If you are a professional such as a doctor, dentist, lawyer or accountant, you might consider the advantages of incorporating your practice if you haven’t already done so. Incorporation is permitted by certain professional regulatory bodies, and may provide potential tax-deferral benefits. It may also enable you to take advantage of enhanced retirement plans such as IPPs or RCAs.
There are significant differences between a professional corporation and other corporations.
Characteristics of professional corporations
There are significant differences between a professional corporation and other corporations. A professional corporation is generally subject to the rules and guidelines of the regulatory body governing its profession. These include restrictions on the name of the professional corporation and who may be named as a voting shareholder. For example, in some provinces and territories, only members of the same profession can be voting shareholders of a professional corporation. Generally, the officers and directors of the corporation must also be voting shareholders. Before deciding to incorporate your practice, make sure you understand the regulatory guidelines that apply to your profession in your province/territory.
Advantages of professional incorporation
There are a number of potential benefits to incorporating your professional practice. You may be able to:
- Benefit from the tax-deferral opportunities of the corporate taxation structure and use the additional funds in the corporation to pay off debt, purchase capital assets, acquire investments or fund an insurance policy
- Take advantage of the capital gains exemption available on the sale of shares of a professional corporation, provided certain conditions are met
- Achieve potential tax savings through a number of income splitting strategies, depending on your province/territory of residence (keeping in mind that there are tax rules that may limit income splitting opportunities with family members)
- Limit your commercial liability to trade creditors
- Choose from flexible remuneration options depending on your province/territory of residence
Planning for retirement
Professional incorporation provides retirement benefits not available to sole proprietors or partnerships, including the ability to establish IPPs and RCAs. These retirement savings vehicles can greatly enhance your retirement benefits and potentially provide creditor protection.
We can provide more detail on how these retirement savings vehicles work and how they can form part of your comprehensive retirement plan.
In addition to the many advantages offered by professional incorporation, there are some considerations to bear in mind. The costs of establishing and maintaining a professional corporation can be higher than those of a sole proprietorship. There are greater tax filing and compliance obligations. You can’t use business losses to offset your income from other sources. And you may also have to pay a health tax levy when your corporate payroll exceeds a certain level (depending on the province/territory).
If you decide to incorporate, you should also keep in mind that a professional corporation can only protect you against business creditors and not personal liability for professional negligence. Consider investing in malpractice insurance and other creditor protection strategies such as setting up an IPP inside the corporation.
We can help you implement several strategies made possible by professional incorporation, including IPPs and RCAs. Please contact us for more information.