For a number of years ‘investor dentists’ have been purchasing and owning dental practices across Ontario. This trend will continue for the foreseeable future with historically low interest rates and banks willing to finance the purchases. What about nondentists? What can they purchase or own? Aside from actually working at a dental practice, how can non-dentists profit from a dental practice?
From a legal perspective the starting point is to understand what only a dentist or a dentistry professional corporation (PC) can own; and that is the professional dental goodwill of a dental practice. That goodwill includes custody and control of all patient records and files (including patient billing records and treatment plans), patient charts, x-rays and models, patient lists, and use of any dental practice names. A dentist or PC are the only ones who can own the goodwill.
The other fundamentals to understand are:
1. a dentist can not engage in any form of fee or income sharing except with other dentists at the practice and with dental hygienists who practice dental hygiene in and at the dentist’s practice;
2. a dentist can only practice dentistry with other dentists. A dentist can not work for non-dentists whether as an associate, employee, partner or otherwise when engaging in the practice of dentistry; and
3. only a dentist can prescribe dental radiographs and only a dentist can be a radiation protection officer.
With these restrictions and fundamentals in mind, following are some ways non-dentists may be involved in ownership of a dental practice.
As I and my former colleague, Barry Spiegel, Q.C. (now retired from the practice of law), have discussed in previous articles of The Professional Advisory, the laws permit family members of a dentist to be nonvoting shareholders of the dentist’s PC. The dentist controls the PC by holding all voting shares.
A “family member” is defined as a dentist’s spouse, child or parent. A “spouse” is defined as someone to whom the dentist is married or with whom the dentist is living in a conjugal relationship outside marriage. “Child” is not defined but is generally taken to mean the dentist’s natural born children and those the dentist legally adopts. However, it is important to note that only the dentist’s parents but not parents in-law or grandchildren qualify as family members.
There are many potential benefits to having your PC own your dental practice, with your family members (non-dentists) as non-voting shareholders. Benefits include the low corporate income tax rate, the ability to sprinkle dividends among family members and the capital gains exemption on the sale of PC shares. If structured and planned properly, family members might be able to use the capital gains exemption when they sell their PC shares. However, to ensure nondentist family members can enjoy all such benefits, it is critical to plan well in advance as such plans may require two or more years to implement properly.
Keep in mind that a PC’s business is restricted to the practice of dentistry and activities related to or ancillary to the practice of dentistry. Surplus funds can be withdrawn from the PC by dividends paid to non-dentist family member shareholders. Or such funds can remain in the PC and invested by the PC.
Many dentists accumulate large amounts of surplus funds in their PC. However by doing so there is a potential tax problem upon a sale of the PC shares. To qualify for the capital gains exemption, there are numerous legal tax rules and requirements including the ‘50 per cent rule’. That rule requires the PC have less than 50 per cent of its assets in passive (nondental) assets for the whole two year period prior to the sale of the PC shares. In some cases, the PC has accumulated so much surplus funds that the PC does not meet the 50 per cent rule. Therefore, to qualify for capital gains exemption on a sale of the PC shares, the PC in those cases must divest itself of those surplus funds more than two years before a sale.
If non-dentist family members are to enjoy the capital gains exemption on the sale of their PC shares, it is clear that careful legal and tax planning is required well in advance. And to do that dentists are well advised to retain professional advisors, especially tax advisors/accountants, who specialize in advising dentists. As my former colleague, Barry Spiegel, Q.C. used to recommend and I still do: Surround yourself with experts in their field, they will serve you well.
Part 2 of this article will continue in the next volume of The Professional Advisory and explore other ways in which non-dentists may be involved in ownership of a dental practice. PA
