Incorporation of Professionals
Before reading on, please read Tax Changes – December 13, 2017
Should I incorporate my business?
There are many factors to consider when deciding whether to incorporate your business. These considerations include, but are not limited to:
- legal liability
- income tax considerations
- does your profession allow incorporation
- do you want to income split
- do you personally need all the income generated by your business
- cost vs benefit
We can help you decide whether incorporating your business is right for you and assist you with income splitting opportunities.
Medicine Professional Corporations
Since 2002 medical professionals have been allowed to establish a Medicine Professional Corporation (MPC) which allows them to take advantage of a number of benefits. Some of the most important tax benefits of creating an MPC are the reduced small business tax rates and income splitting.
Should you incorporate?
When regulated professionals incorporate their business they are separating their legal liability into its own separate legal entity and reducing taxes. However, the Ontario Business Corporations Act (OBCA) does not limit the professional liability of physicians who practice medicine through an MPC.
Therefore, most physicians who incorporate their medicine practice do so to reduce their income taxes payable through income splitting and tax deferral techniques (i.e., the small business rate of 15.5% (combined Federal and Ontario rate) applies to the first $500,000 of active business income earned in a year) .
Medical professionals will need to consider earnings relative to personal spending to determine if retaining earnings in the corporation and deferring tax is a viable plan. The medical professional will also need to consider the personal income tax levels of each member of the family. The MPC can issue non-voting shares to the spouse, children and parents of the professional.
Tax deductions and credits available to each family member will also need to be considered in order to maximize tax savings. Dividends can by paid out of the profits available in the MPC (after the low small business rate of tax has been paid) to family members with low personal incomes or with large tax deductions or credits available. This effectively redirects income within a family group such that the professional pays less top rate tax and more after- tax income remains in the family. Beware of the kiddie tax introduced in 1999 which taxes certain forms of income, including dividends from MPC.
Investment of surplus funds
According to OBCA, a professional corporation may not carry on a business other than the practice of the profession. However, the OBCA allows the surplus funds to be used for temporary investments. It is still unclear the type of investments that are allowed to be held by the MPC. The decision becomes more ambiguous when an investment is not related to or ancillary to the practice.
The date for the year end and regulatory requirements
The choice of year end also has an impact on tax deferral and the potential for tax planning. Incorporated physicians must work within the regulatory requirements. There are numerous regulatory requirements in a medicine professional corporation, and it is critical that incorporated physicians remain current with the regulations and changes in legislation. Therefore, it is important that incorporated physicians work in conjunction with their accountant and lawyer to stay up to date on tax and retirement opportunities.
We can help
Deciding whether to incorporate your practice is an important decision. It is necessary to review all of the legal, income tax and business implications with experienced professionals in the field. If you are interested in incorporating your medical practice, Ritchie Shortt & Tully LLP has assisted numerous professionals. Please feel free to contact us.