Incorporation of Professionals
November 2002
Dentists
and
Physicians
are
now
permitted
to
incorporate
their
practices.
What
does
that
mean?¬Ý How much will it cost me to do it?¬Ý How much tax will I save?¬Ý Would it be a lot more complicated?¬Ý How would it work?¬Ý How do I become incorporated?¬Ý When
should
I
do
it?
How is an incorporated practice different from a proprietorship?
A Professional Corporation is a separate legal entity from its owner.¬Ý Its assets and liabilities, income and expenses are not interchangeable with those of the owner.
While a Professional Corporation does not shield its owner from malpractice liability, a corporations creditors may not look to the ownerˆ¢s assets to satisfy trade
debts, but may only claim against the assets of the Corporation.
The income earned by the corporation is taxed in the corporationˆ¢s hands at a low tax rate, currently
as low as 20%.¬Ý The owner is only taxed on the amounts withdrawn from the corporation by way of
salary (with the appropriate source deductions) or dividends (out of the after tax corporate profit).
How much will it cost?
In addition to initial legal and accounting costs there is a fee to your profession to register as a
Professional Corporation. These costs will vary depending on the complexity of the existing business.
There will be an annual fee to maintain your registration with the Profession, legal fees to keep the
corporate Minute Book up to date, and additional accounting costs to prepare the Federal and
Provincial Corporation Tax Returns. Not everyone will find that the tax they can save will be
sufficient to justify the initial and ongoing costs.¬Ý It is important that a careful analysis be done
at the outset to determine whether the potential tax savings in a particular situation will outweigh the expected additional costs.
¬Ý
How much tax will I save?
Some of the savings will be absolute tax saving, some will be a deferral until a later time.¬Ý If a
corporation earns income and pays it all out to the owner as a Salary, there will be no tax saving.
If the corporation earns income, pays tax at 20% and pays the remaining 80% out as a dividend,
the owner gets a dividend tax credit which saves slightly more than the tax the corporation paid.
To
the
extent
the
owner
does
not
withdraw
all
the
income
from
the
corporation,
it
will
be
taxed only
at
20%
and
the
remaining
80%
can
be
invested
by
the
corporation.
This
deferral
could
be
used
to
acquire
business
assets,
pay
down
business
debt
or
to
acquire ˆétemporaryˆ¢ investments
for
future
business
needs. ¬Ý
The
amount
a
business
will
save
will
depend
on
several
factors:¬Ý how
much
the
business
earns,
how
much
the
owner
needs
to
withdraw,
how
much
business
debt
and
the
amount
of
equity
the
owner
has
in
the
business. ¬Ý
Is it more complicated?
In some ways it is simpler than a proprietorship.¬Ý A monthly salary is paid to the owner, with income
tax and CPP withheld. After-tax income is left in the company to pay off debt and accumulate as
surplus cash. The corporation tax on the remainder is also paid monthly once the first year of the corporation establishes the level of income tax.
The corporation pays all the same expenses as were paid in the proprietorship.
There
is
some
extra
complexity
in
the
tax
planning
that
your
accountant
will
do
to
optimise
the
mix
of
salary
and
dividends
that
result
in
the
lowest
amount
of
tax
overall.¬Ý The
accountant
also
has
to
prepare
Federal
and
Provincial
Corporate
Income
Tax
returns
in
addition
to
the
annual
Personal
Income
Tax
return.¬Ý
¬ÝHow would it work?
On a day-to-day basis, it would work just the same way it does now, except that your sign would
say: Your name, Professional Corporation. Your letterhead, correspondence, invoices, etc would
use the corporationˆ¢s name and your suppliers would need to invoice the Professional Corporation.
¬Ý
How do I become a Professional Corporation?
Once you have established whether it makes sense to be incorporated, there are three steps:¬Ý
the
Legal
Step,
the
Professional
Step,
and
the
Accounting
Step.¬Ý
Each
has
its
complexities
and
costs. ¬Ý
The Legal Step
A lawyer creates a corporation by drawing up the appropriate legal documents and filing them with the Provincial Government.¬Ý There is a Government Fee for this.
In
this
stage
you
establish
the
name
of
the
corporation.
It
must
have
the
words,
Professional
Corporation.
It
must
also
include
your
legal
name.¬Ý It may have the letters, DDS, MD, and it may
use the word Dentistry for a Dentist, or Physician for a Doctor.¬Ý It
is
my
understanding
it
may
have
no
other
words.
If your practice has been operating under a name approved by your profession that includes a location,
your profession can permit you to continue to operate under that.
In addition to the legal fees to register the corporation and set up the corporate Minute Book, the
lawyer will also need to prepare agreements reflecting the fact you are transferring your assets and
liabilities to the new corporation. There may also need to be new agreements with staff, associates,
landlords etc. to permit the new corporation to step into the shoes of the old proprietorship.
The Professional Step
Once the corporation is established, you must apply to your profession for their blessing.¬Ý This
application process costs $750.00 for the RCDS to approve the establishment of Dentistry Corporation.¬Ý
Once the Profession has approved the corporation, you may commence doing business under the corporate name.
The Accounting Step
The Accountant implements the steps to make it all work effectively.¬Ý To avoid paying tax on a Capital Gain and Recaptured Depreciation when you transfer the assets of the Practice into the corporation, an Income Tax
Election, called a Section 85 Rollover must be prepared reporting the value of all of the assets of the practice and electing to transfer them into the corporation at their depreciated tax values.
The
corporation
must
register
as
an
employer,
and
closing
T4's
must
be
prepared
for
the
practice. ¬Ý
New
bank
accounts
must
be
set
up
in
the
corporationˆ¢s name and a new set of ˆébooksˆ¢ created
for
the
corporation. ¬Ý
Analysis
must
be
done
to
determine
the
optimum
mix
of
salary
and
dividends
to
minimize
your
taxes.
The
accountant
will
balance
your
need
to
maximize
your
RRSP
contributions
against
potential
Employer
Health
Tax
that
could
be
triggered
in
the
corporation
on
various
levels
of
owner
salary
and
the
fact
that
Dividends
are
taxed
at
a
lower
rate
than
salaries. ¬Ý
Depending
on
the
Equity
value
of
the
assets
brought
into
the
corporation,
the
owner
may
be
entitled
to
be
paid
back
for
the
depreciated
value
of
the
assets
on
a
tax-free
basis
before
withdrawing
a
taxable
Salary. ¬Ý
Timing Issues
¬Ý
The
timing
of
the
taxation
in
the
first
year
can
be
fine
tuned
to
minimize
the
overall
taxes
you
pay
that
year. ¬Ý
If
you
had
a
10-Year
Reserve
for
1995
Income,
consideration
will
be
made
as
to
the
timing
of
starting
the
operations
of
the
corporation.¬Ý Commencing
operations
in
2002
will
accelerate
this
income
inclusion. ¬Ý
In
many
cases,
commencing
corporate
business
activity
three
or
four
months
into
2003
will
provide
maximum
flexibility
and
allow
you
to
utilize
some
of
your
tax
savings
to
defray
the
transitional
costs. ¬Ý
If you would like us to do a Cost/Benefit analysis of how a Professional Corporation would affect you, we would
be happy to discuss it with you.