For more than 10 years, the Province of Ontario has allowed regulated practitioners in several professional industries to operate as Professional Corporations. From doctors and dentists to lawyers and veterinarians, the process of incorporating has conferred countless tax and non-tax advantages on professionals. This article will discuss the incorporation process, structure and tax benefits of professional corporations.
Operating a professional corporation is the preferred method of operating a business for professionals (see the article “Methods of Carrying On a Business” for a discussion of the different business vehicles). Once incorporated, the professional has created a separate entity which they can control, but which is independent from the professional for income earning purposes.
The process of incorporating a professional corporation can be both complicated and time consuming. Generally speaking, each professional corporation is governed by both the Ontario Business Corporations Act and a piece of legislation that governs their particular industry. These pieces of legislation impose a series of special rules and restrictions, some of which include:
- Restrictions on who may be the director and officer of the corporation, as well as who may own various classes of share of the corporation;
- Direction regarding what names are permissible for the professional corporation to operate under;
- The general requirement of professional corporations to obtain a Certification of Authorization from the respective governing body;
- Imposing personal liability to the professional for all professional matters relating to the practice; and
- A limitation to the types of business activities that the professional corporation can carry on.
The Minute Book will need updating on a yearly basis. A Corporate Information Act Form 1 must be submitted to the Ministry of Small Business and Consumer Affairs and a Certificate of Renewal must be obtained annually from the regulating organization.
Tax Benefits Available
The primary advantages and reasons of incorporating a Professional Corporation are income tax related. A corporation is taxed at a lower effective rate than an individual. Many professionals are taxed at a rate in excess of 46% whereas a corporation is taxed at 18.6%. Although this lower tax rate applies only to money left behind in the professional corporation, the preferential tax rate allows for efficient uses of these after-tax dollars. Professional Corporations also generally allow the professional to income split with family members by paying dividends, which themselves are taxed at a lower rate (note that there are some exceptions to this depending on the professional’s industry).
If the incorporating professional is already in practice, they will need to transfer the assets of their practice to the Professional Corporation. This is generally done through an Asset Purchase Agreement. The Practitioner can obtain a promissory note equivalent to the tax basis of the assets, which can be considered a shareholders’ loan, if the practitioner is taking ownership of shares.
The Small Business Capital Gains Deduction is triggered when shares of a “qualified small business corporation” are sold. The first $500,000.00 of the sale proceeds are not taxed where non active business assets do not substantially exist. Prior to initiating a sale of shares, this asset holding test should be canvassed.
The Professional Corporation is a tremendously useful vehicle in aiding the professional by providing an alternative means of conducting business and tax benefits. To make proficient use of the advantages of the Professional Corporation, proper planning needs to be performed by the professional in conjunction with their lawyer and accountant.