A professional corporation is a corporation that provides professional services and that is regulated by a governing professional body such as the Law Society of Upper Canada or the College of Physicians and Surgeons of Ontario.
Basically, if you are a professional and you are planning on offering your services through a company, you will need to setup a professional corporation.
Who is considered a “Professional”?
Generally only those professions that are governed by a professional body or association will be allowed to incorporate. These typically include physicians, psychologists, dentists, veterinarians, lawyers, accountants, engineers and architects. The rules will differ slightly across provinces, so it’s a good idea to check with your accountant or legal advisor before you go ahead. In Ontario for example, social workers and certain regulated health professionals can also incorporate which may not be the case for other provinces.
Why Setup a Professional Corporation?
The tax reasons for setting up a professional corporation are similar to why many businesses will want to incorporate. The main income tax advantages of a professional incorporation are:
Professional corporations can take advantage of the difference in tax rates between the highest personal tax rate and the more favourable small business corporate tax rate. By taking out less than the full amount of corporate earnings, you can defer the tax paid to a later date when you’re in a lower tax bracket.
Potential income splitting
Professional corporations can issue salary or dividends to family members in lower tax brackets, allowing you to reduce your overall tax liability. Instead of taking out $150,000 in salary by yourself and paying tax at the highest personal rate, you may be able to split the amount between your spouse and children which will significantly reduce your tax bill.
Can all of my family members be included in the income-splitting?
Unlike a non-professional corporation where you typically have the flexibility to elect anyone as a shareholder, a professional corporation is restricted to the rules set out by the governing professional body. That means who can be on your shareholder list (other than you of course) is a question for your governing body, which will differ depending on what profession you are in and in which province you are operating.
Favourable tax rates on dividends
As an incorporated individual, you have the ability to take out a portion of your income from the company as dividends and pay less tax on your earnings due to favourable tax rates on dividends.
Keep in mind that a main differentiator between a professional corporation and a non-professional corporation is that of liability. If you incorporate your photography business and you get sued, your liability will be limited to whatever you invested in the company (there are exceptions). Of course if you weren’t incorporated, all your personal assets would be up for grabs.
In a professional corporation, the story around liability is a bit different. If you are a physician and are sued for malpractice, the corporation does not protect you. You’ll have to check the terms of your professional insurance to see just what your liability is. What the corporation does provide is some protection from creditors if you borrow money, perhaps for the financing of a new office or for some expensive equipment.
Think a professional corporation is right for you?
Getting professional advice is the best way to start! Contact me today, I will be happy to get you started!
Michael Wagman received his Chartered Accountant designation in 1995, and has spent his entire professional career at Lipton, where he became a Partner in 2002. Michael’s extensive experience includes a wide variety of professionals in the medical, dental, psychology, legal and real estate sectors. Michael has decades of experience servicing professionals and has a substantial knowledge of the rules and regulations governing specific organizations, such as the Ontario and Canadian Psychological Associations, The College of Physicians and Surgeons of Ontario, The Royal College of Surgeons of Ontario, Ontario Society of Professional Engineers and The Law Society of Upper Canada.
Michael offers his clients a variety of services including accounting, taxation, estate planning, corporate finance, reorganization and restructuring. Michael has developed an extensive network of contacts, including the community’s top banking, financial, insurance and legal institutions. He is particularly adept at leveraging his contacts for his clients’ benefit. Michael takes pride in bringing the right people together.