Incorporating for Professionals

From a tax perspective a PC is treated like any other corporation meaning many of the same planning opportunities are available.  In fact, where a professional corporation loses its status it remains a corporation, only without the restrictions.  The list of professionals eligible to incorporate generally includes accountants, lawyers, physicians, dentists, and veterinarians, among others.  Professionals are regulated provincially by their professional governing body and as such the ability to incorporate and the rules associated with incorporating varies from province to province.  These rules typically cover the types of services which may be provided and restrict the ownership of shares.  A majority of the provinces restrict share ownership based upon the class of share with voting shares typically restricted to the professional and non-voting shares available to the professional and their immediate family members, i.e. spouse, children, or a trust in favour of minor children.  The ability to offer multiple classes of shares to family members opens up a number of planning opportunities including income splitting and maximizing the lifetime capital gains exemption.

Purpose

The primary benefit3 for incorporating is the ability to take advantage of the lower tax rate attributed to active business income generated in Canada by a Canadian Controlled Private Corporation (“CCPC”).  For 2014 the average tax rate on the first $500,0004 of active business income is 15% which compares quite favourably to an average top personal tax rate of 45%.  The deferral is significant as this is 30% more for the professional to continue growing the business or build an investment portfolio.  The catch is the deferral only exists until the income is ultimately distributed from the corporation.  Below is an example highlighting the difference between paying out $100,000 of active business income today as salary compared to deferring the tax and eventually distributing the proceeds as a taxable dividend.

Who’s this for?

  • Professionals
  • Physicians
  • Lawyers
  • Engineers