David N. Rovan (Appellant) v. The Minister of National Revenue (Respondent) (1986), 86 DTC 1791, the taxpayer was a partner in a law firm. At the end of April 1980, he attended a seminar in Monte Carlo in the Principality of Monaco. The topics discussed at the seminar were condominium law, criminal law and family law, and the participants were from both Europe and Canada. The taxpayer was engaged in a general practice of law with the taxpayer’s main areas being family, criminal and real estate law. The seminar fee included accommodation for six nights even though the seminar involved at most 12 hours of lectures over three days. The organization conducting the seminar had previously held a number of similar seminars in both Canada and in other countries. The taxpayer deducted his convention expenses from his partnership income. The government disallowed the deduction and the taxpayer appealed to the Tax Court of Canada. The Court sided with the government. The Court found that Monte Carlo was within the territorial scope of the organization holding the convention since its very raison d’être was to organize and stage conventions inside and outside of Canada for profit. However, the taxpayer failed to establish that he attended the convention primarily to enhance his business as a source of income rather than for vacation purposes. Worth mentioning is the Court’s view of the objective of section 20(10):
“… I believe that the object to be attributed to the legislation is to allow a taxpayer engaged in business to deduct convention expenses in computing his income if the primary purpose of attending was the enhancement of his business as a source of income. I do not regard the subsection as providing a means whereby a taxpayer belonging to a limited class of taxpayers shall have the benefit of deducting the expenses incurred in going to a convention if in truth and substance the primary purpose of attending was a vacation. Expenditures made for what is a vacation under the guise of attending a convention for business purposes are not deductible in computing income. If they were, this would in effect be allowing certain taxpayers to have other taxpayers share the cost of their vacations. This cannot be what the legislation intends. This is not to suggest that indulgence at a convention in activities normally associated with a vacation precludes the deductibility of expenses incurred, but those activities must be clearly subservient to the overriding business purposes of the meeting.”
In Morris Michayluk and Gloria Michayluk (Appellants) v. The Minister of National Revenue (Respondent) (1988), 88 DTC 1564, the taxpayers were Amways sales distributors and sought to deduct travel expenses to business meetings. The government disallowed certain of these deductions, arguing that they did not relate to business purposes. The Court allowed the deductions pursuant to section 20(10). The Court accepted the taxpayers’ contention that, as business persons, they worked at the stability and expansion of their operation twenty-four hours a day, no matter where they were or what they were doing. The expenses here were reasonable in the circumstances, pursuant to s. 67 of the Act. The convention locations or the climatic conditions alone did not serve to disallow the deductions. The Court concluded that “the convention expenses did not represent a ‘disguised vacation’, nor were the expenses purely ‘recreational’, or for ‘personal motivation’, as opposed to educationally oriented. There may well have been some minor amount of ‘personal or living expenses’ included but not sufficient to cover even a major portion of the claim. In any event, the Minister has not assessed on some such ‘partial disallowance’ basis, and it is not for the Court to make that division.”
In Roche v. Canada (Minister of National Revenue – M.N.R.),  T.C.J. No. 105, the taxpayer operated an Amway distributorship and sought to deduct travel expenses for three trips to the United States in each of three consecutive years. The government disallowed the deductions on the basis that they were not incurred for the purpose of earning income from business or, in the alternative, that section 20(10) would only allow two trips each year. The Court seemed to avoid the issue of whether the travel expenses were incurred for the purpose of earning income from business and simply decided the matter on the basis of section 20(10). After citing (and seemingly accepting) the decision in Morris Michayluk and Gloria Michayluk (Appellants) v. The Minister of National Revenue (Respondent) (above), the Court in this case allowed the taxpayer to deduct only two of the three trips per year on the basis of section 20(10) of the Income Tax Act. Moral of the story: convention expenses were allowed within limits.
In Friesen v. Minister of National Revenue,  T.C.J., No. 926, the taxpayer was an Amway distributor who deducted expenses for sales promotional activities and meetings. The government disallowed these deductions. The Court found that the expenses for attendance at conventions in Canada and the U.S. fell within either section 18(1)(a) or 20(10) of the Income Tax Act and, therefore were prima facie deductible to the extent that they were reasonable. And on the issue of reasonableness, the Court found that, in the circumstances, they were unreasonable and thus were not allowed in light of section 67. The Court noted that the business had not been able to generate a profit or show a reasonable expectation of profit in the near future: “This Court is not prepared to allow convention expenses if a business has not shown a profit and paid tax thereon, or in very exceptional circumstances receives concrete evidence which showed that profit was imminent.” Moral of the story: your expenses need to be reasonable!
In Graves v. M.N.R.,  F.C.J. No. 277, the taxpayers – Amway distributors – sought to deduct travel expenses incurred in traveling to Amway networking meetings in the U.S. designed to develop leadership skills germane to the expansion of their business. The government denied these expenses on the basis that they were person or living expenses and not incurred to earn income (recall section 18(1)(a) and (b)). The Federal Court of Canada – Trial Division allowed these expenses, however, on the basis that they were either legitimate business expenses under section 18(1)(a) OR convention expenses within the meaning of section 20(10) of the Income Tax Act. The conventions included intensive sessions, held primarily during the weekends, with large group meetings, smaller seminars, training sessions and only limited social gatherings. These took up most of the day and, with the exception of breaks for eating, continued with seminars and meetings into the evening and often past midnight. The Court accepted that the personal activities of the taxpayers were brief and clearly subordinate to the business purposes.The Court held that the deductions were allowed and were reasonable in light of section 67 of the Income Tax Act and the evidence presented by the taxpayers (namely, that it was reasonable for the taxpayers to go to US conventions to learn about selling their business even though audio tapes and Canadian conventions may have been available).
In Wees v. Canada,  T.C.J. No. 1192, the taxpayer was an Amway salesperson and had deducted expenses for conventions. The taxpayer argued that he attended the meetings to teach others his techniques and, by doing so, would receive a portion of their sales commissions. Therefore, he was incurring the expenses to produce income. The government only allowed the taxpayer to claim expenses for two conventions (on the basis of section 20(10)) and denied the other expenses. The Court sided with the government and dismissed the case. The Court held that the expenses incurred by the taxpayer were incurred to develop long-term (i.e. capital) assets and therefore they were capital expenses and allowable only where they fit the conditions of section 20(10) of the Income Tax Act, which related to conventions. The government had already allowed the maximum expenses permissible under section 20(10). The meetings the taxpayer was engaged in were conventions.
In Ankrah v. Canada,  T.C.J. No. 4, the taxpayer – an Amway distributor, sought to deduct travel expenses to motivate recruits and attend conventions. The government claimed that these expenses were incurred for personal benefit of the family and not for business and restricted them to the maximum allowed under section 20(10) of the Income Tax Act.. The Court held that the expenses, in their entirety and not just limited to two conventions, were deductible on the basis that the taxpayer incurred them for the purpose of gaining or producing income from a business (i.e. section 18(1)(a)). The Court cited the decision in Graves v. M.N.R. (above) and concluded that, “[i]n respect to travel and convention expenses, the evidence supports that these were business rather than personal expenses.”
In Shaver v. Canada,  T.C.J. No. 3, a taxpayer tried to deduct travel expenses to attend monthly business meetings. And on one occasion, he flew himself, his wife and some of his distributors to Las Vegas on vacation to reward them and promote his business. The government argued that the monthly business meetings fell within the definition and rules relating to “conventions” and disallowed most of the travel expenses because the taxpayer was only allowed to deduct convention expenses to two (2) per taxation year and had exceeded that limit. The court agreed and held that “the seminars in question herein can very well be defined as formal meetings of members of an organization (Amway) that are held for business purposes and that result in the acquisition of knowledge by those attending them. Accordingly, in my view, these seminars are conventions within the meaning of the Act, as defined in the case law and, incidentally, in the Interpretation Bulletin” (IT-357R2). And with respect to the trip to Las Vegas, the taxpayer claimed that this was a special promotion expense and were incurred for a motivational meeting with successful industry members. Here, the government claimed that these expenses to Las Vegas were not incurred for the purposes of gaining or producing income from a business or property and also argued that those expenses were unreasonable. The Court agreed with the government and held that the taxpayer had not proven that “the primary purpose of incurring the expenses related to the Las Vegas trip was the enhancement of his business per se. The expenses are consequently not deductible…” The Court added that, even if it found the expenses were deductible as legitimate business expenses, they were so excessive as to be unreasonable and therefore non-deductible.
In Gunter v. Canada,  T.C.. No. 91, the taxpayer (who was in the hairstyling business and NOT an Amway distributor sought to deduct the cost of an educational cluster course sponsored by Maritime Beauty Supply on Redken on Redken products, plus numerous medians of an organization called Full Circle. The issue was whether these meetings were “conventions” under section 20(10) of the Income Tax Act. The Court held that they were conventions and allowed the deductions. The Court came to that conclusion on the basis that the meetings were well organized and planned quite professionally, had a direct relationship to the business of the taxpayer, were held fairly frequently, was not a loose gathering (but a professional group), there were detailed agenda minutes, and the purpose of the meeting was to learn about new products, techniques, and management ideas. For these reasons, the Court found that the meetings constituted a “convention” under the Act.
Based on the above analysis, here are some helpful tips to help ensure that your expenses are tax-deductible:
- Understand the law (read above).
- Keep your receipts.
- If the registration fee includes meals and entertainment, ask if these costs are shown as separate items on the receipt. Otherwise, the $50 a day rule applies (see above).
- If you are combining a vacation with a conference, be sure to keep separate records of your personal expenses (not deductible) versus business expenses (deductible).
- If you attend a conference outside of Canada, make sure you can justify the relevance of that convention to your business.
- If in doubt, speak with your dental accountant!
Unfortunately, you cannot deduct any costs for attending a convention on a cruise, no matter who sponsors it. The government will not accept expenses for a national convention held on an ocean cruise ship. Even if the ship travels between Canadian and U.S. cities or 2 U.S. cities the convention is deemed to be outside North America, and therefore not allowable.
Metro news quotes me talking about dental industry
Along with today’s Toronto Star, I was featured in the Metro (page 4) for my commentary about the dental industry. Here’s the article entitled “Dentists offer perks in face of fierce competition“:
And here is the text of the article:
TorStar News Service, “Dentists offering perks in face of fierce competition” Metro (8 April 2013), p. 4.
Two dentists, one neighbourhood: Dan Pisek remembers it well.
The dental-marketing consultant had a client who decided to attract new customers with a discount on teeth whitening.
A few weeks later, the dentist down the road put out a better discount. So Pisek’s client doubled down, deepening the savings. And so on, and so forth.
The skirmish, which happened five years ago, is representative of Toronto’s “hypercompetitive” dentist scene,
where more and more doctors are clamouring for customers who often have healthier teeth, thanks to practices like water fluoridation.
The result is the increasing use of marketing gimmicks to rake in clientele. This flips the common feeling, spurred by
doctor shortages, that patients are lucky to land a medical professional. When it comes to dentists in the GTA, they
are lucky to have you.
“I’ve seen practices that when you walk in, they look like spas…. You’re sitting in a vibrating chair, watching TV and being offered an espresso,” said Mike Carabash, a Toronto lawyer specializing in the industry.
A November report on the economics of dentistry for the Ontario Dental Association says the patient-todentist ratio in the province has dropped 13 per cent since 2002, down from 2,277 people per dentist to 1,992 in 2011.
Part of this is because schools continue to pump out hefty cohorts of dental graduates.
I was mentioned in article about dental industry
Wow! Just two weeks ago, I was featured in the National Post (front page) for my commentary about the dental industry. I’m pleased to announce that I was interviewed by Alex Ballingall of the Toronto Star for his article entitled “Dentists offer perks while facing increasing competition for customers“.
Here’s the article:
Alex Ballingall, “Dentists offer perks while facing increasing competition for customers: higher numbers of dentists mean practices are resorting to glitz, glam and old fashioned gimmicks in a skirmish for customers”, Toronto Star (8 April 2013), Section: Life / Health Wellness.
Two dentists, one neighbourhood: Dan Pisek remembers it well.
The dental marketing consultant had a client who decided to attract new customers with a discount on teeth whitening.
A few weeks later, the dentist down the road put out a better discount. So Pisek’s client doubled down, deepening the savings. And so on, and so forth.
“All it takes is to have two such doctors on the same road,” said Pisek.
The skirmish, which happened five years ago, is representative of Toronto’s “hypercompetitive” dentist scene, where more and more doctors are clambering for customers who often have healthier teeth, thanks to practices like water fluoridation.
“I don’t want to say there’s (a dental office) on every corner, but it’s getting there,” said Pisek, who has helped dentists market their services for 13 years.
The result is the increasing use of marketing gimmicks to rake in clientele. This flips the common feeling, spurred by doctor shortages, that patients are lucky to land a medical professional. When it comes to dentists in the GTA, they are lucky to have you.
“I’ve seen practices that when you walk in, they look like spas … You’re sitting in a vibrating chair, watching TV and being offered an espresso,” said Mike Carabash, a Toronto lawyer specializing in the industry.
There are nearly 15 per cent more dentists in Ontario now than there were in 2001, according to the Royal College of Dental Surgeons of Ontario. A November report on the economics of dentistry for the Ontario Dental Association says the patient-to-dentist ratio in the province has dropped 13 per cent since 2002, down from 2,277 people per dentist to 1,992 in 2011.
Part of this is because schools continue to pump out hefty cohorts of dental graduates. In 2001, 251 new dentists were certified as general practitioners in the province. A decade later there were 332 new certificates.
The situation is compounded, according to the economic report, by aging practitioners working past retirement age, and foreign-trained dentists, who often set up shop in urban centres like Toronto.
Dentists trying to start new practices in the GTA are “the most at risk, the most concerned,” said Carabash. “They need clients ASAP. It takes a while to figure out how to retain patients.”
Things aren’t rosy on the demand side either. The report predicts that over the next decade an increasing percentage of patients will pay for dental care out of pocket instead of with insurance—up from 45 to 55 per cent. This could be problematic, given that incomes have stagnated for the majority of Canadians since the early 1980s, the report notes.
In urban areas like the GTA, overhead costs for running a dental clinic are higher than average—with the price of equipment, employees and office space—so maintaining a reliable list of clients is all the more critical. “To stay competitive, you keep your fees as low as possible and you try to increase your volume,” said Natalie Archer, an established dentist and aggressive marketer whose Runnymede Dental Centre caters to a niche market of seniors, offering extras like shuttle service and home visits to get clients.
She also described how the mindset of the profession has changed in recent decades as competition for clients heated up. “Dentistry has always been a business, however I think our profession in a way was taught or thought that by thinking like a business they were embarrassed or felt unprofessional,” she said.
There also used to be more restrictions from the College on how dentists could market their services, including limits on the font size of placards and Yellow Pages ads, said Archer. “Now you’re allowed to do (almost) anything. There are no font restrictions. You can put your name on a bus.”
In this context, dentist review websites like SearchBookSmile.com have popped up to help the public land a good doctor. “You can definitely use the search engine to find the perks that you’re missing,” said Adam Kepecs, who launched the site last October. “If you really want to spend the time, you can find a great dentist.”
George Bashay, manager of the Simply Smile Dental Hygiene Spa, said a good way to attract the public is to create a welcoming atmosphere. His practice, which sticks mostly to teeth cleaning, offers coffee and tea to people in the waiting room. When they’re called in, they pop on a pair of slippers and take a seat in a massage chair as a hygienist chips the plaque from their pearly whites.
“It just makes people more at ease, because a lot of people don’t like coming to the dentist,” said Bashay. “We just try to make our clients more comfortable, pamper them a little bit.”
But at the end of the day, what matters most is to show the people in the dentist’s chair that they’re valued customers whose well-being is important, said Archer.
“Especially in urbanized Toronto, nobody wants to feel just like a number,” she said. “There is no substitute for personalized, excellent service.”
Buying / Selling a Practice
Here’s a new testimonial from a dentist who we represented to purchase a dental practice:
“Michael, David, Ljubica,
I want to acknowledge and thank you for all your efforts with my case. Even though my case was a complicated one, you never stopped working to find solutions and I am so grateful to you and the exceptional team at DMC Law. Your team consistently go above and beyond what is required to ensure that no detail (small or large) is overlooked and you approach every aspect of your work vigorously and professionally, leading to success.
On a personal note, I very much enjoyed working with you on this deal. You showed great dedication, concern and interest in not only the deal, but in me as your client. I had full and complete trust in you and I felt that you treated me as a person rather than just another client. I truly appreciate your excellent overall service and I believe it would be very difficult to find anyone who can measure up to the outstanding job that you have done. I would not have been able to get to where I am without you and I look forward to continuing our working relationship, one that is based on complete trust and respect.”
Dr. A. S.
I was interviewed for article on the dental industry
I’m pleased to announce that I was interviewed by Tom Blackwell of the National Post for his front page article entitled “Too many dentists, too few mouths: report”. Here’s the article:
And here’s the text of the article:
Tom Blackwell, “Too many dentists, too few mouths: report”, National Post (6 March 2013) A1.
Too many dentists, too few mouths: report
Concerns over selling tactics as market tightens
A dentist in midtown Toronto is trying to lure new patients with an attractive come-on: professional teeth whitening for $39.99, “a $400 value.” One in Vancouver goes a step further, providing whitening for free as an introductory offer.
The demand for dental services is likely to decline.It is the kind of salesmanship more common in retailing than health care, but some analysts predict it will become increasingly prevalent among dentists, as one of Canada’s most financially secure professions appears headed for a new era of tough competition.
Stalled demand and a growing supply of practitioners — at least in large cities — mean many dentists will have to fight to maintain their incomes, argues a recent, “doom and gloom” report to the profession.
Some analysts predict that heightened jostling for business will usher in better prices, easier payment plans and more customer-oriented service; others worry that the dentists who are best at marketing, and not necessarily the most adept at fixing teeth, will prosper.
The growing per-capita pool of dentists has already sparked price wars and discount offers in “hyper-competitive” markets like Toronto, said Michael Carabash, a lawyer who works with the profession.
“Dentists, 20, 30, 40 years ago probably thought of themselves as professionals and not business people. They could have hung out their shingle … and through word-of-mouth referrals would have built up good practices,” said Mr. Carabash. “That is not the case any more.”
The new reality means patients will have “more purchasing power than ever,” he said.
The average income for Canadian dentists after overhead is estimated at $140,000 to $170,000.
The tightening market for dentistry is detailed in a recent report by the consultants R.K. House and Associates to the Ontario Dental Association (ODA). The data it cites suggest the trend is similar across the country, though some experts said the saturation problem exists primarily in larger cities, with smaller communities still actually under-serviced. The report indicates the number of dentists in Ontario climbed faster than the population each year between 2002 and 2011, increasing from one professional for every 2,277 residents to one per 1,992. Nationally, there were 1,709 people per dentist by 2009, according to the report.
That contrasts with the situation outside Canada, where many similar jurisdictions have considerably fewer of the professionals per capita, claims R.K. House.
“Compared to virtually every other country, Canada has a very generous sprinkling of dentists and hygienists,” says the report. “Over the next few years, these numbers will grow. This means that competition within the profession will become more intense and individual dentists are going to try to find ways to attract and retain patients.”
The trend will not stop until dental schools cut back on how many students they admit, the report says, arguing they are “graduating more dentists than required to maintain a constant population/dentist ratio.”
The consultant also argues that demand for services is likely to decline. While increasing debt load and higher interest rates in coming years will curb Canadians’ discretionary income, workplace benefit plans are becoming less generous, the report says.
Ron Weintraub, a Toronto dentist and consultant, said he believes such pressures on patient demand will be countered by a growing recognition among younger Canadians that good dental care is essential. The expanding supply of dentists, though, is making the market more constricted, he agreed.
He recommends dentists respond by running their practices more efficiently, ideally by joining forces with colleagues in group offices to share the hefty cost of equipment.
There is pressure, however, to “look around and view others as competition,” Dr. Weintraub said.
“I don’t think that’s a good thing. It encourages marketing initiatives whereby patients will be drawn to the best marketers, rather than the best skills.”
Other observers, meanwhile, say the problem is not the number of dentists, but their concentration. While some cities might have a glut, smaller communities and rural areas continue to be under-serviced, said Dr. Robert Sutherland, president of the Canadian Dental Association.
He also acknowledged that dentists have become more consumer-oriented, shifting from operating nine-to-five out of non-descript, low-key premises, to more visible, people-friendly clinics with extended hours. But he called that a natural evolution.
“The practice of dentistry has changed,” said Dr. Sutherland. “I’m not sure that has been pressured by angst or competition or worry, but just by an evolving profession.”
An ageing population and growing awareness of the importance of dental care will likely keep demand buoyant, but there is definitely an “over-concentration” of dentists in larger urban areas, said Timothy Brown, CEO of ROI Corp., a broker that handles sales of dental practices.
One result of that concentration is a trend toward bidding wars for successful dental practices when they come on the market, he said.
With the cost of opening a new practice starting at about $600,000, many young and foreign-trained professionals, aided by credit from co-operative banks, would rather buy an office that already has a full patient load, said Mr. Brown.
Non-Solicitation Clauses: Are they Legal?
I’m pleased to announce that my article entitled “Are Non-Solicitation Clauses Legal? It Depends…” was published in the April 2013 edition of Ontario Dentist Magazine. Here’s the article:
Dental Advertising article
I’m pleased to announce that my article entitled “Dental Practice Advertising” was published in the Spring 2013 edition of Dental Practice Management (Oral Health Office) Magazine. Here’s the article:
New Dentist Testimonial
Here’s another testimonial from a dentist who hired DMC Law to negotiate a lease agreement:
“David and Michael are both great to work with. Very accommodating knowing that as a dentist I have a busy schedule during regular business hours. They worked with me negotiating a lease for a new start up office. It was an intense lease dealing with a very large developer. Through the negotiations they were able to protect me as a tenant specifically relating to being a dental office. Oh ya, best part – saved me just shy of $90,000 in rent for my first ten years of the lease! Will definitely be using them in ten years from now when lease is up for renewal and for any other concerns I have in the meantime.”
You can read all of our (growing all the time) dentist testimonials by clicking here.
Economic Report (November 2012) by R.K. House & Associates Ltd.
This is a definite must read for every dentist! It’s the 2012 Economic Report to the Dental Professional. It discusses where we’ve been (the heydays of dentistry!) and where we’re heading (gloom and doom for some!).
It gives dentists the opportunity to reflect on what they can and perhaps should be doing to ensure that they survive and thrive in a hyper-competitive industry. Some of the ideas that come to my mind include:
- Setting up a dental practice where there is less competition (i.e. outside the GTA), people have high disposable incomes, and where there is a high proportion of patients to dentists (the patient pool).
- Focus on branding your practice and marketing your brand instead of wasting money on advertising.
- Come up with innovative fee structures.
Perhaps this might be the topic of another article?
Is it legal for an Ontario dentist to treat their spouse?
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
So here is the question: is a dentist treating their spouse permissible under the law? And what about in cases of an emergency?
Let’s start off with the Professional Misconduct Regulations (http://www.canlii.org/en/on/laws/regu/o-reg-853-93/latest/o-reg-853-93.html). Those regulations say it is an act of professional misconduct to contravene the RCDSO’s standard of practice. Now, while 6 of the 21 health regulatory colleges make it a standard of practice to prohibit the treatment of spouses – the RCDSO does not have any such standard of practice on its website (see http://www.health.gov.on.ca/en/common/ministry/publications/reports/hprac/docs/spousal_patient.pdf, p. 15 and footnotes 27 and 30). So lets move on…
The Health Professions Procedural Code (which governs chiropractors and dentists and other regulated health professionals) is really what we’re after. It has a zero-tolerance/mandatory revocation provision. The Health Professions Procedural Code is contained in Schedule 2 of the Regulated Health Professions Act (http://www.canlii.org/en/on/laws/stat/so-1991-c-18/latest/so-1991-c-18.html). “Sexual abuse” is defined in section 1.(3) of the Code to include “sexual intercourse or other forms of physical sexual relations between the member (i.e. a dentist) and the patient”. Under section 51(1)(b.1) of the Code, it is an act of professional misconduct if a member (i.e. a dentist) has sexually abused (i.e. is in a sexual relationship with) a patient. So this generally includes spousal relationships. The penalty for being found guilty of sexually abusing a patient is having one’s certificate of registration revoked for five (5) years: section 72 of the Code. This law was the result of the government wanting to have a policy of zero tolerance when dealing with problems of sexual abuse of patients. But unfortunately, no exception to the rule or the penalty was created for consenting spouses! The law is very black and white and does not take into consideration whether the patient was consenting. In a nutshell, if a dentist-patient relationship coincides with a sexual relationship between them, then the dentist will be guilty of sexually abusing the patient.
Next, let’s take a look at some caselaw to see what the courts have said about all of this. In the case of Leering v. College of Chiropractors of Ontario,  O.J. No 406, the Ontario Court of Appeal had to deal with a situation where a chiropractor (Dr. Vincent Leering) had treated a patient with whom he had a sexual relationship with (though not his spouse). The Ontario Court of Appeal reviewed the relevant caselaw – including whether there was or ought to be a “spousal” exception and concluded that, while the application of the zero-tolerance/5 year mandatory revocation provisions might be harsh (even in circumstances where the parties appeared to be in a truly consensual relationship unrelated to their doctor-patient relationship), the law was very clear. The College of Chiropractors had a Standard of Practice that said “Under no circumstances should a member have a sexual relationship with a current patient”, and “a sexual relationship with a patient is strictly forbidden by law.” Under the heading “Procedure”, the first bullet states: “It is never appropriate to have a sexual relationship with a patient who is receiving active treatment. The professional relationship must be terminated”. [Note: as mentioned above, I did not find any similar Standard of Practice with the RCDSO]. The Court of Appeal concluded that the chiropractor could have avoided the entire problem by simply not seeing the patient after they moved in together. Note: the person who complained to the College of Chiropractors was the patient after her relationship with the chiropractor deteriorated and he sent her the bill! As a result, the Court of Appeal upheld the Chiropractor College of Ontario’s Discipline Committee’s finding that the chiropractor was guilty of professional misconduct and revoked his certificate of registration.
Now, worth mentioning is that the Court of Appeal did acknowledge an exception to the general (and harsh) rule. And that exception is this: if “incidental” treatment was provided during the course of a spousal relationship (for example, in situations of emergency care), then it would be unlikely that the spouse would be considered a “patient” within the meaning of the Code. “Patient” is not a defined term and it will be up to a Discipline Committee to conclude whether a person was a “patient” after considering all of the relevant circumstances. The Court gave the following two examples of “incidental” treatment: “where a doctor and her spouse are in an accident and the doctor provides on-the-spot emergency care to her spouse, or a chiropractor’s spouse suffers a muscle spasm and the chiropractor performs a manipulation in order to provide immediate relief”. In these circumstances, the Court held that it would be “unreasonable for a spouse to be denied treatment in such circumstances”.
Next, it’s important to know the RCDSO’s view of the Leering case After the Leering decision, the RCDSO issued a warning to dentists about the Leering decision and the potential be charged with sexual abuse for treating one’s spouse: see Royal College of Dental Surgeons of Ontario, “Ontario Court of Appeal decision says Zero Tolerance Rule bans health providers from treating spouses or partners,” Dispatch, May/June 2010 (http://www.rcdso.org/Assets/DOCUMENTS/Dispatch/Dispatch_2010_v24_no2.pdf, p. 32).
So the Health Professions Procedural Code, coupled with the Leering decision (harsh rule with a tiny exception), are still the law (at least for now – see below) and the RCDSO reaffirmed all of this.
It is also interesting to note that, in a Toronto Star article (Theresa Boyle, “Dentists flout ‘stupid’ law that treats them as sex abusers”, Toronto Star, 20 April 2011), before the Leering decision, dentists were free to treat their spouses:
“In 1995, after successful lobbying by dentists, the then health minister sent a letter to the Royal College of Dental Surgeons of Ontario, giving them permission to treat spouses and romantic partners, something they had a long history of doing. But last year’s Court of Appeal decision overrides that exemption, leaving the dentists in limbo.”
Finally, some perhaps encouraging news. In early June 2012, the Health Professions Regulatory Advisory Council recommended an amendment to the definition of “sexual abuse” in the Health Professions Procedural Code to exclude consensual relations within a spousal relationship (see http://www.rcdso.org/Assets/DOCUMENTS/Dispatch/Dispatch_2012_v26_no3.pdf and http://www.health.gov.on.ca/en/common/ministry/publications/reports/hprac/docs/spousal_patient.pdf). The RCDSO advocated for these amendments (the College of Physicians and Surgeons did not). Now, until the law is changed, what has been written above still stands as the law. Therefore, the RCDSO asks dentists to continue to abide by the current law. It is now up to the Minister of Health and Long-Term Care to decide whether she will accept these recommendations to amend the current law.
So there you have it in a nutshell: dentists should generally not be treating their spouses as this could amount to sexual abuse until the law is changed.
I’m working on an article that will be published in a few months in one of the dental trade publications. The topic is “Dental Advertising”. I’m hoping to point out some interesting legal issues and also interview some authorities on the topic of advertising, branding and marketing. Stay tuned for the article!
Ontario Dental Law
I am pleased to announce that we have recently updated our eBook (yet again) entitled “Ontario Dental Law“. This eBook is available for free to Ontario dentists. Contact Us to get a FREE copy of our comprehensive eBook “Ontario Dental Law”. You can click on the image below to see the Table of Contents:
Future Ontario Dentist Magazine article
I’m very pleased to announce that an article I’ve written entitled “Are Non-Solicitation Clauses Legal? It Depends…” will be published in the April 2013 edition of Ontario Dentist magazine. This article will be a must read for associates, principals, and those dentists looking to buy / sell a practice. It will review the relevant legal principles and discuss a recent case involving the enforceability of a non-solicitation clause against a dentist. Stay tuned!
Four Tips About Wills
Check out my recently published article, entitled “Four Tips About Wills” in the current edition of Profitable Practice magazine:
Lifetime Capital Gains Exemption Overview
Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice, contact me (Michael Carabash) or David Mayzel.
In this blog, I’ll be talking about the lifetime capital gains exemption. This is one of the most valuable tax incentives provided to dentists who are selling the shares of their dentistry professional corporation.
Capital Gains Tax
Let’s say a dentist owns shares of a dentistry professional corporation (“DPC“). The dentist decides he wants to sell those shares. If the selling dentist receives more money for those shares than what the shares cost him, there will be a “capital gain”. The Income Tax Act imposes a capital gains tax that is equivalent to one-half of the capital gain multiplied by the selling dentists’ top tax bracket.
Example: If the dentist receives $500,000 for shares of his DPC that cost him $100,000, then there is a capital gain of $400,000, half of which (i.e. $200,000) is taxable at the dentist’s top tax bracket.
Lifetime Capital Gains Exemption
Thankfully, the Income Tax Act provides relief to dentists who sell shares of their DPCs. That relief is called the Lifetime Capital Gains Exemption (the “LCGE“). Basically, if a dentist qualifies for the LCGE, they can avoid paying tax on up to $750,000 of capital gains tax on the sale of shares of their DPC.
Example: If a dentist has a gain of $750,000 on the sale of shares of their DPC, they can offset any capital gains tax by using their LCGE. Assuming the dentist would have been paying tax in the top marginal tax bracket (46% combined federal and Ontario tax rate), the dentist could save roughly $172,500 in taxes by using the LCGE.
History of the LCGE
The LCGE was originally enacted in 1985. In its original form, an individual was permitted to claim a $500,000 lifetime capital gains exemption. In 1988, the exemption was cut back to $100,000 for property other than certain farm property and certain shares of a small business corporation (which we will discuss in greater detail below). In February 1992, the exemption was eliminated for most real property. The exemption is currently at $750,000.
Multiplying the LCGE
Another benefit of using the LCGE is that it can be multiplied! If a dentist has a spouse who owns growth shares (i.e. shares that grow in value as the dental practice operates over time), then that spouse can also sell their shares and take advantage of the LCGE. This way, the dentist and his or her spouse can multiply the LCGE and avoid paying tax on the sale of their shares if there is a $1.5-million capital gain. A dentist’s parents and adult children can also own growth shares in a DPC, which allows for further multiplication of the LCGE.
Note: if a dentist is planning on making their immediate family members shareholders of growth shares, it’s vital to have a shareholders agreement in place. This agreement will deal with things like the dentist’s ability to purchase their family member’s shares in certain circumstances – such as death, disability, divorce, or if the relationship turns sour. The dentist should always be protected from family members who may try to claim oppression of their minority interests or if they do not want to sell their growth shares (whereas the dentist does!). The moral of the story is this: get a shareholders agreement in place to deal with these pesky problems in advance and by doing so you can avoid them and the ensuing litigation!
Qualifying for the LCGE
So now that you know the benefits of using the LCGE, how does a dentist qualify for it? Well, in this regard, there are a number of tests that must be met. In a nutshell, to qualify for the LCGE, the shareholder (i.e. dentist or their spouse, child or parent) must meet three tests:
- The shareholder must be resident in Canada throughout the year.
- The shares must have been for a qualifying small business corporation.
- The shares must satisfy a 24-month holding period.
- The dentist shareholder must satisfy an asset test during the previous 24-month period and on the date of sale as well.
Let’s look at the last three things in turn, shall we?
Test #1: Small Business Corporation
The first test that must be met for a shareholder to qualify for the LCGE is that the DPC must be a “small business corporation” at the time of the sale.
A “small business corporation” is a “Canadian Controlled Private Corporation” for which “all or substantially all” of the fair market value of its assets are “used principally” in an “active business” carried on primarily in Canada: section 248(1)of the Income Tax Act.
Wow, that’s a mouthful. Lets take a closer look at this definition and see what “Canadian Controlled Private Corporation”, “all or substantially all” and “active business” mean, shall we?
Canadian Controlled Private Corporation
Suffice it to say, a DPC will meet the definition of a “Canadian Controlled Private Corporation”.
A Canadian Controlled Private Corporation is a private corporation that is a Canadian corporation that is not controlled by one or more non-resident persons or by one or more public corporations. Now, looking at DPCs, it becomes clear that they clearly meet this test. First, DPCs MUST be Ontario corporations. Second, only dentists can be on the board of directors of DPCs and at least 25% of the directors must be Canadian residents under the Business Corporations Act. Typically, there is only one director on the board of a DPC: the sole dentist shareholder, officer and director. Finally, DPCs can only be controlled (i.e. the voting shares can only be held) by the dentist. Hence, DPCs will be considered “Canadian Controlled Private Corporations”.
Now that we’ve covered the first part of the definition of a “qualifying small business corporation”, we need to move on the second part of that definition…
All or substantially all
Now you probably noticed in the definition of “small business corporation” that there was a requirement that “all or substantially all” of the fair market value of the DPC’s assets be used in an active business on the date that the shares are sold. The Canada Revenue Agency has interpreted this to mean at least 90%. So in other words, on the day the shares are sold, the non “active business” assets must not account for more than ten percent (10%) of the fair market value of the DPC’s assets.
OK, so what is an “active business”?
Well, “active business” basically includes operating a dental practice (e.g. scheduling, treating, and billing patients, etc.).
If you wanted to be more technical, the definition of “active business” is “any business carried on by the taxpayer other than a specified investment business or a personal services business”. Specified investment business generally means a business the principal purpose of which is to derive income from property (e.g. rent, royalties, dividends, etc.), but this doesn’t include, for example, a corporation that has at least 6 full time employees. A personal services business is essentially an incorporated individual who resembles an employee of a client, but this doesn’t include, for example, a corporation that has at least 6 full time employees (section 125(7) of the Income Tax Act). So again, it shouldn’t be difficult for a dentist to qualify for the LCGE when they go to sell the shares of their DPC – so long as all or substantially all of the DPC’s assets on a fair market value basis are being used in an active business carried on primarily in Canada.
Problems with Active Business
Some dentists may accumulate retained earnings (i.e. money which the corporation has paid tax on) and use that excess cash to purchase real estate or investment products. These would not be considered “active assets” and could put the shareholder in jeopardy of not qualifying for the LCGE if these assets constitute more than ten percent (10%) of the fair market value of the DPC’s assets! If that’s the case, the DPC will need to purify itself by transferring these assets out BEFORE the shareholder sells the shares of the DPC. This may involve, for example, declaring taxable dividends. Unfortunately, this purification process may be expensive and time-consuming. And the corporation may end up paying capital gains taxes on the sale of these assets. Techniques available to non dentistry professional corporations – such as paying dividends to a taxable Canadian holding corporation on a tax-deferred basis – are not available to DPCs since only dentists can be shareholders (note, however, that the law says that a dentist can hold his shares “indirectly” – which presumably means through another corporation they control – but the Royal College of Dental Surgeons ignores that part of the law). The bottom line is that you need to make sure your DPC uses 90% of its assets in active business on the date of sale.
As noted in the definition above, all or substantially all (i.e. at least 90%) of the fair market value of the corporation’s assets must be “used principally” in an active business carried on primarily in Canada at the time the shares are sold. So what does “used principally” mean in the context of land and building which is owned by the corporation? Here’s the situation: the corporation owns land, a building, and a dental practice (which is situated in the building). So the question is: is the land and building considered an active business asset of the corporation? Or could the value of the land and building which is owned by the corporation be considered a non-active business asset? And if it is a non-active business asset worth more than 10% of the fair market value of the corporation’s assets at the time of the sale, then this could disqualify the shareholder from being eligible to use the LCGE.
The CRA takes the view that the term “principally” generally means more than 50%. An asset which is used more than 50% in an active business is one that is “used principally in an active business”. Generally, an asset is considered to be used principally in an active business if its PRIMARY or MAIN use is in that business. The “used principally” test is applied on a property by property basis.
According to the CRA, it is a question of fact whether a property is “use principally in an active business”. But they do go on to say the following:
“Although there are no set guidelines as to which factors to use in different situations, there are two aspects to be considered in determining the nature of use of a building – quantitative factors (e.g. the total square footage occupancy in the building) and qualitative factors (e.g. the original intent for purchasing the building, actual use to which the building is put in the course of the business, the nature of the business involved and the practice in the particular industry).
The square footage use of a building is generally accepted as a factor to be given significant weight in the determination of the particular use to which the building is put. However, qualitative factors need also be considered. If the fair rental value of the space rented to tenants is greater than the fair rental value of the space used in an active business, this may indicate that a building is not used principally in an active business. Whether such a factor would be decisive in relation to the square footage test would have to be determined on a case by case basis.”
See CRA Views, Interpretation – external, 2009-0307931E5 – Assets used principally in an active business (Date: November 5, 2009)
A few court cases help to shed light on the issue of whether a person will qualify for the LCGE on the basis that the corporation (which they own shares in) is a small business corporation for which “all or substantially all” of the fair market value of its assets are “used principally” in an “active business” carried on primarily in Canada.
In Ensite Limited v. The Queen,  2 S.C.R. 509, the issue was whether interest received from certain U.S. dollar deposits in the Philippines was income from property or from property used in the course of carrying on a business. The corporate taxpayer argued that the interest in question was only income from property. When deciding against the corporate taxpayer, the Supreme Court of Canada stated at paragraphs 14 and 15:
14 … A business purpose for the use of the property is not enough. The threshold of the test is met when the withdrawal of the property would “have a decidedly destabilizing effect on the corporate operations themselves”: March Shipping Ltd. v. Minister of National Revenue,77 D.T.C. 371, supra, at p. 374. This would distinguish the investment of profits from trade in order to achieve some collateral purpose such as the replacement of a capital asset in the long term (see, for example, Bank Line Ltd. v. Commissioner of Inland Revenue (1974) 49 T.C. 307 (Scot. Ct. of Session)) from an investment made in order to fulfill a mandatory condition precedent to trade (see, for example, Liverpool and London and Globe Insurance Co. v. Bennett,  A.C. 610 (H.L.), and Owen v. Sassoon (1951) 32 T.C. 101 (Eng. H.C.J.) Only in the latter case would the withdrawal of the property from that use significantly affect the operation of the business. The same can be said for a condition that is not mandatory but is nevertheless vitally associated with that trade such as the need to meet certain recurring claims from that trade: see, for example, The Queen v. Marsh & McLennan, Ltd.,  F.C.. No. 150 supra, and The Queen v. Brown Boveri Howden Inc., 83 D.T.C. 5319 (F.C.A.)
15. It is true that in this case the taxpayer could have done business and fulfilled the Philippine requirement that foreign currency be brought into the country by a means not involving the use of property. It could have borrowed the U.S. currency abroad and brought it into the Philippines. But this consideration is irrelevant to our inquiry. The test is not whether the taxpayer was forced to use a particular property to do business; the test is whether the property was used to fulfill a requirement which had to be met in order to do business. Such property is then truly employed and risked in the business. Here the property was used to fulfill a mandatory condition precedent to trade; it is not collateral, but is employed and risked in the business of the taxpayer in the most intimate way. It is property used or held in the business.
In the case of Skidmore v. Canada,  F.C.. No. 276, Mr. and Mrs. Skidmore owned the shares of a family corporation carrying on an active business but which had substantial cash reserves. When Mr. and Mrs. Skidmore sold their shares in the family corporation to a company owned by their children, they claimed a capital gains exemption. The Court decided against the taxpayer and cited the Supreme Court’s decision in Ensite (above). The Federal Court of Appeal affirmed the lower court’s decision wrote the following at paragraphs 9 and 10:
9 The Tax Court Judge held that the Appellants had failed to demonstrate that “all or substantially all of Birchill” assets were used in an active business within the meaning of Section 248(1) of the Act.
10 He found that the Appellants had failed to prove that the cash reserves which Birchill kept were reasonably required as backup assets or that Birchill relied on the term deposits as an integral aspect of its business operation. He heard the evidence of the Appellants and was unable to conclude that there existed a relationship of financial dependence of some substance between the amounts in issue and the seedling nursing business. He found that Birchill had never had to draw upon the reserves and that the possibility of the reserves being drawn upon to sustain Birchill’s business was remote.
Finally, in Reilly Estate v. Canada  T.C.J. No. 271, the executrix of a deceased’s estate (i.e. the person responsible for administering the estate of a person who has died) claimed a capital gains exemption with respect to the value of the deceased’s shares in a corporation (called “Ventures”). The government disallowed the use of the exemption on the basis that not all or substantially all of the fair market value of Venture’s assets could be attributed to assets used principally in active business carried on primarily in Canada. The Tax Court of Canada agreed with the government and wrote the following at paragraphs 15 and 16:
15 I conclude that the appeal by the Reilly Estate is on all fours with the decision in Skidmore. There is no evidence that the cash and marketable securities held by Ventures were necessary or even important for the carrying on of its small active businesses. Or in the words of Ensite, there is no evidence that the cash and marketable securities were held “to fulfill a mandatory condition precedent to trade”.
16 In the five years from 1996 to 2000, the fair market value of the cash and marketable securities as a percentage of the total book value of all Ventures’ assets was never less than 27% and, in the year of Mr. Reilly’s death (2000), was 38%. On these facts, I cannot find that all or substantially all of the fair market value of the assets of Ventures was attributable to assets used principally in an active business. I find that Ventures was not a “small business corporation” within the meaning of subsection 248(1) of the Act. And, if Ventures was not a “small business corporation”, then the shares of Ventures or Holdco could not be “qualified small business corporation shares” within the meaning of subsection 110.6(1). The appeal is dismissed, with costs.
Test #2: Holding Period Test
The second test that a shareholder must meet in order to qualify for the LCGE deals with who owned the shares and for how long prior to the sale. Basically, throughout the 24 month period immediately prior to the sale, the only persons who can own the shares are the shareholders or someone related to the shareholder (e.g. a spouse or common law partner). The shares may be newly issued (i.e. not owned for a full 24 months) but they must not have been owned by anyone else in that time frame.
In the case of Twomey v. The Queen, 2012 DTC 1255, the Tax Court of Canada had to decide whether the 24 month holding period test had been met. In that case, the taxpayer sold seventy seven (77) shares in a qualifying small business corporation in 2005 and wanted to claim the LCGE. But the problem was that the corporation had only issued the taxpayer one (1) share when it was incorporated. The taxpayer believed that one hundred (100) shares should have been issued at incorporation, not one (1) share. Financial and tax records had consistently documented the taxpayer as holding one hundred (100) shares right from the start. But the corporate minute book showed only that the taxpayer received one (1) share. When this clerical error was discovered in 2005, a correcting resolution was entered into the corporation’s minute book and ninety nine (99) new shares were issued. When the Canada Revenue Agency reviewed the transaction, they took the very technical position that the 24 month holding period had not been met because the ninety nine (99) new shares were only issued in 2005. The Court, however, rejected the Canada Revenue Agency’s argument on the basis that it was always the intention for the corporation to have issued one hundred (100) shares, the taxpayer acted as though one hundred (100) shares had been issued, and when the mistake was discovered, the corporate records were updated. This was all done in keeping with the corporation’s requirement to maintain true, complete, and accurate records. As such, the taxpayer was allowed to use the LCGE because he met the 24 month holding period test (i.e. the court considered the one hundred (100) shares to have been issued to the taxpayer upon incorporation). The moral of the story: make sure your minute book is properly structured and updated regularly.
Now, realistically, for those dentists who have already incorporated and held onto their shares for a while, this won’t be an issue. But what about those dentists who have not incorporated and who want to now incorporate to take advantage of the LCGE? Well, they can sell their dental practice (assets, goodwill, etc.) to a DPC on a tax-deferred basis, receive shares in the DPC in exchange for transferring those assets, and then sell those shares all on the same day in order to take advantage of the LCGE! This is permitted by section 110.6(14)(f)(ii))(A) of the Income Tax Act. This section says that shares issued by a DPC to a dentist in exchange for the dentist selling all or substantially all of their dental practice assets (e.g. equipment, furniture, supplies, goodwill, etc.) WOULD be considered to have been owned by that dentist immediately prior to them being issued.
Just keep in mind that this rule would only apply to the DENTIST who is “rolling in” their assets (that’s what lawyers and accountants call it when a dentist sell their assets to their own corporation and doesn’t pay taxes on that sale). So a dentist’s spouse or child or parent would not be able to satisfy the hold period rule using the above exception because they generally don’t own the dental practice prior to it being rolled in before the sale. That’s why it’s best to set up a DPC with your family members well in advance of the sale if your aim is to multiply the LCGE.
Test #3: Asset Use Test
As we saw above, a “small business corporation” has assets that are used principally in an “active business” carried on primarily in Canada: section 248(1)of the Income Tax Act.
But to qualify for the LCGE, a shareholder will have to jump through one more hoop: they must show that, for the 24 month period immediately prior to the sale of the shares, more than 50% of the fair market value of the DPC’s assets are used principally in an active business carried on primarily in Canada: section 110.6(1) of the Income Tax Act.
There is a minimum threshold which must be met – namely, at least 50% of the fair market value of the DPC’s assets be used in an active business. And there is also a timing requirement: that this must have been the case for the past 24 months leading up to the sale of the shares (during which time the shareholder owned the shares).
If you’re thinking about taking advantage of the LCGE, you should definitely consult a dental accountant and dental lawyer to ensure that you, your family, and your corporation are all eligible to allow the shareholders to take advantage of the LCGE. There are many minefields along the way, so proceed with caution!