Tax Planning Strategies for Selling Your Veterinary Practice in Canada
Selling your veterinary practice is one of the biggest financial decisions you will make as an owner. With proper tax planning, you can save a significant amount on taxes and better secure your financial future. Here’s what Canadian veterinary practice owners need to know to get the most from their sale while reducing their tax obligations.
Understanding the Lifetime Capital Gains Exemption
The Lifetime Capital Gains Exemption (LCGE) is a key strategy for reducing taxes when you sell your veterinary practice. This exemption allows you to shelter significant capital gains from taxation.
For 2024, the LCGE limits are:
- Before June 25, 2024: $1,016,836 in total capital gains
- After June 24, 2024: $1,250,000 in total capital gains
That means you could save between $150,000 to $290,000, depending on your province and personal tax rate.
Qualifying for the LCGE
To access the LCGE, your veterinary practice must meet three strict criteria:
- 90% Active Asset Test: At the time of sale, more than 90% of your corporation’s assets must be used in an active business carried on in Canada
- 24-Month Test: For the 24 months before the sale, more than 50% of your assets must have been used in active business
- Ownership Test: You, a related person, or a partnership must have owned the shares exclusively
It’s best to give your accountant a full two years’ notice before a potential sale to ensure your shares qualify for the capital gains exemption.
Share Sale or Asset Sale?
The structure of your sale significantly impacts your tax obligations and available exemptions.
Share Sales offer several advantages:
- Eligibility for the LCGE
- Capital gains treatment on the entire transaction
- Simpler transaction structure
Asset Sales typically result in:
- Double taxation (corporate level, then personal level)
- Different tax treatment for each asset category
- Potential recapture of depreciation
While buyers often prefer asset sales for liability protection and tax write-offs, sellers generally favour share sales to access the LCGE benefits.
Advanced Tax Planning Strategies
Purification Process
If you hold non-active assets in your practice (like excess cash or investments), you may need to “purify” your corporation 24 months before the sale. This process involves removing non-business assets to meet the LCGE qualification tests.
Staggered Sales
An emerging trend among veterinary practice owners is the staggered sale approach. This involves selling 50% of your practice initially and the remaining 50% a couple of years later. This strategy provides:
- Greater control over the transaction
- Potential to use the LCGE twice (if structured properly with family members)
- Continued involvement in practice operations
Capital Gains Reserves
You can defer capital gains taxation by claiming reserves if you do not receive the full proceeds from the sale in the same year. The CRA allows extended 10-year reserves for qualifying intergenerational transfers, which creates a significant tax deferral opportunity.
GST/HST Considerations
When selling your veterinary practice, GST/HST obligations may apply. However, you can eliminate GST/HST on the sale through a joint election with the purchaser using Form GST44, provided the purchaser acquires 90% or more of the property necessary to operate the business.
New Opportunities: Employee Ownership Trusts
The 2024 Federal Budget introduced a temporary $10 million capital gains exemption for sales to Employee Ownership Trusts (EOTs). This exemption is available for transactions between January 1, 2024, and December 31, 2026, and can be a beneficial option for both sellers and their employees.
The Importance of Early Planning
Research shows that 75% of business owners regret selling within a year, often due to inadequate planning or high taxes. You need to plan early to navigate the complexities of a practice sale and meet the strict requirements for tax exemptions.
Your advisory team should include:
- An accountant familiar with veterinary industry specifics
- A lawyer experienced in practice transitions
- A banker who understands veterinary practice financing
Regulatory Compliance in Alberta
If you’re selling a veterinary practice in Alberta, remember to notify the ABVMA of ownership changes through a VPE Change Request form. Sales involving controlled substances require inventory verification, and any radiation equipment transfers need current registration certificates.
Protect the Value You’ve Built Over a Lifetime
Proper tax planning for your veterinary practice sale is about more than saving money; it’s about protecting the value you’ve built over years of hard work. With the right strategy, you can potentially save over $200,000 in taxes and leave your practice in a position of strength for its next chapter.
A Financial Assessment of your practice’s structure can help you develop an exit strategy that increases your after-tax proceeds. Planning today will help you achieve a better outcome when it is time to sell.
Frequently Asked Questions
- How far in advance should I start planning my practice sale?
Start planning at least two years before your intended sale date to ensure LCGE qualification and optimize your tax position. - Can I use the LCGE if I’ve used it before?
The LCGE is a lifetime limit, but proper planning with family members can multiply access to the exemption. - What happens if my practice doesn’t qualify for the LCGE?
You’ll pay tax on 50% of your capital gain, but other strategies like reserves can still provide tax deferral. - Should I sell shares or assets?
Share sales typically offer better tax treatment for sellers, while asset sales provide more protection for buyers. - How does the new capital gains inclusion rate affect my sale?
The government’s 2024 proposed increase to 66.67% for gains over $250,000 makes early planning even more valuable for maximizing tax savings.
