Selling Your Medical Practice? Why the Capital Gains Exemption Might Cost You $31,000 in “Tax-Free” Taxes
For many physicians planning retirement, the advice often sounds simple and attractive:
“Sell the shares of your medical corporation and use the Lifetime Capital Gains Exemption to avoid tax.”
It sounds like a dream: tax-free money from the sale of your life’s work. But in 2024 and beyond, the reality is far more complicated—and in some cases, this “tax-free” plan could leave you with a surprise bill of over $31,189 in Alternative Minimum Tax when selling qualified small business shares in 2024 for $1,000,0000 (assuming no other income reported).
This post explains what the Lifetime Capital Gains Exemption really is, how the new Alternative Minimum Tax works, and why selling your practice as an asset sale may now be a smarter exit strategy than selling shares.
What is the Lifetime Capital Gains Exemption (LCGE)?
The Lifetime Capital Gains Exemption (LCGE) allows Canadian business owners to sell shares of a Qualified Small Business Corporation (QSBC) and shelter up to $1,016,836 (in 2025) of capital gains from regular income tax.
For physicians, this means you can sell the shares of your Medical Professional Corporation (MPC) and, if you meet the criteria, pay no regular income tax on the first $1 million of gain.
To qualify:
- The corporation must be a Qualified Small Business Corporation (QSBC)
- 90% or more of the assets must be used in active business at the time of sale
- 50% or more of the assets must have been active for the previous 24 months
- The shares must be held for at least 24 months
First two conditions are easy to meet but 24 months requirement (3–4 elaborate) is tough to meet. The corporation needs to be “purified” at least” 24 prior to sell which means you have to approach tax planning 3 years before the sell, in many cases that is not possible as businesses as it is not possible to plan when you will sell it is all about the offers you can get. Good oiffer results in quick sale and missed LTGE which is what CRA wants. (elaborate)
This leads to a common tax planning strategy to meet 50% requirement is : “purify” the MPC by removing passive assets (like cash and investments), and then sell the shares to use the LCGE.
However in order to purify tax free you must have Holdco as a shareholder of the Professional corporation which for doctors in Ontario is not possible, then options to purify are limited.
The Catch: Alternative Minimum Tax (AMT)
While the Lifetime Capital Gains Exemption eliminates regular tax, it does not eliminate Alternative Minimum Tax (AMT).
Since 2024, AMT rules have changed dramatically. Under the new rules:
- 80% of the capital gain is included in the AMT calculation, even if it is fully exempt under LCGE.
- The LCGE deduction is only partially deductible for AMT purposes
- The federal AMT rate is a flat but also provincial applies
- the basic AMT exemption amount for individual taxpayers in Canada under the 2024 AMT rules is CA $173,205 per person. This means individuals can exclude this amount from their adjusted taxable income (ATI) before applying the 20.5% flat AMT FEDERAL rate AND PROVINCIAL BASED ON EACH PROVINCE
So if you sell your MPC shares and claim a $1 million LCGE, you might pay $0 regular tax, but you could still owe $31,189 in AMT – calculation includes the ON AMT. And the CRA wants that money now.
How AMT Recovery Works (and Why Many Don’t Get It Back)
Alternative Minimum Tax is not supposed to be a permanent tax. It is a prepayment of future taxes.
In theory, you can recover AMT over the next 7 years by applying the credit against regular tax in those years. But to recover the full $160,000, you must:
- Remain a Canadian tax resident
- Have taxable income in the 7 years after the sale
- Pay enough regular federal income tax to absorb the credit
This be possible if you plan to:
- Withdraw large amounts from RRSPs
- Sell taxable investments
- Sell income-generating real estate
- There is max amount to be recovered for each year therefore planning is needed.
Yes, it is possible to recover full AMT. However there are common sutuations that AMY is not recovered. One of them is if the individual sold the SBS leave Canada and become a non-resident before recovering AMT taxes. When you leave Canada and become non resident there is no AMT recovery. Also there is max AMT recovery for each year. This is where Dexado can help. With proper tax planning, we can build a custom 7-year income strategy to maximize AMT recovery, but it requires early planning and commitment.
Purification Headaches
To qualify for the LCGE, your medical corporation must hold only active business assets. This means:
- Removing excess cash
- Selling passive investments
- Paying out retained earnings
- Long term plan with use of AdminManagement Company that provides services and asset management of the medical practices
- Or
- The best plan: Trasnfering all assets producing passive non business income to a holding corporation by combination of paying dividends and then redeeming the shares of the hodlding corp. At the end Holdco will be separate from Prof Co.,
But here’s how the physicians in Ontario are screwed up:
In Ontario, only physicians are allowed to be shareholders of a Medical Professional Corporation.
This limits your options compared to provinces like B.C. or Alberta, where holding companies can hold shares of the mdical corp..
So, how can you strip cash from your Ontario MPC? – not in Ontarion
- The physician declares a dividend to their personally-owned holding company (Holdco)
- Then, redeems the shares of the MPC
While this can work, it introduces complexity, cost, and often triggers unwanted personal tax. And remember—none of this removes AMT.
Why Selling Assets Might Be Better Than Selling Shares
Let’s consider an alternative: selling the business assets from your medical corporation, instead of the shares.
Here’s what that looks like:
- You sell the goodwill, patient files, equipment, and contracts from the corporation to the buyer
- You keep the medical corporation and all its retained earnings and investments
Advantages of an Asset Sale:
- No LCGE needed → No AMT triggered
- No purification required especially in Ontario when options are limited
- Retained earnings and investments stay inside the corporation no need of tax planning and legal fees
- No forced dividend payouts or tax restructuring which will reduce the CRA Audit risks
- Buyer gets a clean purchase (no hidden liabilities)
- Quick and easy sell no need of prep work and can sell at any time
Cons: You must calculate the tax liability in the price if you get 1,000,000 for shares then for asets you should get 1,000,000 + surplus to cover your income tax on capital gains.
What abour alternative minimum tax – corporations does not pay alrernative minimum tax in case of selling goodwill, customer lists and other assets, the full corporate tax rate applies.
This strategy gives you maximum flexibility to draw out funds slowly using dividends, capital dividend account (CDA), or a pipeline strategy. And unlike LCGE, there is no alternative minimum tax payable by the corporation.
Still great: Corporations are not subject to AMT.
Side-by-Side Comparison
Feature | Share Sale with LCGE | Asset Sale from Corporation |
Tax-Free Under LCGE? | Yes (Regular tax only) | No |
Alternative Minimum Tax (AMT)? | Yes (~$160,000 on $1M gain) | No |
Purification required? | Yes | No |
Retained earnings preserved? | No (must strip) | Yes |
CRA audit risk? | Higher (QSBC rules) | Lower |
Buyer preference? | Often reluctant | Preferred |
Emigration or low income risk? | AMT lost if not recovered | No AMT triggered |
When LCGE Still Works
Despite the challenges, LCGE can still work well in the right situation. It may be a good fit if:
- You plan to earn suffucant income in next 7 years to recover AMT
- You expect to remain a Canadian resident for the next 7+ years
But it must be part of a bigger plan — not the default advice.
How Dexado Helps You Exit the Right Way
At Dexado Accounting & Tax, we specialize in helping physicians exit their medical corporations strategically. Led by a former CRA auditor, we design tax plans that work in the real world, not just on paper.
Our Exit Tax Planning Service includes:
- AMT risk analysis and recovery modeling
- Asset vs. share sale planning
- Purification assessment (if needed and if possible)
- Post-sale income strategy to maximize tax efficiency
- CRA audit readiness and documentation support
We make sure your plan fits your goals, your residency, your cash flow, and your lifestyle after practice.
Thinking About Selling Your Medical Practice? Let’s Talk.
If you plan to sell your practice within the next 1–3 years, this is the time to build a proper exit plan.
Don’t rely on outdated LCGE myths that could leave you with a six-figure AMT bill.
Contact Dexado Accounting & Tax for a confidential consultation. We’ll help you build an exit plan that protects your wealth and your future.
