Unfair and Unreasonable Associate Agreements – Don’t Sign ‘Em!
When not to sign an Associate Agreement
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.
I’ve come across some pretty one-sided, unfair and unreasonable dentist associate agreements. I’m asked to comments and negotiate a more fair resolution on behalf of the associate and I do try my best, but sometimes the other side (or their lawyer) is being stubborn to the point that they push away the associate. From these experiences, here’s what I’ve learned…
First, there’s a power imbalance typically in favour of the Principal. The Principal can demand the world and they also think they can get away with it. why? Because there’s an abundance of associates out there, so if it doesn’t work out with this one it will with another. This power imbalance is really disguised as something else though. It’s very clever what you’ll hear the Principal dentist say. Sometimes, it’s something like “Oh, my lawyer says it’s legal, so I’m sticking with it” or “We never modify our contracts because we want to maintain consistency among all of our associates” or “All previous associates signed it, so the candidate associate should have no problem signing it”. Well, these arguments just aren’t that good. Why? Well, lawyers are not always right; that’s what going to court and having a judge make a decision on a matter is for. Second, if you’re not willing to accommodate someone because of your standard, then that’s your choice; just realize the bad reputation you’ll have as a result of being unfair and unreasonable. Finally, just because some associates (who may have never fully read or understood the agreement or had independent legal advice) signed the contract in the past doesn’t mean the candidate associate should do so now. The past mistakes and liabilities of those associates should not be “shared” or “in common” with the new candidate associate. So the bottom line is that there is a power imbalance and so long as Principals have a pool of associates to choose from, they will try to impose their Will on new associates to the utmost degree.
The next lesson to be learned is that the power imbalance translates into terms and conditions which are likely unenforceable. Things like non-competes and non-solicitations have been held by various Ontario courts to be INVALID right from the beginning. They are against public policy. In fact, the Principal needs to justify them in order to make them enforceable. And the only way to justify them is to make them reasonable. If they are not reasonable, they are unenforceable. And Ontario courts have even gone so far as to say that, in certain circumstances, non-competes are illegal in the context of an associate agreement. Principal dentists like to include them because they look good on paper and a lawyer representing the principal can always waive them around in a threatening manner; but they’ve been tested in court and have failed for unreasonableness – particularly when a clearly defined and restricted non-solicitation clause would have sufficed! Also, we sometimes see “pre-estimate of damages” clauses. These basically say: if you breach a part of this agreement, you agree to pay these amounts; sure, they can be legal so long as they are not seen as punishment. But the idea is clearly to punish the associate! I’ve never seen them enforced or seen a dentist pay them (but that’s just been my experience). Again, Principal dentists like to ask for them because they CAN AND MAY get away with having them.
But there’s also a fundamental flaw that Principal Dentists may not appreciate. And that’s the idea of unconscionable bargains. Basically, if one side has so much power over the other that results in the contract being substantively unfair, then the whole contract may be invalid. This power imbalance may arise from a difference in economic power, age, education, etc. And the contract itself is examined to determine if this power imbalance created it.
So given all of this, in my experience, it’s best for both parties to try to reach an agreement where each party gets a little bit of what they want, but also gives in to the other side’s demands. This way, the agreement is entered into properly, negotiated fairly by two parties of somewhat equal bargaining power, and stands a better chance of being upheld in court.
Just my thoughts…
Using a PC can save you $$$
Professional Corporations can save dentists $$$
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 discussing the various ways that dentists can save $$$ by using a dentistry professional corporation.
1. Income Splitting with your Family Member as an Employee
All things being equal, a person who earns $100,000 as employment income will pay about $27,000 in federal and provincial income taxes in 2011. But if that income were equally split between two people, each would only pay about $8,900 in taxes (or about $17,800 in total taxes). That almost $10,000 in tax savings. And it’s all done through income splitting. So how can a dentist income split with his or her family through a corporation?
First, a dentistry professional corporation can hire a member of their family (e.g. husband, wife, child, etc.) to work as an employee of the dental practice. So long as the payment is reasonable in light of the ACTUAL services provided (e.g. receptionist, office manager, marketer, website designer, etc.), then the dentistry professional corporation will be allowed to deduct those expenses in determining its net income. So the corporation received revenue from patient billings and, before paying tax on those billings, was able to deduct an amount as an expense. The family member employee will be taxed at their full marginal rate on the employment income they received. Now, assuming that the family member was in a lower marginal tax rate than the dentist, then this form of income splitting would work (as long as the amount paid for the services was REASONABLE).
2. Income Splitting with your Family Member as a Shareholder
Now, another way to income split with your family is by issuing them shares of your dentistry professional corporation and then declaring and paying dividends. The corporation would end up paying 15.5% income taxes on the first $500,000 of active business income (you can read up about this on my blog) and, from the retained amount, could pay up to $40,000 of dividends to a family member. If the family member didn’t earn income from any other source, then they would end up paying very little tax on the dividends they receive. You can read up more about dividends and paying little or no tax on dividends in this blog.
3. Repaying a Corporate Loan
If you as a dentist took out a business loan in your name and had to repay it, then you’ll need to repay it from after-tax dollars. Well, if you earned $100,000 in 2011 and paid the $27,000 in federal and provincial taxes (and we’re not even considering Canada Pension Plan contributions or Employment Insurance premiums!), then you’d only have about $73,000 of disposable income left in your pocket to repay your loan. But what if the dentistry professional corporation earned the $100,000 instead (as active business income) and paid 15.5% income tax on that amount? Well, the corporation would then have $85,000 of disposable income left which it could use to repay a corporate loan! Get it! So it’s cheaper to have the dentistry professional corporation take out a business loan than it is for a dentist to take it out personally. This way, the corporation would have more funds available to repay the loan. Remember: the loan is not a deductible expense to the corporation; only the interest is so long as the loan is used for business purposes (e.g. buying equipment, leasing space, paying employees, paying for marketing, etc.).
4. Lifetime Capital Gains Exemption
I’ve spoken at length about the lifetime capital gains exemption. Basically, if you’re a dentist and you’re looking to sell your practice, you can take advantage of the lifetime capital gains exemption on the sale of shares of a small business corporation. You essentially pay little or no capital gains tax up to a certain limit on the sale of the shares (currently: $750,000). You can even multiply the capital gains exemption by using your family members (e.g. by issuing common but non-voting shares to your spouse and adult children). This is a huge tax saving opportunity for dentists looking to sell their practice.
5. Employment Contract with $10,000 Tax Free Death Benefits
I’ve blogged about this topic quite extensively. When you set up your corporation, you’ll need to have some kind of relationship with the corporation in order to conduct business on its behalf. Most likely, the dentist will be an officer, director, and employee of the corporation (unlikely to be an independent contractor). Well, it’s a good idea to have the corporation enter into an employment agreement with you that provides for your dentistry professional corporation paying out up to $10,000 to your beneficiary of tax-free money at the time of your death. Here’s how it works:
When a dentist dies, designated recipients can receive a $10,000 tax-free death benefit. Here‘s how it works. Assume that a dentist has a professional corporation. In recognition of the dentist‘s service as an officer, director, or employee, the professional corporation agrees to pay the dentist‘s surviving spouse $15,000 on or after the dentist‘s death. This is called a “death benefit“. Now, section 56(1)(a)(iii) of the Income Tax Act says that the surviving spouse must include, for the purposes of calculating their taxable income, any “death benefit” they receive (i.e. $15,000) minus $10,000 (this is how “death benefit” is defined in section 248(1) of the Income Tax Act). As such, the surviving spouse ends up paying no tax on the first $10,000 they received from the dentistry professional corporation as a death benefit. They would only be taxed on the remaining $5,000 death benefit.
If the death benefit is not paid to the dentist‘s surviving spouse or common law partner, then the first $10,000, net of the death benefits received by the surviving spouse or common law partner, is not included in the recipient‘s income. For example, if a deceased dentist‘s surviving spouse received a death benefit of $6,000 and a surviving child received a death benefit of $6,000, then the entire $6,000 received by the surviving spouse would be tax-free whereas only $4,000 of the $6,000 received by the child would be tax-free. The idea is that the recipients of the death benefit must evenly split the $10,000 exemption which the employee‘s surviving spouse or common law partner have not used.
Worth mentioning is that any payment made out of a superannuation or pension fund or plan cannot qualify as a death benefit; furthermore, “death benefits” received under the Canada Pension Plan do not qualify as death benefits for income tax purposes.
6. Double Wills to save on Estate Administration Taxes
I’ve blogged about this quite extensively. The bottom line is that you can save on paying estate administration taxes by having two wills: one will for your assets that do not include your dentistry PC shares and another will that deals only with those shares. If your shares are worth $1-million, you will have saved $14,500 by using multiple Wills!
Conclusion
If you’re wondering whether incorporation is right for you, you should speak with an accountant and a lawyer. There are a myriad of considerations (e.g. expenses, administration, etc.) and rules that would affect the decision to incorporate.
Selling your Dental Practice | Shares of a Dentistry Professional Corporation
Selling your Dental Practice: Shares of a Dentistry Professional Corporation (Part 1)
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.
Selling the Shares
If you’re a dentist and you’re looking to sell your practice, you basically have one of two options: sell assets or sell shares. This is the first of a series of blogs about selling your dentistry professional corporation. After I’m done with this series of blogs, I’ll discuss selling the assets. So lets get started, shall we?
Lifetime Capital Gains Exemption
It’s all about paying little or no taxes by using the lifetime capital gains exemption. What is this exemption all about? Why is it so important? What does the “lifetime” mean? Well, every human being in their lifetime gets to pay no capital gains tax on certain items they sell up to a certain amount. Well this leads us to asking even more questions: What is capital gains tax? What are those items? What is the maximum amount we can claim?
Capital Gains Tax
This is the tax that you would pay based on selling certain types of property. For simplicity’s sake, the capital property will be the shares of your dentistry professional corporation. When you originally were issued the shares from the corporation, you gave something in exchange to the corporation that was worth the value of the shares you received. If the corporation was worthless and had no assets or income, then you would have received the shares for $1 or something minimal. Now, if you transferred your dental practice to your corporation and in exchange received shares, then there would have been a value assigned to the shares that you paid for (typically, the fair market value of the assets you transferred over). Whatever you paid in order to get your shares is called the Adjusted Cost Base.
Now, when you go to sell those same shares, assuming they have increased in value from the time that you acquired them, then you will receive proceeds that result in a capital gain. Typically, you would have to pay tax on the capital gain. That tax is equal to 1/2 of the gain multiplied by your full marginal tax rate.
Here’s an example: if you paid $1,000 for your shares and then you later sold them for $10,000, then there will be a capital gain of $9,000 – half of which is taxable (i.e. must be included in your taxable income) at your full tax rate. Ouch! If your marginal tax rate on that additional $4,500 was 40%, then you’d have to pay about $1800 in taxes! Ouch!
Thankfully, there’s a way to avoid paying that tax. It’s called the Lifetime Capital Gains exemption on the sale of shares of a small business corporation. If you qualify for it, you can avoid paying up to $750,000 of capital gains and you can even multiply that exemption by using your family members to own shares of your dentistry professional corporation. This will all be talked about in the next series of blogs…
Incorporating your dental practice? Consider this…
Incorporating your dental practice?
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.
If you’re thinking about incorporating your dental practice, you’ll need to think about the following:
Plan Ahead
Look, you can’t backdate a dentistry professional corporation (i.e. want it to come into existence some time last year). You need to create a corporation and then apply for a Certificate of Authorization from the Royal College of Dental Surgeons of Ontario (“RCDSO“). When RCDSO receives the application, and assuming it’s approved, they will issue a Certificate of Authorization to you and it will be dated on the date they received the application. So the bottom line is that, because these things take time (incorporate and obtain Certificate of Authorization), you’ll need to plan ahead if you want to get them done. Allow a few weeks to meet with lawyers, accountants, appraisers, etc. to get the process done.
Transferring your Assets
If you’re presently conducting your dental practice as an unincorporated business (e.g. as a sole practitioner or through a partnership) and you incorporate your dentistry professional corporation, the next step will involve transferring your personal assets related to the dental practice to your dentistry professional corporation. Fortunately, aside from some minimal HST that may need to get paid, no immediate taxes are paid on the transfer of the assets to your corporation. This is a tax free rollover. Keep in mind that a special election must be filed with the tax department if you want to use this tax free rollover. If you file late, you could be slammed with a heft penalty. If you never file, you could end up getting a heft tax bill when the Canada Revenue Agency looks at the transaction.
Buying a Practice?
Typically, a dentist looking to purchase a dental practice will do so through a dentistry professional corporation. That corporation will purchase the shares of another dentistry professional corporation (i.e. the seller) and then the two corporations will amalgamate into one new corporation.
Selling your practice? Use the Lifetime Capital Gains Exemption
If you’re thinking about selling your practice, you will likely be selling the shares of the dentistry professional corporation which you own. There are significant tax advantages to doing it like this: you may get to use any lifetime capital gains exemption available on the sale of shares of a small business corporation. This means that you’ll pay little or no capital gains tax when you sell your shares. I’ve previously blogged about this quite extensively.
You may even be able to multiply the lifetime capital gains exemption by having your family members own shares of the dentistry professional corporation. Only certain family members can do this. And they can only own certain shares. Consult a lawyer and an accountant for more information about the ideal share structure.
Please keep in mind that to qualify for the lifetime capital gains exemption on the sale of shares of your dentistry professional corporation, a professional corporation should exist at least 24 months before the intended sale of the dental practice. There are exceptions to this rule and you should contact an accountant for information about this.
Double Wills: Save $$$
I’ve blogged extensively about this too. The bottom line is that the value of your dentistry professional corporation’s shares can be excluded from probate by having 2 wills: one for the corporation and one for everything else. This could end up saving you about $14,500 if your shares are worth $1-million.
Employment Agreement with Death Benefit: $10,000 TAX FREE
When you set up your corporation, you’ll need to have some kind of relationship with the corporation in order to conduct business on its behalf. Most likely, the dentist will be an officer, director, and employee of the corporation (unlikely to be an independent contractor). Well, it’s a good idea to have the corporation enter into an employment agreement with you that provides for your dentistry professional corporation paying out up to $10,000 to your beneficiary of tax-free money at the time of your death. Here’s how it works:
When a dentist dies, designated recipients can receive a $10,000 tax-free death benefit. Here‘s how it works. Assume that a dentist has a professional corporation. In recognition of the dentist‘s service as an officer, director, or employee, the professional corporation agrees to pay the dentist‘s surviving spouse $15,000 on or after the dentist‘s death. This is called a “death benefit“. Now, section 56(1)(a)(iii) of the Income Tax Act says that the surviving spouse must include, for the purposes of calculating their taxable income, any “death benefit” they receive (i.e. $15,000) minus $10,000 (this is how “death benefit” is defined in section 248(1) of the Income Tax Act). As such, the surviving spouse ends up paying no tax on the first $10,000 they received from the dentistry professional corporation as a death benefit. They would only be taxed on the remaining $5,000 death benefit.
If the death benefit is not paid to the dentist‘s surviving spouse or common law partner, then the first $10,000, net of the death benefits received by the surviving spouse or common law partner, is not included in the recipient‘s income. For example, if a deceased dentist‘s surviving spouse received a death benefit of $6,000 and a surviving child received a death benefit of $6,000, then the entire $6,000 received by the surviving spouse would be tax-free whereas only $4,000 of the $6,000 received by the child would be tax-free. The idea is that the recipients of the death benefit must evenly split the $10,000 exemption which the employee‘s surviving spouse or common law partner have not used.
Worth mentioning is that any payment made out of a superannuation or pension fund or plan cannot qualify as a death benefit; furthermore, “death benefits” received under the Canada Pension Plan do not qualify as death benefits for income tax purposes.
Dental Partnerships (Ontario) – Part 2 of 2…
Dentists as Partners (Part 2)
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.
Terminating the Partnership
Termination by Notice or by Agreement
A partnership can end by notice or by a contractual term in the partnership agreement. This is where section 26(1) and 32(c) of the Partnerships Act becomes relevant.
Section 26(1) of the Partnerships Act provides that, where no fixed term is agreed upon for the duration of the partnership, any partner may determine the partnership at any time by giving notice to all the other partners. This section has been interpreted in Patridge v. Seguin, [1991] O.J. No. 1355 to mean that, where the partnership agreement is silent as to the duration of the partnership, any partner may unilaterally terminate the partnership by giving notice. If, however, the partnership agreement provides for the termination of the partnership, then this section will not apply. As such, this section is subject to any agreement between the partners.
Section 32(c) of the Partnerships Act is similar to section 26(1). Section 32(c) states that, subject to any agreement between the partners, a partnership is dissolved if entered into for an undefined time, by a partner giving notice to the other partners of his intention to dissolve the partnership. This section is subject to any contrary agreement between the partners, whether express or implied. Furthermore, the words “undefined time” used in Section 32(c) does not necessarily mean an “indefinite period” (Keith v. Mathews, Dinsdale and Clark, [1999] O.J. No. 1202). This section has been interpreted in Patridge v. Seguin and Keith v. Mathews, Dinsdale and Clark to mean that, where the term of the partnership is defined, then a partner may not unilaterally terminate the partnership by giving notice under this Section.
Termination by death, insolvency, charge on a partner’s share or illegality of business
A partnership can terminate through death, insolvency, charge on a partner’s share or illegality of business: ss. 33 and 34.
Termination by court order
Third, a partnership can be terminated by court order under section 35 of the Partnerships Act. This method of dissolving a partnership requires that an application be brought because a partner has been found to be mentally incompetent, permanently incapable of performing their duties, or guilty of conduct that prejudicially affects the carrying on of the business. An application to terminate can also be made on the grounds that the partnership can only be carried on at a loss.
In addition to these grounds for bringing an application, s. 35(1)(d) of the Partnerships Act allows a partner to apply to the court for an order dissolving the partnership on the basis that another partner has wilfully or persistently committed a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with that partner. Courts have set a high threshold for dissolving partnerships in this manner: there must be a breakdown in the relationship as between the partners such that mutual confidence (i.e. trust and reliance) no longer exist. In essence, the partners cannot continue carrying on the partnership business together according to the original agreement: Barnabe v. Touhey, [1992] O.J. No. 96 and Damis Holdings Ltd. v. Briarcrest Apartments Ltd., [1974] O.J. No. 672. Largely as a consequence of the agency relationship, and the capability of incurring joint and several liability for the remaining partners, partners are entitled to a very high standard of conduct as amongst themselves. Any breakdown in that relationship or conduct, such that the partners could not thereafter have reasonable trust and confidence in their partners, would generally be circumstances permitting the dissolution of the partnership. Keeping erroneous accounts and not entering receipts, refusal to meet on matters of business, continued quarrelling, and such a state of animosity as precludes all reasonable hope of reconciliation and friendly co-operation, have been held sufficient to justify a dissolution: Barnabe v. Touhey.
Finally, section 35(1)(f) of the Partnerships Act allows a partner to apply to the court for an order dissolving the partnership on the basis that circumstances have arisen which render it just and equitable that the partnership be dissolved. To obtain dissolution under this section, it must be established that there been such a complete breakdown and mutual trust and confidence among the partners as would preclude all hope of reconciliation and future co-operation: Barnabe v. Touhey (1992) O.J. No. 96, Kucher v. Moore (1991), 3 B.L.R. (2d) 50, PWA Corp. v. Gemini Group Automated Distribution Systems Inc., [1993] O.J. No. 723, and Ellerforth Investments Ltd. v. Typhon Group Ltd., [2009] O.J. No. 3714, aff’d [2010] O.J. No. 1470. It must be impossible for the partners to place that confidence in each other which each has the right to expect and that such impossibility has not been caused by the person seeking to take advantage of it. Evidence of a deadlock or substantial disagreement on questions of day to day management of the operations will suffice: Landford Greens Ltd. v. 746370 Ontario Inc., [1993] O.J. No. 1311. A court may also order dissolution under this section on the grounds that the parties have very different views as to the future of the partnership; in other words, there has been a material change of circumstances which makes it impossible for the partnership to be carried on in the way the partners had originally contemplated: Ellerforth Investments Ltd. v. Typhon Group Ltd.
Liability
In a partnership, all partners are jointly and severally responsible for the liabilities of the partnership up to the total value of their personal assets.
Taxation
Partnerships and limited partnerships are flow through entities. They are not legal persons. They don’t pay tax. Their income or losses flow through to the partners and are attributed to them. It is the partners who pay taxes, not the partnership or limited partnership. They are disregarded business vehicles. This differs from a corporation, which is considered to be a legal person separate from its owners and managers. Corporations are required to pay income taxes at both the provincial and federal levels.
A partnership or limited partnership is taxed in the following process. First, the parties involved have to recognize that they are operating as a partnership and not some other structure (e.g. joint venture, co-owning property, corporation, franchise, etc.). Then, the parties have to determine the income, losses, and tax credits at the PARTNERSHIP LEVEL. This requires a temporary assumption that the partnership is a separate person resident in Canada. Finally, once you figure out the income, losses, and tax credits, you ALLOCATE them to the partners. It is the individual partners who have to report (and, if applicable, pay taxes on) income, losses, and tax credits.
As per the Canada Income Tax Act, partnerships do not file separate tax returns. They file annual information returns setting out their income and details of the partners who are entitled to that income.
So to recap: the net income of the partners (for income tax purposes) of a limited partnership is determined by figuring out the net income of the limited partnership. To figure out the net income of the limited partnership, the Act says that you look at it as if it were a separate legal person: s. 96(1)(a). So you include income and deduct allowable expenses and other credits. Then, the partnership’s income will be attributed to the partners (usually as per the limited partnership agreement). Each partner must report their income or losses from the partnership and pay taxes accordingly: s. 96(1)(f).
For tax purposes (remember that partnerships must file an annual partnership information return after their fiscal period), the combined effects of ss. 96(1) and 249.1 of the Canada Income Tax Act make it clear that the fiscal period will be determined by the type of taxpayers (e.g. individuals, corporations, etc.) that make up the partnership group. If any member of the partnership is an individual, then the fiscal year end must generally be the calendar year end (with certain limited exceptions). If all of the members of the partnership are corporations, the fiscal year end can be anywhere, so long as the fiscal period does not exceed 53 weeks: s. 249.1(1)(a).
Selling your Dental Practice (Part 1): An Overview
Selling Your Dental Practice? Read this FIRST!
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.
Selling your Dental Practice in Ontario
It’s amazing really. Many, many dentists aren’t incorporated. And now they’re thinking about selling their practice. What’s wrong with this picture? EVERYTHING! The bottom line is that there is a LOT OF TAX SAVINGS to be gained by (1) rolling over your dental practice into a dentistry professional corporation and then (2) selling the shares of the dentistry professional corporation. You get to take advantage of a tax-deferred rollover (when transferring assets from your dental practice to your dentistry professional corporation) and then you get to take advantage of the lifetime capital gains exemption on the sale of the shares of a small business corporation. I’ve previously blogged extensively about these topics, but I thought it would be worthwhile to get into some of the nitty gritty that’s involved in selling your dental practice. So lets get into it, shall we? Remember, you can contact me if you need help doing this. I work closely with you and your accountant to help ensure a smooth transaction.
Step #1: Create a Corporation
Not every lawyer understands how to create a corporation that complies with dental laws. The name of the corporation needs to comply with specific rules. The business of the corporation needs to be restricted (to include only dental activities, etc.). The share structure needs to be flexible enough to accommodate non-dentist family member shareholders (e.g. spouse, child, parent). The minute book needs to be organized. Directors and shareholders need to have their meetings, pass resolutions, etc. Shares need to be issued. Shareholder and Director registries need to be updated, etc. This isn’t for the faint of heart. Accountants don’t usually do the whole thing for you. They may just file articles of incorporation with the Ontario government, but there are bound to be problems. Make sure to have a lawyer who is knowledgeable of these matters to set up the corporation for you properly. Otherwise, it will cost you more time and money in getting amendments, etc.
Step #2: Get a C of A for the Corporation
After you have a corporation, that corporation will not be able to practice dentistry unless it has a Certificate of Authorization from the Royal College of Dental Surgeons. Now you may be asking: “If I’m going to rollover my assets into my corporation, take back shares, and then sell those shares ALL on THE SAME DAY, then why should I get the C of A for the corporation?” It’s a good point. But the purchaser of your corporation WILL WANT the corporation to have a C of A until they either (1) amend the corporation’s name to their own and get an amended C of A for the new corporation or (2) amalgamate the corporation with their own and get a new C of A. The point is that the legislation didn’t really take into account this interim period whereby a newly purchased corporation carries on the business of a dental practice without the naming requirements being met. It’s best to get the C of A so that no one blames the corporation for illegally operating a dental practice after the sale but before an amendment / amalgamation has been completed. I realize this may be a lot of legal mumbo-jumbo, but just trust me on it…
Please note that there is a lot of paperwork that goes into getting a C of A from the College. If even one of the requirements (e.g. timelines aren’t met, documents are incomplete, documents are not provided, the business wasn’t set up properly, etc.), then you can kiss your chances of getting a C of A any time soon goodbye! It will add more cost and time if you don’t do this right from the get go. It’s particularly important if you’re under time constraints to buy or sell a dental practice.
Step #3: Rollover Your Assets
If you’re carrying on a dental practice as a sole proprietorship or in partnership with other dentists, then you need to transfer (or rollover) the ASSETS of that business into the corporation. This is done through an asset purchase agreement. The purchaser is the corporation. The vendor is the party who owns the assets of the dental practice (typically the dentists). The dentists should have the ability to transfer over the assets without getting into trouble with creditors. In exchange for transferring the assets to the corporation, the vendors will take back shares that are equal to the worth of the assets that they are transferring. This is generally fair market value. It’s typical to find ‘price adjustment clauses’ in asset purchase agreements which say that, if the CRA ever challenges the value attributed to the assets and declares it to be higher or lower than what was elected, then the vendor and purchaser will be deemed to have completed the sale at THAT price. It’s just like an insurance policy: the vendor and the purchaser agree that, if the price they elected to rollover the assets and take back the shares was wrong because it wasn’t FAIR MARKET VALUE (which is a whole other thing), then they’ll just adjust to whatever the CRA thinks it should have been…Nice.
Step #4: Sell the Shares
Now, assuming that you qualify for the Lifetime Capital Gains Exemption on the sale of shares of small business (you really should talk to an accountant about this), the next step is to sell your shares. So, when you rolled over your assets into the corporation, there would have been an Asset Purchase Agreement. Now, when you’re selling your shares, you’ll be entering into a Share Purchase Agreement. This will be much more negotiated than the previous agreement because before, you were basically transferring assets from your left hand into your right. Now, you’re selling the whole damn thing to a third party.
Closing a Share Purchase is complicated and has a lot of different components to it. There is the agreement + schedules. There are indemnifications, declarations, assignments of leases, directions, etc. The corporation minute book has to be updated to account for the asset and share purchases. It’s a lot of work…trust me. And the whole deal could fall apart if the due diligence hasn’t been completed or if third party consents haven’t been provided (e.g. the Landlord giving its consent to assign the lease to the professional corporation, which will then change ownership). So there’s a lot of documents that get drafted, reviewed, revised, negotiated, and finalized.
Step #5: Amalgamate the two corporations
Now, it’s sometimes the case that the purchaser will be another dentistry professional corporation. So one corporation will purchase the shares of the dental practice. What happens then? Well, there will need to be an amalgamation (or joining / combination of the two corporation into ONE NEW CORPORATION). The new corporation will then proceed to get a Certificate of Authorization to be able to carry on the dental practice.
This is just a general overview. There are a lot of nitty gritty things to look at in greater detail – which I will in the next few posts. Each step of the way carries with it significant legal and accounting implications. Make sure you have someone knowledgeable enough on your side to answer your questions and ensure a smooth transition.
Sale of a Dental Practice (Part 1)
Thinking of selling your Dental Practice?
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.
Selling your Dental Practice in Ontario
It’s amazing really. Many, many dentists aren’t incorporated. And now they’re thinking about selling their practice. What’s wrong with this picture? EVERYTHING! The bottom line is that there is a LOT OF TAX SAVINGS to be gained by (1) rolling over your dental practice into a dentistry professional corporation and then (2) selling the shares of the dentistry professional corporation. You get to take advantage of a tax-deferred rollover (when transferring assets from your dental practice to your dentistry professional corporation) and then you get to take advantage of the lifetime capital gains exemption on the sale of the shares of a small business corporation. I’ve previously blogged extensively about these topics, but I thought it would be worthwhile to get into some of the nitty gritty that’s involved in selling your dental practice. So lets get into it, shall we? Remember, you can contact me if you need help doing this. I work closely with you and your accountant to help ensure a smooth transaction.
Step #1: Create a Corporation
Not every lawyer understands how to create a corporation that complies with dental laws. The name of the corporation needs to comply with specific rules. The business of the corporation needs to be restricted (to include only dental activities, etc.). The share structure needs to be flexible enough to accommodate non-dentist family member shareholders (e.g. spouse, child, parent). The minute book needs to be organized. Directors and shareholders need to have their meetings, pass resolutions, etc. Shares need to be issued. Shareholder and Director registries need to be updated, etc. This isn’t for the faint of heart. Accountants don’t usually do the whole thing for you. They may just file articles of incorporation with the Ontario government, but there are bound to be problems. Make sure to have a lawyer who is knowledgeable of these matters to set up the corporation for you properly. Otherwise, it will cost you more time and money in getting amendments, etc.
Step #2: Get a C of A for the Corporation
After you have a corporation, that corporation will not be able to practice dentistry unless it has a Certificate of Authorization from the Royal College of Dental Surgeons. Now you may be asking: “If I’m going to rollover my assets into my corporation, take back shares, and then sell those shares ALL on THE SAME DAY, then why should I get the C of A for the corporation?” It’s a good point. But the purchaser of your corporation WILL WANT the corporation to have a C of A until they either (1) amend the corporation’s name to their own and get an amended C of A for the new corporation or (2) amalgamate the corporation with their own and get a new C of A. The point is that the legislation didn’t really take into account this interim period whereby a newly purchased corporation carries on the business of a dental practice without the naming requirements being met. It’s best to get the C of A so that no one blames the corporation for illegally operating a dental practice after the sale but before an amendment / amalgamation has been completed. I realize this may be a lot of legal mumbo-jumbo, but just trust me on it…
Please note that there is a lot of paperwork that goes into getting a C of A from the College. If even one of the requirements (e.g. timelines aren’t met, documents are incomplete, documents are not provided, the business wasn’t set up properly, etc.), then you can kiss your chances of getting a C of A any time soon goodbye! It will add more cost and time if you don’t do this right from the get go. It’s particularly important if you’re under time constraints to buy or sell a dental practice.
Step #3: Rollover Your Assets
If you’re carrying on a dental practice as a sole proprietorship or in partnership with other dentists, then you need to transfer (or rollover) the ASSETS of that business into the corporation. This is done through an asset purchase agreement. The purchaser is the corporation. The vendor is the party who owns the assets of the dental practice (typically the dentists). The dentists should have the ability to transfer over the assets without getting into trouble with creditors. In exchange for transferring the assets to the corporation, the vendors will take back shares that are equal to the worth of the assets that they are transferring. This is generally fair market value. It’s typical to find ‘price adjustment clauses’ in asset purchase agreements which say that, if the CRA ever challenges the value attributed to the assets and declares it to be higher or lower than what was elected, then the vendor and purchaser will be deemed to have completed the sale at THAT price. It’s just like an insurance policy: the vendor and the purchaser agree that, if the price they elected to rollover the assets and take back the shares was wrong because it wasn’t FAIR MARKET VALUE (which is a whole other thing), then they’ll just adjust to whatever the CRA thinks it should have been…Nice.
Step #4: Sell the Shares
Now, assuming that you qualify for the Lifetime Capital Gains Exemption on the sale of shares of small business (you really should talk to an accountant about this), the next step is to sell your shares. So, when you rolled over your assets into the corporation, there would have been an Asset Purchase Agreement. Now, when you’re selling your shares, you’ll be entering into a Share Purchase Agreement. This will be much more negotiated than the previous agreement because before, you were basically transferring assets from your left hand into your right. Now, you’re selling the whole damn thing to a third party.
Closing a Share Purchase is complicated and has a lot of different components to it. There is the agreement + schedules. There are indemnifications, declarations, assignments of leases, directions, etc. The corporation minute book has to be updated to account for the asset and share purchases. It’s a lot of work…trust me. And the whole deal could fall apart if the due diligence hasn’t been completed or if third party consents haven’t been provided (e.g. the Landlord giving its consent to assign the lease to the professional corporation, which will then change ownership). So there’s a lot of documents that get drafted, reviewed, revised, negotiated, and finalized.
Step #5: Amalgamate the two corporations
Now, it’s sometimes the case that the purchaser will be another dentistry professional corporation. So one corporation will purchase the shares of the dental practice. What happens then? Well, there will need to be an amalgamation (or joining / combination of the two corporation into ONE NEW CORPORATION). The new corporation will then proceed to get a Certificate of Authorization to be able to carry on the dental practice.
This is just a general overview. There are a lot of nitty gritty things to look at in greater detail – which I will in the next few posts. Each step of the way carries with it significant legal and accounting implications. Make sure you have someone knowledgeable enough on your side to answer your questions and ensure a smooth transition.
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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.
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.
Ljubica Durlovska is a dental lawyer and the newest member of DMC Law. David, Michael, and Ljubica are a truly dynamic team. Their diverse knowledge, skills, and experiences will help you get the best deal possible. They are here to help you get your legal affairs in order while promoting your interests and protecting your rights. You can read dentist testimonials here.
David, Michael, and Ljubica help dentists incorporate, buy and sell practices, lease space, deal with employment matters (including associate agreements), and get their Wills and estates in order.
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