Buying into a dental practice: shares or assets, and where the loan sits

Summary

Buying into a dental practice means buying it from the dentist who owns it, either the whole thing or a slice of it, and there are two ways to do it. You can buy the practice’s assets one at a time: the goodwill (i.e. what the patient list, the location and the name are worth beyond the physical things), the equipment and the patient records. Or you can buy the shares of the corporation the selling dentist practises through, which brings the whole company along, including everything it has ever done.

We’d recommend buying the shares, and buying them through a corporation of your own where your provincial dental college allows it. Your dental college is the provincial regulator that licenses dentists, not a school, and each one sets its own ownership rules. You then merge your corporation and the practice corporation into a single company. Two things drive that recommendation, and both matter more than the tax write-offs buyers tend to focus on:

1. A share sale is the only version that lets the seller use the lifetime capital gains exemption, which shelters up to $1,275,000 of capital gain on a 2026 sale of qualifying shares.¹ Qualifying means, broadly, that all or substantially all of the corporation’s value is tied up in the working practice, and that the seller has owned the shares for at least 24 months.² To a seller who passes, the exemption is worth roughly $285,000 to $350,000 of personal tax.³ Someone getting a saving that size can accept a lower price or softer terms, so much of it comes back to you.
2. Merging is what puts the purchase loan and the practice income inside one company, so the loan gets repaid out of the corporation’s after-tax profits rather than out of yours. Doing that removes the second and larger layer of personal tax.

Push for an asset purchase instead if the seller’s shares don’t qualify, or if what you turn up inside their corporation beforehand would cost more than the price concession the exemption buys.

This article assumes you’re buying equity rather than joining a cost-sharing arrangement (i.e. one where each dentist owns their own corporation and you split the premises, staff and equipment), and that you and the seller aren’t related. Buying from a parent, spouse or sibling can turn the seller’s capital gain into a dividend under an anti-avoidance rule, which wipes out the exemption. A family deal needs its own design from the start.

Assets or shares

In an asset purchase the seller’s corporation stays behind with its bank account, its filing history and its liabilities, while in a share purchase you buy that corporation itself.

An asset purchase gives you a fresh tax cost on everything you buy. Tax cost means the amount the rules eventually let you write off against income. The price you pay for each item comes back to you as deductions over the following years. Goodwill goes into Class 14.1, one of the capital cost allowance classes, capital cost allowance being the tax system’s version of depreciation. Class 14.1 comes off at 5% of the declining balance a year, meaning 5% of what’s left rather than 5% of the original price. Equipment and furniture go into Class 8 at 20% on the same basis.⁴ You also take only the liabilities you agree in writing to take, so the investigation you run before the deal completes is narrower and cheaper.

What an asset purchase costs falls mostly on the seller, which gives the seller a reason to resist it. The money goes to their corporation rather than to them, and a dentist who built the practice from scratch never paid anything for its goodwill. There is nothing to subtract from the sale price, so the whole goodwill amount is a capital gain inside that corporation. Half of a capital gain is taxable, and the untaxed half can normally be paid out to the dentist as a tax-free capital dividend.⁵ So the second layer of tax lands on half the goodwill price rather than on all of it. The lifetime capital gains exemption is no help either, because on a practice sale it only covers shares.

A share purchase flips both sides of that, starting with the deductions. You get no fresh tax cost on anything, so the equipment sits at whatever value the seller had already depreciated it down to. You get no new goodwill deduction from buying the shares, although any existing goodwill tax cost stays on the corporation’s books. What you do get is everything that corporation did before you arrived. Two of the usual finds are income tax and CPP withheld from staff pay but never sent to the CRA, and a GST/HST position nobody has ever tested. A third is an “associate” dentist treated as a contractor who legally looks like an employee, which can produce years of unpaid payroll tax plus interest and penalties. Buy the shares and every one of those bills becomes yours, known or not.

What the goodwill write-off is worth

In our view the goodwill deduction gets more weight than it earns, so do the arithmetic before you trade price or deal certainty for it. Suppose you buy a practice in an asset purchase and $800,000 of the price is goodwill. Goodwill bought and put to work in the practice in 2026 gets 7.5% in the first year, which is a $60,000 deduction. That saves between $5,400 and about $7,300 of corporate tax, being 9% federal on the first $500,000 of active business income (i.e. money from running the practice rather than interest and dividends on invested cash) plus a provincial small business rate of nil to 3.2%.⁶ The second year is 5% of the $740,000 still on the books, or $37,000, and it shrinks every year after that.

The 7.5% comes from a federal measure called the accelerated investment incentive, which suspends the usual first-year haircut and adds half again on top.⁷ The incentive steps down on the date the goodwill becomes available for use, meaning in service in the practice, which is not the same date as when you buy it. Goodwill available for use after 2029 gets 5% in its first year, and after 2033 it drops back to 2.5%.

Where the purchase loan sits

Financing is where the largest avoidable cost in a buy-in sits, because the choice is made early and can’t be unwound. Canada’s Income Tax Act allows a deduction for interest on borrowed money used to earn income from a business or from property.⁸ Borrow personally to buy the shares and the interest deduction is yours personally. However, the CRA only allows it where you can show you bought the shares expecting income from them, which in practice means dividends. If the corporation never pays any, your deduction is exposed on audit.

The interest isn’t really where the money goes, though. Repaying the principal is the part nobody gets a deduction for, so it has to reach the bank after tax. Borrowing personally sends it the long way round. The practice earns a dollar, the corporation pays corporate tax, and what’s left is paid out to you as a dividend. You pay personal tax on that dividend, and only then does the bank get paid.

Put the loan in the same corporation that earns the practice income and the last two steps disappear. The practice earns a dollar, pays corporate tax of 9% federal plus its province’s small business rate, and 88 to 91 cents of it reaches the bank. The corporate layer is still there, but the personal layer is gone and it’s the bigger of the two. At the rates a practice buyer usually faces, borrowing personally takes roughly twice as much practice income to repay the same principal.⁹

The usual route is for a corporation you own to borrow the money and buy the shares, after which the two companies are amalgamated, meaning legally merged into one. The CRA’s published guidance says it will still treat the loan as having been used to buy the practice itself after the merger, so the interest stays deductible.¹⁰ The CRA’s view there is administrative rather than a rule written into the Act, so have it confirmed for your own deal. On the flip side, the route costs you a second corporation, possible short-year tax returns and the legal work of merging it into the practice. It’s also only open where your college permits a corporation to hold shares of a dental practice.

How often this changes

Re-run the analysis when you sign a letter of intent, and again if the closing slips by more than a few months. A letter of intent is the short and mostly non-binding document setting out price and structure before the lawyers draft the real agreement.

• The lifetime capital gains exemption rises every January with inflation, so the amount sheltered in the year you close will be a little higher than the 2026 figure.
• The enhanced first-year deduction on goodwill steps down for property available for use after 2029, and again after 2033, so a 2031 purchase won’t get what a 2026 one gets.
• College rules on who may own a dental practice change without much warning, and provincial corporate tax rates move with provincial budgets.

Closing thoughts

Most of the negotiating energy in a practice sale goes into the multiple, which is the percentage of a year’s collections (i.e. the fees the practice actually banked, which isn’t the same as what it billed) that a practice is said to be worth. The structure is harder to argue about and decides more. Very little of it can be repaired once the deal completes. Three examples are a share structure the college won’t authorize, a loan sitting in the wrong company, and a seller whose shares fail the exemption test because cash and investments have piled up inside the corporation. Each is cheap to fix months before a letter of intent and expensive afterwards.

How we handle it

We model the share version and the asset version side by side before the letter of intent, on your numbers and, where the seller will share them, theirs. From there we set up whatever corporations the structure needs, prepare the opening balance sheet, and file the corporate and personal returns out of one file. Where the deal needs a formal tax opinion, we work alongside your lawyer.