DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

Posts Tagged ‘Company’

Yes, It Is Safe To Incorporate!

In Canadian Income Tax on August 8, 2010 at 2:22 pm

Is it safe? Maybe Sir Lawrence Olivier’s demented sadist was simply a frustrated Quebec dentist, driven crazy over the years by government restrictions preventing him from incorporating his practice. OK, maybe not, but he could have been :-).

Are you also a member of one of Quebec’s 45 professional orders? Did you know that you can finally start thinking about running your business through a corporation? It’s been a couple of years now, but Quebec has joined the rest of Canada and now allows professionals such as pharmacists, lawyers and dentists to incorporate their practices.

I’m A Dermatologist. Surely I Can’t Incorporate, Can I?

Yes you can. Any business can incorporate as long as there are no legal restrictions to doing so. A member of a profession governed by the professional code of Quebec has, until recently been restricted legally from incorporating due to concerns for the protection of the public. But that has all changed now and the tax benefits of incorporation are now available to all professionals, including physicians.

Tax Benefits? What Tax Benefits?

There are essentially 3 main tax advantages to incorporating your practice. Let’s discuss them in order of importance.

Tax Deferral: If you are a high income earner in Quebec, your top personal tax rate is 48.22%. Corporate tax rates for small business income are 19%. So, if you make enough money to save in your corporation, you will defer close to 30% in taxes. This leaves that much more money in your hands to invest until you need the funds personally.

Income Splitting: Generally, anyone can own shares in a corporation. If you have family members with low income, you could pay out those low-taxed dollars from your corporation to them as dividends. This strategy turns a deferral into a permanent tax savings!

Capital Gains Exemption: If you run your business through a corporation and then sell your practice, the capital gain on the sale might wind up being tax-free. Every individual in Canada is allowed an exemption for up to $750,000 in capital gains on certain shares of small companies. What’s more, those family members of yours each have the same access to the exemption, so this amount could be multiplied with the proper planning.

What about the Public? Don’t we care about them anymore?

Sure we do. The main reason why professionals were restricted from incorporating in the past was that we didn’t want them hiding behind the “corporate veil” in terms of their professional liability. Under the new regulations, any professional who incorporates must still acquire professional liability insurance within their corporation. There are also restrictions on who can run the company and who can hold voting shares. Any professional thinking about incorporating must carefully examine the regulations governing the incorporation of their practice to ensure they comply with all the restrictions.

OK, I’m ready. What Now?

My best advice is – don’t try this at home! I strongly suggest that you consult your tax advisor, but the basic steps are as follows:

  • First, check with your professional order to ensure that they have adopted the necessary regulations to allow their members to practice through a corporation. While the province has opened the door to all professions some have been slow to step across the threshold.
  • Set up a new company: You can create a company under the Canada Business Corporations Act or under the laws of the province in which you practice.
  • Inform your professional order: Again, check the regulations – your professional order will likely require a signed declaration and a fee before they will approve your change in status.
  • Transfer your business assets: An established professional practice will have to be transferred, or sold from you personally to your corporation. This will normally require transfer documentation and special tax election forms for the CRA and Revenue Quebec to ensure that you don’t inadvertently trigger any tax on the transfer of the practice.

Thanks. But I’m Still Confused. Where can I get more information?

Your professional order should have a website with a special section on incorporating your practice. Check it out or give them a call. They will likely have someone on staff in charge of incorporating your practice.