The rules vary depending on your province or territory of residence, but practicing members of many professions – including medicine, law, engineering and dentistry – may choose to incorporate. If you’re a professional and you decide on incorporation, you will become an employee of the professional corporation, which is the entity that engages in the business of the professional practice. There are pros and cons to your decision – let’s look at some of them:
• All earnings are paid to the corporation (perhaps along with other family members or a trust). You would be a shareholder of the corporation and also be paid a salary as an employee of the corporation. Any amounts not paid as salary would accrue within the corporation, gradually increasing the value of your shares, and can be paid out to you (or other shareholders) as dividends as they are required. From a tax perspective, this can be advantageous – but only to the extent that you leave a portion of the earnings within the corporation (where they will be taxed at the lower small business corporate rate) and defer the personal level of taxation.
• There is the opportunity for ‘enhanced’ income-splitting. Unlike an unincorporated business where income-splitting is limited to the payment of a ‘reasonable’ salary for services provided by your spouse or adult child, a professional corporation allows you to pay dividends to any shareholder without a reasonableness test – so you can split as much income as you wish with a spouse or adult child when paid as a dividend.
• There may be increased liability protection from business contracts such as your office lease and suppliers.
• You may be able to pay off debt or pay insurance premiums with partially-taxed corporate dollars instead of fully-taxed personal dollars.
• You may choose to create an individual pension plan (IPP) instead of making RRSP contributions to investments held within a RRSP which may allow you to make larger contributions than permitted in an RRSP, possibly with the added benefit of creditor protection.
• If you decide to sell your practice or retire, it may be possible to shelter $750,000 (proposed to increase to $800,000 effective January 1, 2014) of capital gains from tax on the sale of shares by using the lifetime capital gains exemption. A shareholding spouse or adult child may also take advantage of this exemption.
• It costs to incorporate your business and, in addition to the initial setup and legal costs, there will be ongoing requirements for annual tax returns and corporate resolutions.
• There is zero added protection from personal liability for professional negligence claims.
• Share ownership is usually restricted to you and your immediate family members. At the time of a share sale, a non-professional corporation may remove investment assets tax-free, via an inter-corporate dividend to a holding corporation, but this option is usually not available to a professional corporation.
If you think professional incorporation might be right for you, talk to your professional advisor – and to your legal and tax advisor – before you incorporate.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.