Thinking about retirement? If you’ve run your practice as a medical practice corporation (MPC), you’ll need to decide on the future of your professional corporation.
Here’s what you need to know about your available options to help you formulate the right questions to ask when you meet with your tax and legal advisors.
Regulatory requirements when leaving your practice
When retirement beckons, physicians often find themselves grappling with an all-new list of “must-dos” to comply with regulatory standards for leaving a practice: From notifying patients to returning or transferring the pharmaceuticals in your practice — and everything in between — there’s a lot of things you’ll need to do.
Your MPC adds another layer of complexity. Professional corporations aren’t like regular corporations. They come with regulatory requirements, and depending on the province you’re practicing in, these requirements can be quite stringent.
There are three things you can do with your MPC when you’re retiring:
(1) Sell your medical practice corporation
If you are planning to sell your MPC, here’re some factors you may want to consider:
Voting shares in an MPC must be held by individuals who are members of the relevant College governing physicians in your province. This has an impact on any potential sale of your MPC. Note that in BC, a holding company can also hold a voting share in an MPC, but a member of the College of Physicians and Surgeons of British Columbia must own the holding company.
Qualified buyers only. While you do have the option to sell your MPC, you can only sell it to another physician who’s a member in good standing of your College. Selling might be a good option for you if, for example, your child is a physician practicing in your province and is interested in taking over your practice or you have a physician in your employ who’s interested in buying your MPC.
Lifetime capital gains exemption (LCGE). If you have an interested and qualified buyer, selling your practice might be a good option if you qualify for the lifetime capital gains exemption, which, for 2021, is $892,218.
Here’s an example of how the LCGE works: If you sold your MPC for $800,000, you’d normally have to pay capital gains tax on half of that amount ($400,000). But if your MPC is a qualified small business corporation and you still have enough LCGE available (you haven’t used up your LCGE in previous tax years), you might not have to pay this tax.
Qualified small business corporation (QSBCS). Your MPC needs to be a qualified small business corporation for you to qualify for the LCGE. The factors that apply in making this determination include the following:
- “All or substantially all” (which generally means 90%) of the assets your MPC owns must be used in carrying out your business. So if your MPC owns, for example, a personal-use vehicle, this would be an issue if it results in less than 90% of your MPC’s assets being used in your practice. While in most cases personal-use assets owned by an MPC won’t add up to more than 10% of the MPC’s assets, it’s good to be aware of this potential issue.
- Your practice must be carried on primarily in Canada (typically, at least 50%).
Sale of shares. Because you’re using the LCGE, you’ll need to sell your MPC shares rather than the assets that make up your practice. This means your lawyer will need to structure the sale as a sale of shares, and you’ll need to comply with any of your College’s MPC requirements, including notifying them of the change in share ownership.
(2) Convert your medical practice corporation
Chances are, you’ve accumulated substantial assets in your MPC over the years. If this is the case, converting your MPC to an investment holding company may provide certain tax and estate planning opportunities for your retirement.
The following are some of the benefits of converting your MPC into a regular holding company:
Tax advantages. If you take all of the assets out of your MPC when you retire, you may face a substantial personal tax hit. Converting your MPC to an investment holding company lets you keep those assets in your company and draw from them as needed during your retirement in a more tax-efficient way (for example, you might be able to take advantage of capital dividends, which are tax-free).
Continued control. You maintain control of your holding company, which means you get to decide when and how you’ll withdraw income and the types of assets the company holds. For example, you could convert non-income-producing assets into investment assets, giving you opportunities to generate more interest or dividend income within your company.
Income splitting. Your holding company also provides potential opportunities for income splitting, which can be particularly advantageous during retirement.
Reduced regulatory requirements. Since your company will no longer be an MPA, you won’t have to deal with the heightened compliance requirements normally part of administering an MPA. And your company is a holding company, so you also won’t have to deal with running an active business.
(3) Dissolve your medical practice corporation
Your choice to dissolve your MPC can depend on the value of the assets the MPC owns. As with each of the previous options, you should speak with your professional advisors to determine if this is the right option for you, but the following are some general considerations:
Taxes. Suppose your MPC doesn’t hold a lot of assets. In that case, dissolution may be a good route because the tax consequences and legal costs of converting your MPC may outweigh any tax, investment, or estate planning benefits you get from keeping the MPC as a holding company.
Regulatory requirements. Check with your College to see what you’ll need to do before you dissolve or wind up your MPC. British Columbia, for example, requires you to notify the registrar of the College of Physicians and Surgeons of British Columbia by submitting an Inactive Notification form and surrendering your medical corporation permit.
Formal dissolution. You’ll also need to dissolve or wind up your MPC formally. The steps for doing this will depend on your province’s corporation legislation requirements. Dissolution typically involves:
- Selling assets
- Paying off liabilities
- Distributing remaining proceeds to shareholders
- Submitting paperwork to dissolve your MPC formally
Can you maintain your medical practice corporation?
While you can technically maintain your MPC when you retire, you may only do so if:
- You give up your voting share in your MPC and hold a non-voting share instead and,
- at least one of the voting shares in the MPC is held by a family member who’s a member of the College.
These restrictions mean you won’t be able to retain control over your MPC, as you will no longer be a voting shareholder. Without this control, maintaining your MPC in this way may not be a viable option.
Consult with your professional advisors
The MPC option that will work best for you in retirement depends on your circumstances. Consult with your professional advisors, who will be able to explore each option further with you, along with other tax, legal, insurance, and estate planning considerations, and advise you on the option that makes the most sense for your retirement needs.
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This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.