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Buying a medical or dental practice involves more than agreeing on a price. Learn how asset vs. share purchases, HST, goodwill, financing and due diligence can affect the true cost of the acquisition.
Buying an established medical or dental practice can be an attractive way to step into an existing patient base, trained staff, equipment and established cash flow. For professionals looking at practices in Mississauga, Toronto or elsewhere in the GTA, however, the purchase price is only one part of the transaction.
How the purchase is structured can affect your taxes, financing and risk for years after closing. Some of the most important decisions should be reviewed before the purchase agreement is finalized, not after.
1. Asset Purchase or Share Purchase?
One of the first questions is whether you are buying the assets of the practice or the shares of the corporation that owns it. Neither structure is automatically better. The right choice depends on the practice, the seller's position and the risks the buyer is prepared to assume.
Asset purchase
In an asset purchase, the buyer acquires selected assets such as equipment, furniture, leasehold improvements, supplies and goodwill rather than taking over the seller's corporation.
- Potential advantage: the buyer generally receives a new tax cost in the assets acquired and may claim CCA on eligible depreciable assets over time.
- Potential advantage: it is usually easier to avoid taking on historical corporate liabilities that are not specifically assumed.
- Potential drawback: contracts, leases, employees, licences and other arrangements may need to be transferred or recreated.
- Potential drawback: the seller may prefer a share sale because of the seller's own tax position, which can affect negotiations and price.
Share purchase
In a share purchase, the buyer acquires the corporation itself. The corporation continues to own the practice assets, and those assets generally remain at their existing tax values.
- Potential advantage: the business may continue with less disruption because the same corporation remains in place.
- Potential advantage: existing contracts, leases and other arrangements may be easier to preserve, subject to change-of-control provisions and professional requirements.
- Potential drawback: the buyer is acquiring the corporation together with its history, so tax, payroll, HST, legal and other exposures require careful due diligence.
- Potential drawback: the purchase of shares does not normally create a new tax cost in the corporation's equipment, goodwill or other underlying assets.
From the seller's side, a share sale may also be attractive because qualifying shares may be eligible for the lifetime capital gains exemption if all requirements are met. This is one reason buyers and sellers sometimes approach the same transaction with different preferences.
2. The Purchase Price Allocation Matters
If you are buying assets, agreeing on a total price is only the starting point. The purchase price also has to be allocated among the assets being acquired.
For example, a $1 million practice purchase might be allocated as follows:
| Asset | Example allocation |
|---|---|
| Equipment and furniture | $250,000 |
| Leasehold improvements | $100,000 |
| Other assets | $50,000 |
| Goodwill | $600,000 |
| Total purchase price | $1,000,000 |
The allocation matters because different assets can have different income tax treatment and depreciation rates. It should be commercially reasonable and consistent between buyer and seller. This is something worth reviewing before the final agreement is signed.
3. HST on the Sale of a Medical or Dental Practice
HST is an area where medical and dental practice sales can differ from many other business sales. A doctor or dentist may have paid HST when purchasing equipment but been unable to recover it because the equipment was used to provide exempt health-care services. That does not necessarily mean HST has to be charged when the equipment is later sold.
CRA specifically addresses the sale of a dental practice in GST/HST Memorandum 14-4. In its example, the dentist had used the practice assets exclusively to provide exempt dental services and had made no taxable supplies.
- Dental supplies, equipment and furniture were not subject to GST/HST on the sale.
- Goodwill was not subject to GST/HST where the requirements connected with the sale-of-business rules were satisfied.
- Leasehold improvements were different. CRA treated them as real property, and GST/HST applied to their sale.
The reason the equipment and furniture were not taxable was not simply that the parties made a section 167 election. CRA explains that personal property can be sold without GST/HST where it was acquired exclusively for non-commercial activities and was not used in commercial activities.
Section 167 is a separate sale-of-business rule. Where the buyer acquires all or substantially all, generally at least 90%, of the property reasonably necessary to carry on the business and the other conditions are met, the parties may be able to make a joint election so that GST/HST is not payable on qualifying property. It can still be relevant, but it should not be treated as the reason every asset in an exempt medical or dental practice is HST-free.
The practical point is that HST should be reviewed by asset type. Equipment used exclusively in exempt medical or dental activities may be non-taxable on sale, while other assets, particularly real property or leasehold improvements, can produce a different result.
4. Understand What Earnings You Are Actually Buying
A profitable practice on paper does not necessarily mean the purchaser will earn the same amount. Before deciding whether the asking price is reasonable, the financial statements should be normalized.
- Owner salary and benefits
- Associate physician or dentist payments
- Family members on payroll
- One-time expenses
- Personal or discretionary expenses
- Rent compared with market rates
- Equipment leases
- Management fees
- Repairs and capital expenditures
- Recurring versus non-recurring revenue
For a professional practice, it is also important to understand how much of the revenue depends personally on the departing doctor or dentist. Patient retention after the ownership transition can materially affect the value of the practice.
5. Review Accounts Receivable and Work in Progress
The agreement should clearly state who owns amounts earned before closing but collected afterward. Depending on the practice, this may include OHIP receivables, insurance receivables, patient receivables, dental treatment in progress, deposits and prepaid services.
6. Consider Equipment Before Paying for It Twice
Medical and dental practices can have significant investment in equipment. Before accepting the seller's valuation, consider the age, condition, financing and remaining useful life of the equipment. A practice may look reasonably priced until major replacement costs are factored in.
7. Review the Lease Carefully
The location of a medical or dental practice can represent a meaningful part of its goodwill. This can be particularly important for established practices in Mississauga and the GTA, where accessibility, parking and patient convenience may affect retention.
- Remaining lease term and renewal options
- Future rent increases and additional operating costs
- Assignment or change-of-control requirements
- Personal guarantees
- Renovation or restoration obligations
8. Structure the Financing Before Closing
Many professionals finance at least part of a practice acquisition. Whether the borrowing is personal, corporate or part of a broader structure can affect interest deductibility and how future practice cash flow is used to repay the debt. The financing structure is best reviewed before closing.
9. Your Professional Corporation Needs to Be Considered
If the practice will operate through a professional corporation, the corporation must comply with Ontario corporate law and the requirements of the applicable professional regulator. The accounting, legal and regulatory structure should be coordinated before the transaction closes.
10. Do Your Due Diligence Before Signing
Your accountant should ideally review the practice before you enter into an unconditional purchase agreement. Depending on the transaction, this may include financial statements and tax returns, revenue trends, normalized earnings, payroll and associate costs, GST/HST filings, equipment, receivables, liabilities, financing and the proposed purchase-price allocation.
The legal review is equally important, particularly for the purchase agreement, lease, employees, regulatory matters, representations and warranties, and potential liabilities.
Before You Sign the Purchase Agreement
Buying an established medical or dental practice can be a major career and financial opportunity, but the structure of the transaction matters. Asset versus share purchase, purchase-price allocation, HST, financing and due diligence can all affect the true cost and risk of the acquisition.
Ideally, your accountant and lawyer should be involved before the final purchase agreement is signed. Once the deal is closed, some planning opportunities may no longer be available.
Technical References
- Canada Revenue Agency, Buying an existing business.
- Canada Revenue Agency, GST/HST Memorandum 14-4, Sale of a Business or Part of a Business, including the dental practice example.
- Canada Revenue Agency, Form GST44, GST/HST Election Concerning the Acquisition of a Business or Part of a Business.
How Source Accounting Can Help
Source Accounting Professional Corporation is a CPA firm serving incorporated businesses, medical and dental professionals, professional corporations and other small and medium-sized businesses across Mississauga, Toronto, Brampton, Oakville, Milton and the surrounding GTA. Our services include corporate and personal tax, professional corporation accounting, bookkeeping, HST/GST, payroll, tax planning, corporate reorganizations and support with business transactions. For a practice purchase, we can review the financial information, identify key tax and accounting issues, and coordinate with your lawyer before the deal is finalized.
This article is intended for general information only and does not constitute tax, accounting or legal advice. The tax treatment of a practice purchase depends on the specific facts, the assets being acquired, the structure of the transaction and the applicable rules at the time of closing. Professional advice should be obtained before entering into or completing a transaction.
