Splitting a Clinic's Real Estate From Its Operating Business

The situation

Antonio, a professional engineer, and Andre, a physiotherapist, had built their clinic company from a single rented unit into a group of five locations across the GTA, with roughly $11 million a year in revenue. Antonio managed facilities, equipment and expansion; Andre ran the clinical side. About six years in, the company bought the building that housed its flagship Milton clinic outright, using retained earnings and a mortgage, rather than continuing to pay rent to an outside landlord.

At the time it felt like a smart use of cash. By the time the co-founders came to Treadstone Law, it had become a structural problem. The building, now worth roughly $2.1 million against a remaining mortgage of about $900,000, sat inside the same corporation that treated patients, employed staff and carried the liability that comes with running a healthcare business. Every lawsuit, every creditor claim, every risk the operating business faced was a risk to the building too.

The legal problem

Our corporate team identified two separate issues layered on top of each other.

The first was liability exposure. A corporation is a single legal entity. If a claim against the clinic business succeeded, in theory every asset owned by that corporation, including a debt-free chunk of real estate, was available to satisfy it. Landlords who lease to their own operating companies routinely avoid this by holding property in a separate entity. Antonio and Andre had done the opposite: they had put their most valuable asset inside their highest-risk one.

The second issue was about the future, not just the present. Owners of a growing private company often plan around the lifetime capital gains exemption, a provision in the Income Tax Act that can shelter a meaningful amount of gain on the sale of qualifying small business corporation shares from tax. To qualify, a company's assets need to be substantially used in an active business. Real estate held for its own sake, appreciating quietly while the clinics operated around it, is exactly the kind of passive asset that can disqualify a company from that treatment, or force an expensive last-minute cleanup before a sale. With the building's value climbing and the founders in their forties, thinking seriously for the first time about what a future exit might look like, waiting was making the eventual fix more expensive every year.

The plan was straightforward in outline: move the real estate into its own holding corporation, separate from the company that ran the clinics, and have that operating company pay market rent to occupy the building going forward. What was not straightforward was that Antonio and Andre were not the only shareholders.

What we did

1. Reviewed the existing shareholder structure before touching anything. The clinic company had a third shareholder: Simone, a physiotherapist who had joined as an early clinical hire and been given a 15 percent stake in lieu of a higher salary during the company's first lean years. She had no involvement in the real estate decision and, on paper, an equal claim to the value the building had built up.
2. Designed the reorganization around a tax-deferred rollover. The Income Tax Act permits a corporation to transfer property to another corporation it controls without triggering immediate tax on the accrued gain, provided specific conditions are met. We structured the transfer of the building from the operating company to a newly incorporated realty company on this basis, with a lease back to the clinics at fair market rent, set with input from an independent commercial appraisal.
3. Brought Simone into the process early rather than presenting a finished plan. Because the reorganization affected the value and composition of her shares, her consent was legally required for several of the corporate resolutions involved, and practically important regardless. Antonio and Andre's initial instinct was to offer her a cash buyout of her interest in the real estate and move forward without her holding any stake in the new realty company.
4. Negotiated when that offer was rejected. Simone's position was that she had helped build the company's value during years when she was paid below market rate, that the building's appreciation was part of what she had been building toward, and that a cash number set by the two majority founders, without her own advisor at the table, undervalued her position. She retained her own counsel, as we recommended she should, and the two sides spent several weeks working through valuation, structure and control before reaching terms.
5. Documented the compromise in a revised shareholders' agreement. The final structure gave Simone a 15 percent interest in the new realty company, mirroring her existing stake, alongside a smaller equalization payment to reflect that she would no longer share in future clinic revenue growth tied to real estate the operating company no longer owned. The shareholders' agreement was rewritten to address decision-making in the realty company specifically, including how rent increases would be set and how a future sale of the building would require agreement among all three owners.

The outcome

The real estate came out of the operating company. That was the core objective, and it was achieved: the clinic business no longer carries the building as an asset exposed to its operating risk, and the company is meaningfully closer to qualifying for the lifetime capital gains exemption on a future sale, subject to meeting the other conditions at the time.

But it was not the clean split Antonio and Andre had pictured at the outset. They had hoped to hold the realty company between themselves alone and settle Simone's interest with a fixed payment. Instead, she remained a co-owner of the building going forward, with a formal say in decisions about it. The monthly rent the clinic company pays the realty company also settled a little higher than the founders' original target, roughly $14,000 rather than the $11,500 they had proposed, reflecting the appraisal and Simone's advisor's input on market comparables. Over a year, that difference amounts to roughly $30,000 more in occupancy cost for the clinic business than the founders had budgeted for.

Both sides gave something up to get the deal done without a dispute that could have dragged on for months and put the whole reorganization at risk. Antonio and Andre got the liability separation and the tax planning benefit they needed, on a timeline of a few months rather than a drawn-out standoff. Simone kept a stake in an asset she felt she had helped build, with a governance role to match, rather than a one-time payment she considered too low. Neither outcome was what either side asked for at the start. Both were prepared to live with it, and the revised shareholders' agreement now sets out clearly, in writing, how future decisions about the building will be made, which is more than the original arrangement ever did.

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