Should I Establish a Professional Corporation?
Professional corporations (PCs) are used by a variety of professionals including physicians, dentists, lawyers, engineers and accountants. Generally, only professions governed by a professional body or association are allowed to form a PC. In Ontario, PCs are incorporated as regular corporations, however they are subject to a number of special rules and restrictions. The following are some important features of PCs:
- Activities– the activities of a PC are generally limited to carrying on a professional practice and related matters and investments.
- Tax Deferral– similar to a regular corporation, a PC can earn income at a lower tax rate than the marginal tax rates faced by individuals. A corporation (including a PC) can earn $500, 000 per year of active business income at a tax rate of 15.5% (Ontario). While this advantage is negated when the PC eventually distributes funds to shareholders (since dividends will be taxed in the hands of shareholders), the money can be left in the PC so that the additional taxes are not immediately incurred. The extra after-tax dollars left in the PC can be invested and subsequently distributed at the discretion of the shareholder.
- Income Splitting– depending on the rules of the governing professional body and province, a professional may be able to split income with family members by having them hold non-voting shares of the PC. This allows dividends to be issued to multiple family members, enabling income to be split among individuals subject to lower marginal tax rates.
- Liability– one of the main differences between a PC and a regular corporation concerns liability. In general, a professional will remain personally liable for all professional matters relating to the practice, which differs from a regular corporation which assumes its own liability. However, for non-professional matters such as the PC borrowing money or leasing equipment, the PC generally assumes liability.
As evidenced above, a PC can offer significant advantages to a professional. There are a number of technical considerations such as the share structure and tax planning objectives which must be considered at the outset and periodically evaluated so that maximum tax savings and flexibility are achieved. If you would like to discuss whether a PC is suitable for your own practice, please contact one of our tax professionals.