Federal 2016 Budget and Professional Corporations
For the past few months we have been receiving questions from our doctor and dentist clients about whether the new federal budget would restrict or eliminate the advantages of setting up a professional corporation.
Everyone in the medical and dental industry in Ontario has probably had a few
sleepless nights thinking about this topic. When budget 2016 was released we all breathed a sigh of relief when we found out that it would be business as usual.
There were some items to note:
1. There had been a small business rate reduction for the years 2017-2019 planned which has been cancelled. In Ontario this means that the tax rate
will remain at 15% on the 1st $500,000.00 of active income for Canadian Controlled Private Corporations (which would include a professional
corporation) rather than getting reduced as planned.
2. Budget 2016 has implemented new rules that will prevent doctors and dentists from multiplying the small business deduction in certain structures
(such as dentists or doctors practicing in partnership). This will not have an effect on most of our dentist and doctor clients.
3. There have been some changes that will affect the purchasing of assets of a dental practice. Budget 2016 will change the taxation on gains that
arise on the sale of goodwill after January 1, 2017. If you are buying or selling assets of a practice you should speak with your accountant to ensure
you have a favorable allocation of the assets.
With all the fear of changes to medicine professional corporation and dentistry professional corporations behind us now may be the time to incorporate
if you haven’t already done so. We have previously written about the advantages of incorporating but we thought it would be a good time to give a high
level rundown of the benefits:
A doctor or dentist who carries on a professional practice in Ontario is likely paying the highest marginal tax rate of approximately 53%. Conversely,
professional corporations pay on their first $500,000 of taxable income, approximately 15%. The difference is staggering, on $100,000 of taxable
income you are looking at tax savings of approximately $38,000.00. To achieve these savings however, you have to leave the earnings in the
corporation. The after tax money can be invested just like it could be outside of the corporation and provides a great way for you to build up savings
in a tax efficient manner. If you ever need money from the corporation you can always declare a salary or dividend to yourself or other family
members, although you will be taxed at a higher rate than if you left the cash in the corporation. Most tax practitioners would advise not taking
monies out of your professional corporation until retirement when your personal rates may be lower.
If you thought taking advantage of the tax deferral was beneficial it gets better. Income splitting allows income from a professional corporation to
be redirected to certain family members of the professional (spouse, parents and children of the doctor or dentist) to take advantage of a family
member’s lower tax brackets, credits and deductions. This is set up by giving the family member non-voting shares of the professional corporation and
by declaring dividends on those shares. Dividends are taxed more favorably than other types of income. Further, a family member with no income can
receive dividends of approximately $50,000 tax free and higher if that family member is in university. This would work well for a doctor or dentist
with children at least 18 years of age in university or a spouse who is not working.
Capital Gains Exemption
For dentists who can sell the shares of their professional corporation they are entitled to the lifetime capital gains exemption of $824,176.00 per
person – both the professional and any family members who own non-voting common or growth shares could enjoy this exemption on the sale of shares.
Are there any advantages from a liability perspective?
Our clients often ask us whether there is an advantage from a liability perspective for setting up a professional corporation. The answer is mostly
no. The professional is still liable for their professional work but there may be some limited liability advantages with respect to non-professional
matters such as a lease assuming you do not guarantee the lease personally.
What else should doctors and dentists consider with regard to incorporation?
There are several other factors a professional will want to consider when setting up their professional corporation. How do I set up the share
structure? How do I transfer assets and agreements into my professional corporation? What are the legal requirements for setting up a professional
corporation and how do I license the professional corporation with my College.
Kutner Law LLP has over 35 years of experience in dealing with the dental and medical profession. We would be happy to walk you through all of these
questions and any other concerns you may have. Feel free to contact us for a free consultation to determine whether setting up a professional
corporation is the right decision for you or for discussing your other legal professional queries. This blog post is for informational purposes only
and should not be relied on as legal advice.