In 2001, Ontario introduced legislation allowing professionals to incorporate. Along with other regulated professionals, this allowed doctors, lawyers, dentists and accountants to form professional corporations. When the legislation was first introduced, these corporations had some restrictions. In addition to not having limited liability, all of the shareholders had to be professionals.
Fortunately for doctors and dentists, the legislation was amended allowing family members to be shareholders. The definition of family members includes a spouse, parents, adult children and trusts for minor children only. (Please note that for other professionals, the restriction on shareholders still applies.)
The family members can be issued only non-voting shares with the professional maintaining voting control. Having family members as shareholders of your professional corporation allows the opportunity for income splitting. With good tax planning and the proper structure for the authorized and issued shareholdings, a family member could be paid a dividend which could attract minimal income tax as opposed to the high rates a professional might pay.
Another tax advantage is that the tax rate on up to $500,000 of taxable income earned in a small business corporation is 15.5% in Ontario. If earned directly by a professional in the top tax bracket, the rate is 46%. To be able to take advantage of this low rate of income tax, the earnings must be left in the corporation. The personal income tax is deferred until the funds are withdrawn. The withdrawals could be in the retirement years, when the professional would likely be in a lower income tax bracket. With the deferral and potentially lower tax bracket, there can be significant savings to the professional.
In order to take advantage of these opportunities, the proper planning must be done in advance. There are also legal requirements which must be met to form a professional corporation. You should consult your advisors to ensure you are able to take the most advantage of incorporating your practice. For more information, please feel free to contact me at firstname.lastname@example.org
Faith Marcotte, CPA, CA, CFP