PROFESSIONAL CORPORATIONS FOR THE BUSY PROFESSIONAL
By Puneet S. Kohli, BAS, LL.B.
Since 1980, certain professionals have been permitted to practise their profession as a corporation, yet many chose not to as the
advantages to incorporate did not create an overwhelming reason to bother. Moreover, the tax authorities have been traditionally hostile towards incorporated professionals and the process can be complex. Recently, tax laws have changed and the benefits for the savvy doctor or dentist to incorporate are more apparent.
Advantages of a Professional Corporation:
On May 11, 2005, the Ontario budget fundamentally changed the landscape for professional corporations with regards to doctors and dentists.
There are two primary reasons for doctors and dentists to incorporate:
(1) Tax Deferrals – a doctor or dentist that uses the professional corporation vehicle would pay a lower tax rate than an individual professional would personally pay when repaying debt borrowed for the practice or when retaining after-tax income for investments. The difference in tax rates between the corporation and the individual can be staggering (compare the corporate rate of 18.6% vs. 46.4% representing the 2005 tax rate paid by an Ontario resident with a taxable income over $116,000). Unincorporated professionals who have personal investments outside of their RRSP should consider transferring these investments to a professional corporation, which may be transferred on a tax free basis, as there can be tax benefits on the funds being withdrawn.
(2) Income Splitting – the 2005 Ontario Budget permitted doctors and dentists to distribute non-voting shares in their professional corporations to family members, which now creates the opportunity to split business income with family members at lower income brackets so as to reduce overall taxes for the family. Under this law, “family members” means the professional’s spouse, parents and children. It is worth noting that the law differentiates between children under the age of 18 and children that are 18 years and older (adult children). Income splitting with children under 18 is restricted by what is commonly referred to as the “kiddie tax” (though beyond the scope of this newsletter, the use of a discretionary trust with children under the age of 18 is one strategy used to reduce taxes). The ideal family member for income splitting purposes is over the age of 18 and in a low tax bracket…who would have thought that adult child / student for life of yours who is working on his second PH.D. would actually save you money!
The exciting world of Tax Law!
While these changes in legislation are primarily tax focused, that does not mean that their impact is limited to your financial statements. These are not mere mundane tax laws and there are many personal considerations, unique to each individual, which one must evaluate with their lawyer and accountant. For example, in providing family members with shares in your professional corporation, you are in essence forgoing your control over the money paid to them, albeit to those you assumingly love. Yet, one must consider issues such as the effect of a divorce or death on your professional corporation’s structure…or if that forever student of yours finally graduates and gets around to getting a job!
There is a ripe opportunity for doctors and dentists to take advantage of the changes in tax laws. That being said, there are costs and complexities involved that must be discussed with an experienced business lawyer. Puneet S. Kohli, BAS, LL.B., is a business lawyer with the law firm of Simmons da Silva & Sinton LLP located in the Mississauga – Brampton corridor. He may be contacted at (905) 457-1660 and firstname.lastname@example.org.Since 1969, the law firm of Simmons da Silva & Sinton LLP has been serving medical professionals with practice purchases and sales, professional corporations, obtaining and securing bank financing, real estate investments and commercial leases, wills, tax and estate planning, partnership disputes and litigation, family law matters such marriage contracts, separation agreements and divorces, and regulatory matters.
The comments in this newsletter are of a general nature and are not designed to replace the need for professional advice in specific situations. If you have questions about this bulletin, we would be pleased to assist you. Copyright 2005, Simmons da Silva & Sinton LLP