David and I will have the honour to speak about the growing trend in Canada: the corporatization of dental practices at the 4th Annual Definitive Conference for Dental Service Organizations from June 15-16. I’ve spoken and presented about this topic HERE. We see what’s happened in the U.S. and what has only started to happen in Canada as the future of the dental industry: small mom and pop shops operating in highly competitive areas will be replaced by large chains of dental service organizations that partner up with dentists to provide top notch patient care. These new models should allow better access to care, while reducing inefficiencies and costs to patients / insurers.
So in previous blogs about dentistry professional corporations, I talked about the two step process for getting yourself up and running. First, you need a corporation. And second that corporation needs a Certificate of Authorization from the Royal College of Dental Surgeons of Ontario. I’ve talked about some of the tax benefits to incorporating a dentistry professional corporation. I also mentioned how dentist shareholders have UNLIMITED (that’s right, “unlimited”) professional liability when it comes to operating through a professional corporation (but limited liability when it came to things like trade, lease, and banking liabilities).
Now, in this blog, I’m going to discuss the intersection of Family Law and Wills and Estates Law when it comes to having a dentistry professional corporation.
When you’re conjugating with someone (or planning to do so), and you don’t have a cohabitation agreement that says otherwise, there is an important legal issue that you need to think about with respect to your professional corporation: does your partner or soon-to-be common law spouse have any rights to your shares in that corporation during the period of cohabitation or upon the breakdown of the relationship? Now, the Ontario Family Law Act does not afford common law spouses any rights to the other party’s property; they can only claim support under that Act. But at equity, courts have held that a cohabiting spouse may have certain rights to the other spouse’s property (e.g. corporate shares) on the basis of unjust enrichment, constructive trust, or resulting trust. If you want to try to avoid these arguments from being raised, then you’ll want to have a cohabitation agreement.
When you’re getting married, and assuming you don’t have a prenuptial agreement or marriage contract that says otherwise, there’s a BIG legal issue you need to think about: the breakdown of the marriage and it’s impact on your dentistry professional corporation. Now, just to recap (as I’ve previously blogged about this stuff here), when you get divorced, unless you have a prenup or marriage contract or unless the separation agreement says otherwise, the spouses are supposed to add up and then equally divide their NET FAMILY PROPERTY. Well, guess what? Unless there’s something said to the contrary, included in that calculation will be the shares of the professional corporation. If you want to understand how NET FAMILY PROPERTY is calculated, just read this comprehensive blog post I previously wrote.
Often times, the shareholders of a corporation will want to have a private agreements amongst themselves to deal with things like how they can transfer their shares, manage the corporation, etc. This is done through something called a Shareholder Agreement. Now, part of what the Shareholder Agreement deals with is the case of a family breakdown (separation / divorce) of one of its shareholders. The idea is that, if this happens, this gives a right to the other shareholders to purchase the shares of the shareholder going through that separation / divorce, so that the remaining shareholders aren’t forced to dissolve the corporation or end up with a shareholder partner they didn’t want. You can read up more about these family law provisions here.
OK, now, with respect to getting your Will done, assuming you’re married and you have kids and you want to save on some administrative and tax dollars, you should seriously have MULTIPLE WILLS: one Will for your general estate (e.g. registered property, bank accounts, etc.) and one Will for your corporate shares. The reason? When you ultimately kick the bucket, your estate trustee (i.e. the person responsible for administering your Will and final wishes) will generally need to obtain a Certificate of Appointment of Estate Trustee (this is the first of many, many blogs I wrote about estate administration in Ontario) from the courts in order to prove to the banks and the government that they are the Estate Trustee; having a Will in your hand just won’t cut it. Part of the process of getting that Certificate of Appointment is paying Estate Administration taxes on the value of the estate. The great thing is that you can actually avoid paying these taxes for the value of your corporate shares (which is the intrinsic value of your corporation) by having a separate Will dealing only with your corporate shares! It’s perfectly legal (after a few court cases in Ontario) and you can read up about having multiple Wills to save lots of money here.
On the topic of the intersection of Wills and Estates on your corporate shares, you should note that EXCLUDING your wife or husband as a beneficiary under your Will doesn’t mean that they won’t up getting your corporate shares. As I’ve previously blogged about, if you’re not separated / divorced at the date of your death, and you’ve left nothing for your spouse in your Will, then he or she can elect to take what they are entitled to under the Ontario Family Law Act – which, absent a prenup or marriage contract – is an equalization of Net Family Property and which will include the corporate shares.
You should always keep in mind that, if the corporate shares are to be transferred over to a spouse (common law or married) and this results in the professional corporation no longer being able to comply with the requirements necessary for a Certificate of Authorization (as previously blogged about), then the corporation will no longer be able to operate as a dentistry professional corporation. In this situation, the corporation will need to be dissolved and its assets liquidated and net profits distributed to existing shareholders. At this point, if a doctor shareholder or his or her estate is liable to pay their spouse pursuant to an order or private agreement, then it will be taken out of the net profits received from dissolution of the corporation and liquidation of its assets.
Worth mentioning is that there are strategies to avoid having the full value of your professional corporation being transferred to your spouse upon divorce or death (and these involve not owning most of your own corporation via the share structure), but these strategies are not without their risks. Those risks include: continuing to comply with legislation to have a dentistry professional corporation and not having the majority or full value of the corporation yourself to benefit through proper tax planning.
Phew! We covered a lot in this blog about the intersection of Family Law and Wills and Estates law with respect to having a dentistry professional corporation.
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 or Ljubica Durlovska.
David Mayzel is your legal risk manager. He is a trained courtroom lawyer and has spent many years resolving disputes both in and out of court. He knows how to prepare documents and execute transactions in a way that avoids or mitigates legal risks. He can be reached at 416.528.5280. or firstname.lastname@example.org.
Michael Carabash is your business law adviser. He is an entrepreneur at heart who helps you see the big legal picture. He drafts clear and effective agreements that protect your rights while promoting your interests. He can be reached at 647.680.9530. or email@example.com.
Ljubica Durlovska is your transition lawyer. She helps you with staff and associates, maintaining your corporation, and other business matters. She can be reached at 416.443.9280, extension 206 or firstname.lastname@example.org.
Jonathan Borrelli is your employment lawyer. He helps you with staff and associates matters, including hirings, terminations, switching staff to written contracts and resolving disputes. He can be reached at 416.443.9280, extension 204 or email@example.com.
Benjamin Kong is an experienced business law clerk. He assists David and Michael with corporate matters and purchase / sale transactions. He can be reached at 416.443.9280, extension 207 or firstname.lastname@example.org.
Julie Whitehouse is an experienced business law clerk. She assists David and Michael with corporate matters and purchase / sale transactions. She can be reached at 416.443.9280, extension 203 or email@example.com.
David, Michael, Ljubica, Jonathan, Ben and Julie are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible while promoting your interests and protecting your rights. You can read dentist testimonials here.