Take advantage of enhanced tax and retirement benefits!
If you are a professional such as a doctor, dentist, lawyer or accountant, there are many strategies that you can adopt to accumulate wealth, manage risk and ultimately transition into a well-funded retirement. Incorporation is often permitted by professional regulatory bodies, and can provide potential tax savings and tax-deferral benefits. It may also enable you to take advantage of enhanced retirement plans such as Individual Pension Plans (IPPs) or Retirement Compensation Arrangements (RCAs).
As an incorporated professional, we offer a range of services that address your various tax, estate and financial planning needs. We would be happy to discuss how customized strategies can help you achieve your professional goals and enhance your personal wealth.
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 could include restrictions on the name of the professional corporation and who may be named as a shareholder. In addition, in many provinces, only members of the same profession can be shareholders of a professional corporation. Generally, the officers and directors of the corporation must also be shareholders. Before deciding to incorporate your practice, make sure you understand the regulatory guidelines applying to your profession in your province.
Advantages of professional incorporation
There are a number of potential benefits to incorporating your professional practice. You may be able to:
- Enjoy potential tax savings due to the reduced federal and provincial corporate tax rate that applies to active business income up to the small business limit earned by a professional corporation.
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 of residence.
Limit your commercial liability to trade creditors.
Choose from flexible remuneration options depending on your province of residence.
Potential Tax Savings
A reduced federal and provincial corporate tax rate is applied on the first $500,000 of professional income earned by a professional corporation. For 2011, the combined federal and B.C. provincial tax on income is 13.5%. As a result of this lower rate, the combined corporate and shareholder taxes paid on professional services income is slightly lower than if such income were to be earned by you directly.
Potential Tax Deferral
Professional income earned through a corporation is taxed at two levels once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income. Since income at the corporate level is taxed at a lower rate than your personal income, a tax deferral opportunity exists when the income is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. you). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend. The additional funds in the corporation may be used to pay off debt, purchase capital assets, acquire investments or fund an insurance policy.
You can split income through a corporation by paying dividends to adult family members who are shareholders of the corporation. This strategy may be less applicable to professional corporations where share ownership is restricted to members of a particular profession. However other income splitting strategies, such as hiring family members to work in the business and paying them a reasonable wage for services rendered, are still available through a professional corporation.
Capital Gains Exemption
Up to $750,000 in capital gains arising from the sale of the shares of a qualified small business corporation may be exempt from tax. This exemption is also available for shares of a professional corporation, provided certain conditions are met. However, the ownership of a professional corporation may not be as easily transferable since, in many provinces, it can only be transferred to members of the same profession.
Limited Commercial Liability
A professional corporation does not generally protect you from personal liability for professional negligence. However shareholders of a professional corporation will have the same protection as other corporate shareholders when it comes to trade creditors.
Individual Pension Plan
Professional incorporation provides retirement benefits not available to sole proprietors or partnerships, including the ability to establish an Individual Pension Plan (IPP). This is a defined benefit pension plan that a professional corporation can set up for the professional. The IPP provides much larger annual contributions than RSP limits for those over 40. 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.