What is a professional corporation (PC)?

A PC is a corporation that is owned and operated by one or more members of the same profession (for example, doctors, lawyers, accountants, dentists). The services provided by the company are generally restricted to the exercise of the profession.

Professional corporations are now permitted in all Canadian provinces and territories. In each province/territory, the professional regulatory body usually determines whether its members can join. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to join.

How is it different from a common corporation?

There are some significant differences between a professional corporation and a common one.

corporation like:

• Only members of the same profession can be shareholders of a professional corporation in many (but not all) provinces.
• The officers and directors of a professional corporation generally must also be shareholders of the corporation.
• The professional corporation is generally subject to the investigative and regulatory powers of the regulatory body that governs the profession.
• A professional corporation will not protect a professional against personal liability for professional negligence.

As a result of these differences, some of the benefits commonly associated with a corporation may have limited application to a professional corporation. This is described later

Advantages of using a Professional Corporation

Potential Tax Savings

A reduced federal and provincial corporate tax rate applies to the first $400,000 of professional income earned by a professional corporation. Some provinces apply the reduced tax rate on income up to $500,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on income subject to the small business limit will range from approximately 11% to 19%. As a result of this lower rate, the combined corporate and shareholder taxes paid on professional services income are slightly lower than if you earned it directly.

Possible Tax Deferral

Perhaps the most significant advantage of using a PC is the ability to defer taxes. Professional income earned through a corporation is taxed at two levels: one 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, there is a tax deferral opportunity when income is taxed at the corporation (at the lower rate) and not distributed to the shareholder (i.e. , you). The deferral ends when a dividend is paid to you and you pay tax on that dividend.

Let’s illustrate. If you earn $500,000 in professional income per year as a sole proprietor and only need $200,000 of pre-tax income for personal expenses, you will have $300,000 left over which will be taxed at the higher marginal rate. Assuming a 47% marginal tax rate, you will have $159,000 left to invest.

On the other hand, if you incorporate the practice, the $300,000 will be left with the corporation and taxed at the small business rate. Assuming a corporate tax rate of 18%, the corporation will be left with $164,000 to invest.

That’s $87,000 more.

Single owner professional corporation

Income $500,000 $500,000

Personal Needs ($200,000) ($200,000)

Remaining Funds $300,000 $300,000

Tax ($94,000) ($54,000)

Net funds $159,000 $246,000

additional funds in

professional corporation $87,000

Additional funds in the corporation can be used to pay down debt, purchase capital assets, acquire investments, or finance an insurance policy.

Flexible employee benefits

As an employee of a professional corporation, you may be able to access certain types of employee benefits that would not otherwise be available if you were a sole proprietor or partner in a partnership. For example, the corporation may establish an Individual Pension Plan (discussed below) or a Retirement Compensation Agreement (RCA) for you. These retirement savings vehicles can also provide you with potential creditor protection benefits. An employee health and welfare trust can also be created to provide health benefits for you and your family.

Capital Gains Exemption

Canadian tax rules allow up to $750,000 in capital gains arising from the sale of shares of a qualified small business corporation to be exempt from tax. This $750,000 capital gains exemption is also available for shares of a professional corporation, provided certain conditions are met. However, ownership of a professional corporation may not be as easy to transfer as, in many provinces, it can only be transferred to members of the same profession.

Flexibility in remuneration

You can choose to receive a combination of salary and dividends from a professional corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.

Limited commercial liability

A professional corporation generally does not 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 business creditors.

revenue split

You can divide income through a corporation by paying dividends to adult family members who are shareholders in the corporation. This strategy may be less applicable to professional corporations located in provinces where share ownership is restricted to members of a particular profession. However, other revenue-splitting strategies, such as hiring family members to work in the business and paying them a reasonable salary for services rendered, are still available through a professional corporation.

Multiple deductions for small businesses

As a result of a Canada Revenue Agency (CRA) ruling, professionals operating through a professional partnership may be able to provide their services through a professional corporation and be eligible for multiple small business deductions (SBDs). .

Income earned up to the $400,000 SBD limit is subject to a preferential tax rate (some provinces have a higher SBD). Historically, the SBD had to be shared among all corporate partners. Given the new CRA ruling, professionals currently operating as a partnership should consider the benefits of establishing a professional corporation to take advantage of multiple SBDs.

individual pension plan

An Individual Pension Plan (IPP) is a defined benefit pension plan that a professional corporation can establish for the professional. The IPP provides better annual contributions than the RSP limits for those 40 and older. Assets in an IPP are protected from creditors; however, they may be subject to lock-in provisions during retirement. For more information about IPPs, ask your advisor.

Disadvantages of a Professional Corporation

Costs and complexity

The costs of establishing and maintaining a PC are usually higher than those of a sole proprietorship. Also, a professional corporation will incur more costs to file a corporate tax return, prepare T4 tickets for salaries and T5 tickets for dividends. A corporation is also subject to more regulation and enforcement than a sole proprietorship or partnership.

Employer health tax and EI premiums

Corporations in various provinces have to pay a provincial health tax once the corporate payroll has exceeded a certain threshold. Fortunately, the basic amount you don’t pay tax on is quite high (for example, $400,000 in Ontario), so the impact of this tax on professional corporations may not be as significant.

business losses

You cannot claim business losses incurred by a PC on your personal tax return; whereas, in a sole proprietorship, you can use business losses to offset your personal income from other sources.

Liability for malpractice

As mentioned above, a professional corporation will not protect you from personal liability for professional negligence.

Who should use a professional corporation?

A PC can provide potential tax savings and tax deferral benefits. This may be attractive to you if you don’t need all of your income to live on. Professional corporations may also be attractive to you if you want to save for retirement through alternative means, such as a pension plan or retirement compensation arrangement, or if you want to limit your personal exposure to business liability.

Before you incorporate, you should consider the cash retention strategy, which converts all of your personal, non-deductible debts into tax-deductible business debts. Know more
If you have questions about any of the topics discussed in this article, talk to your advisor.