Introduction
For many dentists, buying into an established practice — or eventually selling their interest — is one of the largest financial decisions of their career. The sums involved are significant, the structures are often complex, and the tax consequences of getting the structure wrong can be substantial.
This article does not cover every scenario. What it does is explain the key concepts that any dentist entering a practice purchase or sale should understand before engaging legal and accounting advisors.
Share Sale vs. Asset Sale: The Foundational Question
As with any business transaction, a dental practice sale can be structured as a share sale or an asset sale. The implications differ significantly.
In a share sale, the buyer acquires the shares of the dental professional corporation. The goodwill, patient base, equipment, and all other assets remain inside the corporation — they transfer with the shares. The seller may be able to access the lifetime capital gains exemption (LCGE) on any gain, provided the shares qualify as qualifying small business corporation (QSBC) shares.
In an asset sale, the corporation sells individual assets — goodwill, equipment, patient charts, and any other practice assets — to the buyer (or the buyer's corporation). Each asset class has its own tax treatment. Goodwill, which is typically the largest component of dental practice value, is treated as an eligible capital property for tax purposes. Equipment sold for more than its tax value creates a recapture of previously claimed capital cost allowance.
Buyers often prefer asset sales because they receive a stepped-up tax basis in the assets and avoid assuming hidden liabilities. Sellers typically prefer share sales because of the LCGE opportunity and more favourable overall tax treatment. Negotiating this structure — and arriving at a purchase price that accounts for the after-tax position of both parties — is a central part of any practice transaction.
Valuing Goodwill in a Dental Practice
Dental practice goodwill represents the value of the patient base, the reputation of the practice, and the expectation of ongoing revenue. It is typically the most significant asset in any dental practice sale.
For tax purposes, the seller's gain on goodwill depends on its adjusted cost base and the proceeds allocated to it. The buyer may wish to amortise the goodwill acquired for accounting purposes, though for tax purposes the treatment of eligible capital expenditures has specific rules.
The allocation of purchase price between goodwill, equipment, and other assets is a negotiated matter with significant tax consequences for both parties. Buyers and sellers should each model the tax impact of different allocations before agreeing to a final allocation in the purchase agreement.
Buying Into a Practice as a Partner
Many dentists begin their ownership journey by buying a minority interest in an existing practice — becoming a partner rather than a sole owner. This structure raises questions about how the interest is acquired (share purchase vs. newly issued shares), how dividends and income are allocated, and what the exit provisions look like.
Shareholder agreements are essential in multi-owner dental practices. They should address purchase price formulas for future buy-ins and buyouts, dispute resolution, non-compete provisions, and what happens in the event of death, disability, or retirement of a partner. Tax structuring should be considered alongside the legal structure — the two affect each other.
The Earn-Out Structure
In some dental practice transactions, the purchase price includes an earn-out component — additional payments tied to the future performance of the practice, typically over one to three years post-closing. Earn-outs are common where the value of the practice is partly dependent on whether existing patients continue to attend under the new ownership.
Earn-out payments have tax complexity: when are they income, and to whom? How are they recognised for tax purposes if the total purchase price depends on future events? These questions require specific planning at the time the transaction is structured.
The Transitioning Associate Arrangement
When a dentist sells their practice, there is typically a transition period during which the selling dentist continues to practise — either to introduce patients to the new owner or under an earn-out arrangement. The structure of this period (employment, associate arrangement, or consulting contract) has tax and HST implications for both the selling dentist and the purchaser. It should not be left to a handshake agreement.
When to Speak With a CPA
A dental practice transaction should involve both a CPA and a lawyer, ideally with both engaged before any term sheet or letter of intent is signed. The structure agreed to at the letter of intent stage significantly constrains what can be changed later. Getting the structure right from the start is far less costly than restructuring mid-transaction.