Many different professional groups have been granted the ability to provide their services through a professional corporation. The groups entitled to incorporate vary from province to province. In Saskatchewan, the eligible groups include the following professions:
- certified professional accountants;
- certified management consultants;
- occupational therapists;
- physical therapists;
- real estate agents; and
Practicing through a professional corporation has several benefits. For example, the tax rate applicable to professional income earned by the corporation will generally be significantly lower than the rate that would apply if the individual earned the income personally, particularly where the corporation is eligible for the small business deduction (“SBD”). This can provide tax deferral opportunities.
Many people were concerned that the 2016 federal budget might impact the ability of professional corporations to take advantage of the SBD. Fortunately, professional corporations are still entitled to claim the SBD on their first $500,000 of active business income. However, the ability of professional corporations to claim the SBD may be impacted by the 2016 federal budget where the corporation is being used in more complex corporate or partnership arrangements such as:
- situations where the professional corporation is being used to provide services to a partnership where the individual professional is a member of the partnership;
- situations where a professional is employed by a professional corporation that provides services to a second professional corporation that is a member of a partnership, and the first corporation, one of its shareholders, or a person not dealing at arm’s length with the corporation or one of the shareholders, has a direct or indirect interest in the second corporation; and
- situations where a professional is employed by a professional corporation that provides services to a second professional corporation, and the professional is a shareholder in both corporations.
Subject to certain legislative exceptions, the proposed rules can impact the ability of professional corporations to claim the SBD in the above (and other) situations. Professionals considering incorporation should review their particular situation with a tax advisor to ensure they will not be impacted by the changes proposed in the 2016 federal budget. If a professional corporation is not able to claim the SBD under the new rules, there is still a deferral advantage to the retention of surplus funds in the corporation, but the value of this deferral is reduced.
Aside from potential access to the SBD, where the corporation will carry debt (e.g. where a professional is financing the purchase of an existing practice from another professional), incorporation is often recommended as it will allow the debt to be paid on a more efficient basis than if one were paying it using personal after-tax dollars.
Incorporation also offers the ability to engage in income splitting with certain family members in lower tax brackets to reduce the family unit’s overall tax burden. Eligible family members can hold shares in the corporation and be paid dividends, or can be paid a salary for services rendered to the corporation.
It is important to note, however, that unlike regular business corporations there are restrictions on who can hold shares in a professional corporation. In Saskatchewan, all of the voting shares of the corporation must be owned by the individual who is the member of the professional association (i.e. the licensed professional). The non-voting shares can only be held by the individual professional, certain family members, and certain corporations and trusts related to the professional or his or her family. As with non-professional corporations, income splitting with children under the age of 18 is also limited on account of the “kiddie tax” rules in the federal Income Tax Act.
The incorporation process for a professional corporation is slightly different than that for a business corporation. First, there are restrictions on the corporate name that can be selected by the corporation. Second, there are limitations on who can act as a director of the corporation. Third, it will be necessary for the newly incorporated entity to apply for a permit from the designated professional association before the corporation can engage in practice. Additional requirements may be found in the bylaws of the governing association of the professional.
Professionals should bear in mind that while incorporation offers several advantages, a professional corporation does not shield an individual from professional liability (e.g. liability for negligence or malpractice). Accordingly, professional liability insurance will still be required following incorporation.
Tax and legal advice play an important role in the incorporation of a professional corporation. Professionals considering incorporation are encouraged to consult a member of our legal team to obtain assistance in navigating the incorporation process.