Professional Corporations in Ontario

Professional Corporations – A Great Tax Shelter for Doctors, Lawyers, and Other Professionals

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 Ontario, the Royal College of Dental Surgeons of Ontario, or the College of Physicians and Surgeons of Ontario. Only specific professions can use a Professional Corporation. These professions include:

  • Accountants
  • Architects
  • Dentists
  • Engineers
  • Lawyers
  • Physicians
  • Social and Social Service Workers
  • Veterinarians

Characteristics of a Professional Corporation

A professional corporation cannot register as a licensed member of the profession nor can it be a registered practitioner of a profession. Rather, it may obtain a permit that allows it to engage in the practice of a profession. As governing professional bodies, such as the Law Society of Ontario or the Royal College of Dental Surgeons of Ontario, have different rules and criteria for professional corporations, the specifics of professional corporations will vary from profession to profession. Compared to a regular Ontario Business Corporations Act (“OBCA”) corporation, a Professional Corporation generally allows one or more members of the same profession to be shareholders in a Professional Corporation.

Generally, all officers and directors of the professional corporation are required to be shareholders of the corporation. The name of the professional corporation must include the words “Professional Corporation” or “Société Professionnelle” and \aA Professional Corporation cannot be a number name. Professional Corporations in Ontario can only be incorporated under the OBCA.

Partial exclusion of limited liability

One important difference between a regular OBCA corporation and a Professional Corporation is the partial exclusion of limited liability. Typically, a Corporation insulates shareholders in their personal capacity from corporate liability. However, in a Professional Corporation, shareholders only have limited liability in certain areas. Generally, a shareholder is only liable for the debts of the corporation to the extent of their investment. In a Professional Corporation, for the purposes of professional liability, the acts of a professional corporation are deemed to be the acts of the shareholders, employees or agents of the corporation. The liability of a member for a professional liability claim is not affected by the fact that the member is practicing the profession through a Professional Corporation.

A professional is jointly and severally liable with a professional corporation for all professional negligence claims made against the Professional corporation in respect of errors and omissions that occurred while the person was a shareholder of the corporation. Thus, shareholder-professionals remain liable both for their own individual negligence and for the negligence or other breach of other professionals who are employed by the corporation. This liability structures would be the same as if the professional was practicing through a partnership.

Benefits of a Professional corporation

There several advantages to providing professional services using a Professional Corporation. The main advantages are the potential tax advantages of deferral, income splitting, and use of the lifetime capital gains exemption. Professional corporations also provide limited protections from creditors, flexibility in remuneration, and the ability to pay non-deductible expenses from the Professional Corporation.

Tax Deferral

Setting up a Professional Corporation is most useful for professionals who earn more income than they need; allowing them to keep surplus billings in the Corporation. These surplus billings will likely be taxed at a lower rate when retained in the Corporation and can be reinvested in stocks, bonds, or GICs, allowing the professional to accumulate additional wealth in their Professional Corporation.

Capital Gains Exemption

Those professionals who are permitted to sell their practices can also benefit from the Capital Gains Exemption. Where the professional corporation has value, the shareholder-professionals can sell shares of their Professional Corporation, then claim the Capital Gains Exemption and receive the first $824,176 of the capital gain tax-free.

Income Splitting

Most Professional Corporation do not allow shareholders of the corporation to be persons other than those licensed by the professional. However, some professionals, such as dentists and doctors, can benefit from income splitting. Income splitting for Professional Corporation is complex and a professional tax adviser or lawyer is necessary ensure ones does not trigger the attribution rules.

Drawbacks of a Professional Corporation

The disadvantages of a Professional Corporation are the additional costs and documentation. Professional Corporation typically result in additional legal and accosting costs for the professional during both the set up and on an annual basis. There are certain expenses which are associated with incorporating. If you hire a professional to incorporate on your behalf these fees would be around $1,200.00 + HST. There would also be additional yearly accountant fees around $1500.00 – $2,500.00 per year. However, some professionals could reduce their tax bill by tens of thousands of dollars per year. A well coordinated legal and tax strategy could assist you in achieving substantial tax savings.

Conclusion

Each Professional Corporation is different and will require input from accounting and legal professionals before being created. Generally, the articles of incorporation, in addition to all other requirements, must limit the activities of the corporation to the profession. Professional corporations may also subject to additional limitations and regulations imposed by their respective professional bodies. Registering a Professional Corporation is complicated, but Pawlina Law can assist you with setting up your Professional corporation.