Until recently, professionals were unable to utilize a corporation to operate their practice and to enjoy many of the benefits derived by other individuals operating non-professional businesses through corporations. Changes to the Ontario Business Corporations Act were effected in 2001 which allowed physicians, lawyers, accountants, veterinarians and social workers to incorporate. The technical rules for such incorporations were simple, requiring restrictions only on share ownership (limited to the professional and not family members) and the authorized scope of business for such corporations.
The question that arose at the time of evaluating professional incorporation was whether there were sufficient benefits to make incorporation attractive to the practitioner and which would outweigh the cost of the reorganization and maintenance of a corporate entity. Due to the fact that the professional was not sheltered from malpractice liability nor could there be income splitting to lower earning spouses or family members, the reaction of professionals to the new opportunity was modest. It was perceived that incorporation was only beneficial to a practitioner who was able to leave excess earnings in the corporation which would attract a lower rate of tax as a result of the small business deduction (approximately 20%). Since most professionals tend to draw as much income out of the business as possible to defray personal and living expenses, very few chose to avail themselves of the corporate form of business association.
Presumably in recognition of the limited appeal of the professional incorporation initiative, the Ontario government expanded the share ownership eligibility requirements in medicine and dental professional corporations to include family members, provided that the shares owned by family members are non-voting. This has created the tax incentives necessary to make corporations attractive as an income splitting device. Hence, spouses and adult children with lesser marginal tax rates can participate in the distributed earnings of professional corporations resulting in a lesser overall tax cost on distributed earnings. Unfortunately, the “kiddie tax” restrictions continue to apply where minors hold shares.
The legal steps necessary to transfer an individual’s professional practice to a professional corporation are relatively straight forward. The value of the individual’s practice must be ascertained and the assets comprising the practice transferred or “rolled into” the professional practice in exchange for shares of equal value. This is a classic freeze technique which then allows the corporation to issue new non-voting equity shares to family members for nominal share subscription prices. If a professional has previously incorporated and transferred the business assets to the corporation, a simple exchange of shares can be used to freeze the value of those shares with family members free to subscribe for share capital immediately thereafter at a modest share price. Each profession’s governing body has certain restrictions concerning share ownership, corporate names, etc., but these restrictions tend to be consistent with the restrictions imposed by the government.
Now a professional has the opportunity to enjoy most of the typical benefits of incorporation, including limited asset protection from creditors, perpetual existence, income splitting and tax deferral. The major downside is the expense of establishing the corporation and rolling in the existing business assets as well as the ongoing accounting and legal costs associated with maintaining the corporate entity. Whether this opportunity makes business sense to any specific professional is a matter that ought to be discussed between the professional and his or her accounting, tax and legal advisors.
Together with the City of Hamilton, Hamilton International Airport, Hamilton Port Authority, Canadian International Freight Forwarders Association and Supply Chain & Logistics Canada, Feltmate Delibato Heagle will host the Southwestern Ontario Transportation & Logistics Conference to be held in March, 2008. For more information contact Christopher Neufeld at firstname.lastname@example.org or 905-631-3662.