BC Dentist With $3M in a Professional Corporation: Estate Freeze, Lifetime Capital Gains Exemption, and How to Pass Retained Earnings to Adult Children in 2026

The Dentist Scenario: $3M Corporation, $1.8M in Retained Earnings, Two Adult Children

Here is the setup. A 58-year-old dentist in Surrey, BC, has built a professional corporation worth approximately $3M. Inside the corporation: $1.2M in active business assets (dental equipment, leasehold improvements, patient goodwill, receivables) and $1.8M in retained earnings that have been invested in a mix of GICs, ETFs, and a rental property held corporately. Two adult children, ages 28 and 31. Married, spouse age 55. The dentist plans to work another 10–15 years and wants the practice value to eventually pass to the children with as little tax friction as possible.

The problem is straightforward: if the dentist does nothing and dies holding those shares, section 70(5) of the Income Tax Act deems a sale at fair market value on the terminal return. A $3M deemed disposition (minus nominal ACB) produces roughly $870K to $950K in combined federal and BC tax. If the corporation grows to $5M by then, the bill jumps past $1.6M. Every year of inaction makes the problem worse.

How a Section 86 Estate Freeze Locks the Current Value

A section 86 estate freeze is a share reorganization — not a sale, not a gift, not a transfer. The dentist exchanges their existing common shares for a new class of preferred shares. The preferred shares have a fixed redemption value equal to the current fair market value of the corporation ($3M in this case). The exchange is tax-deferred under section 86(1) — no capital gain is triggered as long as the preferred share redemption value does not exceed the FMV of the surrendered common shares.

The dentist loses nothing in this exchange. They still control the corporation through voting preferred shares. They still receive income through dividends on the preferred shares. They can still wind down the corporation and redeem the preferred shares for $3M at any time. What they have done is put a ceiling on their estate exposure — the maximum deemed disposition at death is now $3M, no matter how much the practice grows. For a deeper look at estate freeze mechanics, see our estate freeze guide.

The LCGE Problem: Why $1.8M in Retained Earnings Disqualifies the Shares

The 2026 lifetime capital gains exemption shelters up to $1.25M in capital gains on qualified small business corporation (QSBC) shares — each individual gets their own $1.25M exemption. For a dentist with two children, the family could theoretically shelter $3.75M in total gains (dentist + child 1 + child 2). That would eliminate the tax on a $3M corporation entirely.

Except the shares almost certainly do not qualify. The QSBC test under section 110.6 of the ITA requires that at the time of disposition (including a deemed disposition at death), 90% or more of the corporation's assets by fair market value must be used primarily in an active business carried on in Canada. This corporation has $1.2M in active business assets and $1.8M in passive investments. That is 40% active — not even close to the 90% threshold.

Purification: Cleaning Up the Balance Sheet Before the Freeze

The sequence matters. If the dentist purifies the corporation before the estate freeze, the children's growth shares start in a QSBC-qualifying corporation — and each child can claim their $1.25M LCGE when they eventually sell or redeem those shares.

Purification means removing the passive assets from the professional corporation. The most common methods:

• Pay taxable dividends to the dentist. The $1.8M in passive investments gets paid out as eligible dividends (taxed at roughly 36.5% at BC's top combined rate on eligible dividends — approximately $657K in personal tax). Expensive, but it clears the passive assets from the corporation immediately.
• Transfer passive assets to a holding company via section 85 rollover. The professional corporation transfers the GICs, ETFs, and rental property to a separate holding company on a tax-deferred basis. The professional corporation receives holding company shares in exchange. The holding company shares are still inside the professional corporation — but they may count as active assets if the holding company is connected (more than 10% ownership) and itself meets the active business asset test in a connected-corporation chain. This is complex and requires careful structuring. Get a tax lawyer involved.
• Repay shareholder loans. If the dentist has a shareholder loan owing to the corporation, repaying the passive investments as loan repayment avoids the dividend tax. This only works if there is an existing loan balance — you cannot create one retroactively.

Deemed Disposition at Death on the Frozen Shares

The freeze caps the dentist's exposure, but it does not eliminate the tax at death. When the dentist dies holding preferred shares with a $3M redemption value (or $1.3M if purified before the freeze), section 70(5) triggers a deemed disposition at fair market value. The capital gain equals the FMV minus the ACB of the preferred shares — which is the carryover ACB from the original common shares (typically $100 or less for a professional corporation).

Spousal Trust vs. Direct Transfer at Death

The dentist has a spouse. This opens a deferral option that changes the timing of the entire tax bill.

Option 1: Direct Transfer to Children at Death

The preferred shares pass directly to the two adult children under the will. The deemed disposition triggers immediately on the dentist's terminal return. Tax payable: $408K to $950K depending on the freeze value. The children receive shares with a stepped-up ACB equal to the FMV at death. No further tax until the children sell or redeem the shares. This is the cleanest option — one tax event, one return, done. The downside: the estate needs roughly $400K to $950K in liquid assets to pay the CRA within six months.

Option 2: Spousal Rollover (Section 70(6))

The preferred shares roll to the surviving spouse at the dentist's ACB — no deemed disposition, no immediate tax. The spouse holds the shares until death or disposition, at which point the full gain crystalizes. If the corporation has continued to pay dividends on the preferred shares, the spouse receives income during the deferral period. The risk: if the spouse lives another 25 years, that is 25 years of the $3M (or $1.3M) gain sitting untaxed — but also 25 years of potential legislative change, and the children wait until the second death to access the shares.

Option 3: Testamentary Spousal Trust (Section 70(6)(b))

The preferred shares roll into a testamentary trust for the spouse's benefit. Same deferral as a direct spousal rollover — no tax until the spouse dies or the trust disposes of the shares. But the trust adds a layer of control: the dentist's will specifies how the trust income is distributed to the spouse, and names the children as capital beneficiaries on the spouse's death. This protects against the spouse remarrying and redirecting the assets, or against creditor claims on the spouse. The trade-off: testamentary trusts are taxed at graduated rates on income up to roughly $253K (the same brackets as individuals), but at top marginal rates above that — which is worse than two separate individual tax returns.

BC Probate Fees and the Holding Company Strategy

BC's probate fees hit harder than most provinces. The Probate Fee Act charges $0 on the first $25K, $6 per $1,000 from $25K to $50K, and $14 per $1,000 above $50K, plus a $200 court filing fee. On a $3M estate, that is $41,650 plus the $200 filing fee. For comparison, Alberta caps probate fees at $525 regardless of estate size, and Quebec charges $0 with a notarial will.

The holding company play: if the dentist transfers the frozen preferred shares to a holding company during their lifetime (using a section 85 rollover to defer the capital gain), the holding company — not the dentist — owns the professional corporation shares. When the dentist dies, only the holding company shares pass through probate. The underlying $3M of corporate value sits inside the holdco, which continues to exist after the dentist's death.

The result: instead of $41,650 in probate fees on $3M of professional corporation shares, the estate pays probate only on the holdco shares — which can have a nominal paid-up capital. Combined with beneficiary designations on RRSPs, TFSAs, and life insurance, the dentist's estate can reduce probate-eligible assets to near zero. For a broader look at holdco planning, see our holding company guide.

Putting It All Together: The Optimal Sequence

The total cost of this structure: roughly $620K in purification dividends (if done via personal dividends) plus $8K–$15K in legal and accounting setup fees. The savings: $500K+ in reduced terminal tax, up to $2.5M in LCGE-sheltered gains for the children, and $41K+ in BC probate fee avoidance. For a $3M professional corporation that is still growing, the return on the planning investment is not close.

The one thing that cannot be stressed enough: the sequence and the timing are everything. Purify before you freeze. Freeze before the value grows further. Set up the holdco before the freeze value makes the section 85 rollover more expensive. And do not wait until age 70 to start — the 24-month lookback tests and the multi-year dividend strategy require lead time. A 58-year-old dentist thinking about this today has 10+ years of runway. A 68-year-old dentist with the same plan has a much tighter window.