Selling a Medical Practice? Here’s How to Maximize the Lifetime Capital Gains Exemption – Holdco and Trusts
Introduction
For many doctors, selling a medical practice is the financial capstone of a long career. It can also be one of the most stressful financial events you’ll ever face.
You may have heard the common advice: “Don’t worry, the Lifetime Capital Gains Exemption means you won’t pay tax when you sell your practice.”
Unfortunately, that’s only half true. While the exemption is powerful, the rules are complicated. Without proper planning, many physicians still end up with surprise tax bills — sometimes in the tens of thousands of dollars — even when they thought the sale would be “tax-free.”
This article breaks down what the exemption really means, why Alternative Minimum Tax (AMT) can still apply, how purification rules affect you, and how using a trust and holding company (Holdco) can protect your estate.
What the Lifetime Capital Gains Exemption Really Means
The Lifetime Capital Gains Exemption (LCGE) allows you to sell shares of a qualified small business corporation and shelter up to $1.25 million (2024 indexed limit) from regular income tax.
For doctors, that usually means selling the shares of your Medical Professional Corporation (MPC).
But here’s the catch: your corporation must meet strict tests.
- 90% or more of its assets must be used in the medical practice at the time of sale.
- At least 50% of its assets must have been active for the past 24 months.
- You must have owned the shares for at least 24 months before selling.
These tests sound technical – but they’re critical. If your corporation has too much cash or investments sitting on its balance sheet, it may fail.
Myth vs. Reality: “Tax-Free” Sales
- Myth: LCGE means you will pay zero tax on your sale.
- Reality: The LCGE only shelters regular tax. You may still pay Alternative Minimum Tax (AMT).
Alternative Minimum Tax (AMT)
AMT is like a deposit you pay to the CRA. Even if your sale qualifies for the LCGE, CRA still requires you to calculate your taxes a second way – under AMT rules.
- 80% of your capital gain is included in AMT.
- Federal rate: 20.5%, plus provincial tax.
- There is an exemption (~$177,000 federally in 2025).
In practice, a doctor selling their practice for $1M could still owe $30,000+ in AMT immediately, even though their regular tax is zero.
The idea is that you may recover AMT over the next 7 years, but that only happens if you:
- Stay a Canadian resident, and
- Generate enough regular tax from RRSP withdrawals, investments, or other income.
If you retire on a modest income or leave Canada, much of that AMT may never come back.
Purification: Why Planning Ahead Matters
To use the LCGE, your MPC must be “pure” – meaning its assets are almost entirely related to your medical practice.
If you’ve built up large retained earnings, investments, or rental property inside your corporation, CRA may say it’s not a qualified small business corporation anymore.
Purification is the process of removing those non-business assets, usually by:
- Paying dividends,
- Moving assets to a Holdco, or
- Restructuring the balance sheet.
The challenge? Purification normally needs to happen at least 2 years before a sale. Doctors who wait until an offer is on the table are often too late.
In Ontario, purification is even harder. Only physicians can be shareholders of an MPC, which limits how Holdcos can be used. This makes early planning essential.
Share Sale vs. Asset Sale
When you sell your practice, there are two paths:
| Feature | Share Sale | Asset Sale |
| LCGE available? | Yes | No |
| AMT applies? | Yes | No |
| Purification required? | Yes | No |
| Retained earnings preserved? | No | Yes |
| CRA audit risk? | Higher | Lower |
| Buyer preference? | Sometimes reluctant | Often preferred |
- Share Sale: Potentially very tax-efficient if you qualify, but triggers AMT and requires years of prep.
- Asset Sale: Simpler, avoids AMT, preserves retained earnings — but you can’t use the LCGE.
Holdco and Trust: Protecting Your Estate
The Problem at Death
When you pass away, CRA deems you sold your shares the day before death. This creates a deemed disposition — and potentially a large tax bill for your estate.
The Role of a Holdco
A Holdco can be used to move cash and investments out of your practice corporation. But in many provinces (like Ontario), only physicians can own MPC shares, so Holdco options are limited.
Adding a Family Trust
When regulations allow, a family trust can own Holdco, and Holdco can own shares in your MPC.
This structure provides two key advantages:
1. Estate planning: Trust-owned Holdco shares are not deemed disposed of on death. Only the MPC shares you hold personally are taxed. This reduces the immediate tax burden on your estate.
2. Family flexibility: Beneficiaries (spouse, children) can receive dividends from Holdco. In some provinces, this may also allow LCGE multiplication, letting more than one family member use the exemption.
- Ontario doctors: Trusts are mainly for estate planning, since only physicians can be shareholders of an MPC.
- Other provinces: Trust + Holdco can be used for both estate planning and LCGE multiplication.
The Dexado Advantage
At Dexado, we design exit strategies that protect doctors from costly surprises. Our services include:
- AMT exposure and recovery planning.
- Purification strategies to preserve LCGE eligibility.
- Modeling share vs. asset sales for after-tax results.
- Structuring Holdcos and trusts for estate and tax efficiency.
- Preparing audit-ready documentation, backed by the insight of a former CRA auditor.
Conclusion
The Lifetime Capital Gains Exemption is powerful, but it isn’t simple — and it isn’t always fully “tax-free.” Between AMT, purification hurdles, and shareholder restrictions, the wrong structure can leave you with a six-figure bill.
The solution is early, proactive planning. Whether it’s deciding between a share sale and asset sale, purifying your corporation years in advance, or setting up a Holdco and trust for estate protection, the right strategy makes all the difference.
If you’re thinking about selling your practice in the next 3 years, now is the time to plan. Contact Dexado for a confidential consultation and protect the wealth you’ve worked so hard to build.
