March 2002

New Professional
Corporations Save Taxes

© Talbot Stevens

New changes to Ontario's Business Corporations Act now allow professionals practicing medicine, law, and accounting the option of structuring their businesses as corporations. Other provinces also allow certain professionals to incorporate.

At least from a tax perspective, this levels the playing field with other businesses and professionals like engineers and architects, who already had the option to incorporate.

While many businesses incorporate to limit the financial liability to creditors and lawsuits, professional corporations will not shield individuals from malpractice claims. However, the corporation can limit the owner's financial liability for things like leases, accounts payable, and loans that are not personally guaranteed.

Corporations are more complex than simple proprietorships or partnerships and require more administration. But the payoffs for qualified Canadian-controlled private corporations (CCPC) are lower taxes and the flexibility to structure the type of personal income received to further minimize taxes. Income splitting, perhaps with different classes of shares, may also be possible.

The first $200,000 of annual income earned by a CCPC is taxed at a lower rate than for personal income. Corporate income can be paid out to the owners or shareholders as either a salary to create RRSP contribution room and/or as dividends.

Many professionals prefer taking their first $75,000 of income as a salary so they can make the maximum RRSP contribution of $13,500. Additional income drawn beyond $75,000 is often paid out as a dividend to take advantage of the lower tax rate due to the dividend tax credit.

The general rule of thumb is that the lower corporate taxes are only a benefit if the business earns more than is needed to cover personal expenses. For example, if the owner earns a net income of $150,000 and needs a personal income of $100,000, the extra $50,000 can be taxed at the corporation's lower tax rate. This results in deferral of tax until the money is withdrawn from the company. Those who consume all of their practice's net income will generally not benefit from incorporating, after factoring in the extra accounting and paperwork costs.

The bigger benefit of a "qualified" CCPC is the ability to take advantage of the $500,000 capital gains exemption when the business or shares are sold.

There is little doubt that granting doctors the tax benefits of professional corporations is a trade-off for government imposed caps on their incomes. However, the change is fairer for everyone, including professions outside of the medical field.

Many higher-income professionals will probably benefit from the flexibility and tax savings of the corporate structure. Since the switch could result in immediate tax savings on this year's income, it is wise to evaluate the pros and cons with your tax advisor as soon as possible.

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