The retirement plan for many professionals in Ontario includes the sale of his or her shares in a professional corporation, often using the lifetime capital gains exemption to exempt from capital gains tax of up to $750,000 of proceeds.
There are unique issues with respect to the sale of professional corporations that are bear traps for the unwary. A professional is well advised to seek advice from his or her legal and tax advisors at least two years in advance of the date planned for retirement.
Unique issues include:
- many professional corporations, including those governed by the Regulated Health Professions Act, Ontario (including dentists, physicians and other health care professionals) are prohibited from having corporate shareholders. This prohibition eliminates easy access to the means to “purify” the corporation in order to gain access to the lifetime capital gains exemption. Careful legal and technical steps have to be taken to tax effectively purify the professional corporations;
- relationships with other professionals employed or associated with the professional corporation not are not governed solely by contract and employment law but also by professional codes and common law recognition of duties and obligations that professionals have to each other and their clients or patients;
- hygiene and technical corporations used for tax splitting opportunities or risk management have to be integrated in the sale transaction and the interests of family member shareholders, who often have little knowledge regarding the business, must be addressed.