Professional Corporations

I am a Professional, how do I decide if I should incorporate?

After many years of lobbying by professionals in Ontario the Provincial government passed the appropriate legislation to allow professionals, as in many other jurisdictions, to incorporate their practices. The question now becomes, if I am an accredited professional practising in Ontario should I incorporate?

When answering this question one has to remember that a corporation, professional or otherwise, is a separate person at law. This means that, as any other person carrying on business in Ontario, that person must pay taxes on income earned. Therefore, whether processionals should incorporate or not is primarily a tax driven decision. Recent changes have eliminated the possibility of income splitting with your spouse or children. Further the lower tax rate (12% 2020) could be lost as your professional corporation accumulates retained earnings (after tax dollars). However, this tax rate is only lost completely when you have accumulated approximately Three million dollars (assuming a 5% return on investments). Further, if you are able to sell your shares at retirement then there is an additional benefit of , most  likely, over a million dollars of tax free capital gains.

What is the difference in the tax rates of myself and my corporation?

An active Canadian Controlled Small Business pays a reduced rate of tax of approximately 12% (in Ontario for 2020) on the first $500,000.00 of net income. An individual reaches the maximum tax rate of approximately 53.53% at $220,000.00 of net income (again in Ontario 2020) but reaches 46.4% at approximately $144,500.00. Thus, between $144,500.00 and $220,000.00 there is an approximate potential tax deferment of $21,222.00 (the tax rate of 46.4% vs. a flat rate of 12%), the deferral in tax dollars over $220,000.00 is slightly larger. Clearly, at first glance, it would seem that the decision to incorporate is a simple one, however, there are several factors to consider in moving forward.

Firstly, you must look at your net income. Secondly, consider your standard of living. Whether you earn $150,000.00 or $450,000.00 if all of your net income is required to support your standard of living then there would be no tax savings in incorporating. Therefore, the first question to ask yourself is whether at the end of the year there is any surplus income that you then invest in investments such as GIC’s etc.? If so, then you are paying income tax on money that was not necessary for your basic living. If this is the case, then by keeping the same funds in a professional corporation you will be able to invest, the difference between the corporate tax rate of 12% (2020)and your individual tax rate.

What happens to my corporation after I retire?

If you are in a profession where your client/patient base is of value you (and any other shareholder if allowed) could sell your shares and thereby pass the value of your client/patient base to the professional buying your practice. Each shareholder is entitled (as long as the shares have been owned for at least two years) to sell his or her shares and claim a capital gain exemption of up to $883,000.00 (2020) now indexed. If your practice has no value i.e. most medical practices, then you would surrender your license issued by your governing body and your professional corporation would become a holding corporation. You would then be able to withdraw your retained earnings as dividend income which has a preferred tax treatment to regular income.

By having a corporation is my liability limited?

The Act explicitly ensures that any liability owed to a client/patient flows through to the professional and therefore there is no protection as it relates to clients/patients. However, the Professional corporation is still a corporation and therefore the limited liability would apply as against non-client/patient third parties i.e. landlords.

What happens to my corporation after I retire?

If you do not sell your shares or book of business on retirement then, if your governing body allows for your spouse to be a shareholder, then, as a shareholder, her or she could be entitled to dividends if you retire after turning 65. This in turn could allow a family to reduce its overall tax liability.

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