If you are not a member of the college that regulates the practice, you cannot buy its shares. In Ontario that is a statutory condition rather than a preference, and it pushes the deal into an asset purchase — which takes the lifetime capital gains exemption away from the seller. Here is the rule, the tax consequence, and why Alberta is different.
Key takeaways
SECTION 01 OF 09
In Ontario, the shares of a medicine or dentistry professional corporation can only be held by a member of the college that regulates it. The Business Corporations Act says it plainly, at s. 3.2(2), paragraph 1: “All of the issued and outstanding shares of the corporation shall be legally and beneficially owned, directly or indirectly, by one or more members of the same profession.” That is not a guideline a buyer can negotiate around. It is a condition of the corporation being allowed to exist.
A second condition sits beside it and catches anyone hoping to hold influence without holding shares: “All officers and directors of the corporation shall be shareholders of the corporation.” If you cannot own shares, you cannot sit on the board either.
SECTION 02 OF 09
Physician corporations are exempt from that first paragraph and get a narrower rule in its place. Under O. Reg. 665/05, “each issued and outstanding voting share of the corporation shall be legally and beneficially owned, directly or indirectly, by a member of the College of Physicians and Surgeons of Ontario”. The regulation defines the term it turns on: a “voting physician shareholder” is a member of that college who owns voting shares. The parallel definition names the Royal College of Dental Surgeons of Ontario for dentistry.
The practical difference is that the restriction bites on voting shares specifically, which is what leaves room for family shareholding structures. It does not leave room for an unlicensed purchaser to take control.
SECTION 03 OF 09
Work through who is excluded. A spouse who is not a member of the college. A holding company, unless it is itself owned by members. An investor group. A consolidator that is not licensed in that profession. A dentist buying a medical practice, or a physician buying a dental one — the rule is profession-specific, not health-sector-wide.
What remains is licensed members of that one college who also want to buy a practice, in that city, at that price, at that moment. For a seller who has been told their practice is worth a particular number “on a share sale”, that is a materially thinner market than the one they were picturing.
SECTION 04 OF 09
If the shares cannot be sold, the transaction becomes an asset purchase. That is not a paperwork preference. It moves money, and it moves it away from the seller.
The lifetime capital gains exemption attaches to shares, not to assets. The Income Tax Act, s. 110.6 defines a “qualified small business corporation share” as “a share of the capital stock of a corporation” meeting further conditions, and adds a holding requirement: the share must, “throughout the 24 months immediately preceding the determination time”, not have been owned by anyone other than the individual or a related person or partnership.
An asset sale produces no such share disposition, so that exemption is simply unavailable on it. The proceeds also split into components taxed differently — inventory, recapture on depreciable property, and capital gain on goodwill. Treadstone Law sets out the same split from the legal side in asset purchase versus share purchase in Ontario and capital gains on a business sale.
SECTION 05 OF 09
The obvious idea is to find a licensed nominee to hold the shares and take the economics and the control by contract. The legislation anticipated that. Section 3.2(4), headed Voting agreements void, provides: “An agreement or proxy that vests in a person other than a shareholder of a professional corporation the right to vote the rights attached to a share of the corporation is void.” Not voidable, not unenforceable in part — void.
The next idea is a unanimous shareholder agreement, which in an ordinary corporation can move powers away from the directors. Section 3.2(5) closes that too: “a unanimous shareholder agreement in respect of a professional corporation is void unless each shareholder of the corporation is a member of the professional corporation.”
Read together, these are the reason a licensed-nominee structure does not work as a way for an unlicensed buyer to acquire a practice corporation. The instruments you would use to hold control without holding shares are the specific instruments the Act nullifies.
SECTION 06 OF 09
There is a further constraint that catches buyers with plans for the entity. Section 3.2(2), paragraph 5 requires that the articles of incorporation “provide that the corporation may not carry on a business other than the practice of the profession”.
The same paragraph preserves the obvious commercial breathing room: it “shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of the profession, including the investment of surplus funds earned by the corporation.” So retained earnings can be invested. A plan to bolt an unrelated line of business onto the same corporation is a different matter.
Two smaller conditions in the same subsection are worth knowing before you draft anything: the name must include the words “Professional Corporation”, and the corporation may not have a number name.
SECTION 07 OF 09
Both sides now want opposite structures for good reasons, and neither is being difficult. The buyer often prefers assets anyway, because an asset purchase leaves most historical liabilities behind in the corporation. The seller wants shares, because that is where the exemption lives.
In an ordinary business sale that tension is negotiable and usually gets priced. In a regulated professional practice with an unlicensed buyer it is not negotiable at all — the legislation has already chosen the structure. The only thing left to settle is who absorbs the tax difference, and that conversation goes far better before a price is agreed than after.
SECTION 08 OF 09
This is where advisers get caught. The restriction is provincial and it is not uniform.
Alberta is the clearest counter-example. The College of Dental Surgeons of Alberta states that “the Proclamation of Bill 53 now allows Alberta dentists who use a professional corporation to benefit from the new legislation which removes the restrictions on share ownership and allows family members to own non-voting shares.” Read the scope carefully: that is the dental college, speaking about dentists. It is not a statement about Alberta professional corporations generally and should not be read as one.
British Columbia we are not going to guess at. The British Columbia College of Oral Health Professionals directs applicants to its bylaws for who may hold voting and non-voting shares without stating the rule on the page. We have not read those bylaws, so we are not summarising them from secondary commentary. If you are buying in BC, get the bylaws.
SECTION 09 OF 09
Confirm the profession and the province, in that order, and read the actual instrument rather than a summary of it. The college that regulates the seller is the authority on who may own the corporation, and its rules are usually published.
Then settle the structure before you settle the price, because here the structure determines what the seller nets. A number agreed on the assumption of a share sale, in a practice where a share sale is not legally available to the buyer, is a number that will be reopened.
Related reading in this library: the full guides index and the deal glossary.
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