- Medical professional corporations:Process and tax benefits
Ontario has allowed regulated practitioners to incorporate and reap the benefits. The Regulated Health Professions Act, 1991 (Ontario) allows a number of health professionals, including but not limited to, Dentists, Surgeons, Audiologists, Dental Technicians, Psychologists, Nurses, Midwives and Massage Therapists to incorporate their practices. Further, the Social Services and Social Service Work Act, 1998 (Ontario) allows the benefits of incorporation to those who are members of that College. We intend to discuss the incorporation process, structure and tax benefits and the affect professional corporations governed by the Acts can have on will drafting.
A practitioner who incorporates creates a separate entity which they can control, but which is independent from the practitioner for income earning purposes. The practitioner then possesses several roles including that of an employee shareholder and director of the Corporation. They are able to collect payment through several avenues, each taxed in its own manner. As the practitioner carries on as an employee, the Professional Corporation must have the ability to remit all employee deductions, including CPP, EI and certain instances, the Ontario Health Tax, insurances, and employee allowances for automobile use and leases and use of he home for employment related uses.
Generally, practitioners who wish to incorporate must meet the general requirements for incorporations under the Ontario Business Corporations Act and then obtain a Certificate of Authorization must be obtained from the regulating organization. All Professional Corporations must be named and not numbered, so a Names search must be submitted. Similar names to those already incorporated cannot be used. The name of the Professional Corporation must contain at least one surname of a shareholder who is a member of the regulating organization and may contain any given names or initials of that shareholder. The name must contain the words “Professional Corporation” and finally, in the case of Regulated Health Professionals, it must contain the area of practice as well.
The organization of the Professional Corporation is also outlined. All Directors must be members of the regulating organization and all shares must be legally and beneficially owned by members of the Regulating organization, except in the case of physicians, surgeons and dentists, whose spouses, children (through trusts) and parents are able to hold non-voting shares of the Professional Corporation. A restriction of the business activities is also required in the Articles. Application forms, fees, statutory declarations and in some instances undertakings are also required by the various regulating organizations. The Professional Corporation should also apply for a Business Number and GST number from the Canada Revenue Agency. A minute book should be prepared.
The Minute Book will need updating on a yearly basis. A Corporate Information Act Form 1 must be submitted to the Ministry of Small Business and Consumer Affairs and a Certificate of Renewal must be obtained annually from the regulating organization.
Tax Benefits Available
If the practitioner is already in practice, they will need to transfer the assets of their practice to the Professional Corporation. They will require an Asset Purchase Agreement which clearly indicates the value assigned to the assets, including goodwill, works in process and chattels. The Practitioner can obtain a promissory note equivalent to the tax basis of the assets, which can be considered a shareholders’ loan, if the practitioner is taking ownership of shares. (Does this help in the creditor proofing process???) If the practitioner has liabilities, these should be taken on by the Professional Corporation which will obtain a promissory note from the practitioner or the liabilities can be retained by the practitioner. The Professional Corporation cannot take on additional liabilities or the ability to defer taxes will be negated.
If the practitioner is part of a partnership which decides to incorporate into a Professional Corporation has two options. Each individual practitioner can choose to incorporate a Professional Corporation which can then create the partnership or the individual practitioners can directly become shareholders in the Professional Corporation. Employed practitioners should not include their employment income in the Professional Corporation or they will be considered a “personal services business” and will be taxed at the highest income bracket.
A Professional Corporation can claim the Small Business Deduction as indicated in the Income Tax Act. This Deduction is allowed to Canadian Controlled Private Corporations on the first $400,000.00 of active business income. (This amount is subject to change according to changes in the Income Tax Rules). This amount is taxed at a lower rate, currently 18.67%. Each individual incorporated partner of the Professional Corporation can claim the deduction as an employee, although it may need to be shared if the Professional Corporation and the Claimant are considered associated parties according to the Income Tax Rules.
Income that is necessary to the maintenance of the practitioner’s personal lifestyle can be disbursed as income to the practitioner while all other funds can be maintained in the Corporation and invested. By using the additional share structure, physicians, surgeons and dentists can income split resulting in a further reduction in tax payable.
In addition to the methods of paying money out of the Corporation, there are a few other methods of doing the same. First, the Corporation can issue promissory notes to the practitioner for funds. Second, the practitioner can obtain a salary from the Corporation. Salaries can also be disbursed to family members in reasonable amounts and for work performed. Funds in the Corporation can be withdrawn as a taxable dividend, making the tax payable deferred until the dividend is paid.
The Small Business Capital Gains Deduction is triggered when shares of a “qualified small business corporation” are sold. The first $500,000.00 of the sale proceeds are not taxed where non active business assets do not substantially exist. Prior to initiating a sale of shares, this asset holding test should be canvassed.
A tax deferral is also available through the use of pension plan initiation.
In Dr. Lombardi’s Practice Building One Day Workshop he will show you examples of how to incorporate yourself and give you the paperwork you need to make this transition easy and to save you thousands of dollars.
Next Workshop is August 27, 2011 in Hamilton. Register at www.hamiltonbackclinic.com as soon as you can. Space is limited.