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Professional Corporations

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In Ontario, a number of professionals can incorporate their practice to obtain the tax advantages enjoyed by corporations, such as tax deferral and a lower tax rate.

Professionals who can form a Professional Corporation include: doctors, lawyers, accountants, dentists, chiropractors, registered nurses, massage therapists, social workers, veterinarians, optometrists, and pharmacists, among others.

Advantages of a Professional Corporation

A professional corporation offers tremendous tax and business advantages, including:

1. A Lower Tax Rate. Without a PC, professionals pay tax on their earnings at their personal income tax rate, which can be as high as 53.5% for income earned in excess of $220,000. With a PC, however, income will be taxed at the corporate rate of 12.2% on the first $500,000 and 26.5% on earnings above $500,000. This will leave you with a greater amount of after-tax dollars to invest in the corporation or build an investment portfolio. The lower tax rate also allows you to build a retirement portfolio more rapidly if retirement is on the horizon.

2. Tax Deferral. Since an owner of a PC only pays personal income tax on business income that is drawn out of the corporation as a salary, the professional can defer paying income taxes at a higher marginal rate by leaving a portion of her business income in the PC. For example, say you earned $200,000 last year, but your income this year was $90,000 for whatever reason.  You can draw a salary from your retained earnings of $110,000 last year at a low marginal tax rate this year. In this example, the tax rate on the shifted dividend drops from 47.74% to 25.16%. Tax deferral is a powerful strategy for building cash reserves for lower income years, leave of absences, parental leave, or retirement.

3. Lifetime Capital Gains Exemption. If the professional owns a business with tangible value, her or she can sell those shares with a significant tax break. With a PC, professionals have access to a lifetime capital gains exemption which allows them to shelter $892,218 from capital gains tax on the disposition of the corporation’s shares. No such deduction is available on the sale of an unincorporated business. This tax protection is also available to your estate on the disposition of the corporation’s shares at death.

4. Your Business Is an Asset. Just like any other business, a PC can sell its shares as long as the purchaser is a licensed member in good standing of the same profession as the seller. In addition, PCs can enter into contracts with other PCs, independent contractors, employees, and general or limited liability partnerships. Selling a professional practice is a great way to cash in, tax-free, on the business you have built.

5. Income Splitting. Subject to certain strict rules, a professional may be able to split income with lower-earning family members who are actively engaged in the business and are non-voting shareholders of the PC. The rules surrounding income splitting are complex and one should seek a tax advisor before implementing this strategy.

6. Protection from Personal Liability for Commercial Activity. Forming a PC can protect your personal assets from a number of expenses and claims, including your lease of office space, employees you hire, expenses that your business incurs, and business loans. Note, however, that a PC does not shield a professional from professional liability. The professional is still personally liable for professional misconduct.

7. Accounting Flexibility. PCs convey flexibility for accounting purposes. For example, an owner can choose any tax year end for a PC, while unincorporated businesses must report on a calendar year basis.

Disadvantages of a Professional Corporation

At the outset, there will be legal and accounting costs for initial planning and to establish the PC. So, if you are just starting out in the field, or do not have an income that exceeds your annual expenses, incorporating a PC may not yet be worth it.

In addition, because the PC is a separate legal entity from its owner, it will require annual accounting costs to prepare financial statements and tax returns. Moreover, there will also be a modest annual legal cost to prepare annual shareholder minutes and resolutions. These costs are tax deductible, but will play a role in your decision to incorporate.  For most professionals, however, choosing to incorporate is usually a no-brainer given the massive tax savings.

Why You Need a Lawyer

Given that professional corporations are governed by their respective regulatory bodies, each PC has specific requirements that may be difficult to meet without the assistance of a lawyer. Generally, however, PCs require the following:

  • The shareholders of a PC are restricted to licensed members of the regulated profession and, for some PCs, their family members;
  • For those PCs allowing family members to be shareholders, such persons must be non-voting/non-controlling shareholders;
  • The licensed professional must be the only voting or controlling shareholders of the professional corporation;
  • The licensed professional must be the PC’s only director and officer;
  • The PC’s articles must restrict the business to the practice of the regulated professional; and
  • The PC must have “Professional Corporation” in its name.

In addition to the requirements above, a professional may have further regulatory requirements imposed by their respective governing body. Prior to the PC being formed, various documents must be submitted to the professional’s governing body to obtain a certificate of authorization. Most governing bodies charge a one-time application fee to obtain a certificate and an annual renewal fee. 

It is crucial that you consult a business lawyer experienced in PCs to ensure that every step is completed correctly. 

Our lawyers understand the Professional Corporation formation process and can evaluate your unique situation to determine if a Professional Corporation is the right fit for you.

We’re in business to help your business succeed. Our real business is you.

Ready to Get Started?

Check out our pricing and the different packages we offer below. If you would like a free consultation, we’re happy to talk about your individual business needs to see if incorporation makes sense for you. Just email info@drlawyers.ca with “Professional Incorporation Consultation” in the subject line and we’ll schedule a time to talk.

If you’ve ready to move forward you can click the link at the bottom of the page to fill out our incorporation form. This’ll give us the information to get you started and speed up the intake process. We look forward to growing your business with you!

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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If you need any help, please feel free to email us and we’ll get in touch with you to determine if we can help you achieve your goals.

Info@drlawyers.ca

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