Chartered Accountants
4 Robert Speck Parkway, 15th Floor, Mississauga, ON L4Z 1S1 Tel: 905.366.5016 | Fax: 905.216.6726 info@sandhudhillon.com | www.sandhudhillon.com
THE TAX
CORNER PROFESSIONAL CORPORATIONS This edition of the Tax Corner addresses the benefits of incorporating for professionals. The Income Tax Act provides certain professionals with the option of incorporating, these professionals include dentists, physicians, lawyers, accountants, chiropractors and veterinarians. These professionals are allowed to incorporate ‘Professional Corporations’ as long as they are in accordance with the regulatory and administrative framework set out by their respective professional governing bodies. The advantages of Professional Corporations include the opportunity to defer taxes, income splitting, access to the capital gains exemption, and the potential multiplication of the capital gains exemption. Tax Deferral Currently in Ontario, individual professionals at the top marginal tax rate pay taxes at a rate of 49.53%, whereas Canadian Controlled Private Corporations, earning active business income of less than $500,000 pay a combined corporate tax rate of 15.50%. The potential tax deferral of 34.03% achieved through the use of a professional corporation, allows for the corporate surplus to be used to pay down corporate debt, finance non-deductible expenditures, and buy working capital (fixed assets and inventory). In the most extreme scenario, a corporation can achieve a maximum tax deferral of $170,150 (34.03% x $500,000) annually by retaining all the profits in the professional corporation. Income Splitting For some professionals, their respective governing bodies allow for family members to be able to hold non-voting shares of a Professional Corporation. The main advantage of having family members as shareholders of the Professional Corporation is income can be split through the use of a dividends, a practice commonly known as “dividend sprinkling.” In order to achieve the optimal amount of tax savings, dividends should be paid out to low income earning family members. For professionals in the highest tax bracket, the maximum annual tax savings achieved through income splitting for each family member would be approximately $13,659. It is worth noting, that through creative tax planning, minor children can also be shareholders of the professional corporation.
Chartered Accountants
4 Robert Speck Parkway, 15th Floor, Mississauga, ON L4Z 1S1 Tel: 905.366.5016 | Fax: 905.216.6726 info@sandhudhillon.com | www.sandhudhillon.com
THE TAX
CORNER The Capital Gains Exemption The capital gains exemption is a powerful tax planning tool that allows shareholders to pay no income taxes on capital gains up to $800,000 (subject to certain qualifying rules). For professionals that are allowed by their governing bodies to have family members as non-voting shareholders, the potential to multiply the capital gains exemption is quite advantageous. Each shareholder of the Professional Corporation would be eligible for their own capital gains exemption. As a result, a practice worth $2.4 million with three family members as shareholders would be able to sell their practice without incurring any income taxes. The information provided in this publication is just an overview of some of the benefits available to professionals. However, please note that the decision on whether to incorporate is dependent on an individual’s personal needs, and therefore recommendations may vary. Therefore, it is very important to talk to your accountant to determine what structure best suits your needs. If you would like more information with regards to professional corporations please feel free to contact us at 905366-5016 or at info@sandhudhillon.com.