Professionals will not be able to hide under the limited liability provisions of incorporation but will be able to enjoy the following benefits:
a. Income taxes of only some 19% on the first $200,000 of professional income providing it is not withdrawn by the professional for personal use, but rather invested through the Corporation. The balance of these retained earnings can be withdrawn in future years when the professional's income will be lower, such as in retirement.
b. By choosing a fiscal year-end date other than December 31 it is possible to move income from one calendar year to another by accruing a salary (or bonus) to the professional. For example, if the fiscal year-end date was September 30, 2003 it would be possible pay income taxes on part of the salary in 2003 and the other part in 2004 (within six months from September 30).
c. Professionals can benefit from the $500,000 Capital Gain exemption when they finally decide to retire and sell their practice. This exemption is only available when shares of a private corporation are sold, as would be the case here, and is based on goodwill transferred to the purchaser (i.e. clients or patients lists).
d. It could be possible for a professional over the age of 65 not to lose his or her Old Age Pension due to a clawback which starts at about $55,000 of Income. This could be done by leaving the income earned in the Corporation rather than paying taxes on it personally, as was previously the case.
e. It would be possible to withdraw funds out of an RRSP at a cheaper rate by leaving income earned during the year in the Corporation until the desired amount is withdrawn.
f. The corporation does enjoy limited liability protection regarding certain matters such as leases which are not guaranteed personally.
Also, reasonable salaries can be paid to family members in order to split income and save on income taxes.
Corporations can distribute profits (income) by way of salary, bonus or dividends and as a rule of thumb all income over $200,000 would be paid as salary or bonus with the rest taxed at the low 19% rate, with the balance (retained earnings) taken out as dividends some time in the future. These retained earnings could also be loaned or invested in another corporation (even one owned by a spouse) which would protect growth of investments from creditors of the professional corporation.
If the professional practice is carried on as a partnership then each corporate partner would share a portion of the $200,000 small business rate. However, each partner would be eligible for the $500,000 Capital Gain exemption on the sale of shares. (If a joint venture structure were to be set up, each corporate partner could be eligible for the low tax rate).
All the officers and directors of a professional corporation must be shareholders and the principals must make clients aware that they are dealing with a corporation, which should have its own stationery, bank account and telephone listing.
The disadvantages to incorporation could be the extra charges for professional fees as well as the loss to a few professionals of their 1971 Accounts Receivable and 1995 Ten Year Reserves.
JOHN E. SOOSAR, C.A.
(416) 864-0099
e-mail:soosar@attcanada.ca