May 26, 2020
There are dozens of reasons to delay incorporation.
Here are just a few:
- When shares of another Canadian-Controlled Private Corporation (“CCPC”) are owned
- When moving to another province or country is likely
- When income is earned in multiple jurisdictions
- When a Canadian physician is also a US citizen
- When waiting for permanent residency status to be granted
These are all instances when further thought should be given before incorporation. (Notice that debt repayment is not one of the reasons listed above. If you would like to know why debt is not a reason to delay incorporation, ask the author directly.)
Operating through an Professional Corporation (“PC”) offers options otherwise not available to an unincorporated health care professional. Having a variety of options at your disposal is critical to effective tax planning–a PC being one of them.
When shares of another Canadian-Controlled Private Corporation (“CCPC”) are owned:
Until the new Tax on Surplus Income (“TOSI”) rules took effect January 1, 2018, it had been a common strategy for dividends to be paid to family members in lower tax brackets. University-aged children, for example, were issued shares to permit them to earn dividend income, which was then used to pay for tuition and living expenses. This resulted in tax savings as lower-income children paid less income tax than their higher-income parent(s) would have paid on the same income.
Income splitting among lower-income family members has been significantly curtailed since the implementation of new TOSI rules; yet, the shares held in these family owned corporations can inadvertently remain. This can pose a variety of tax problems for both parent and child shareholders if these original shares are not redeemed before shares of a new PC are issued. If this sounds like your situation, be sure to speak with an accountant about the implications of association between your PC and other family held CCPCs!
When moving to another province or country is likely:
When a PC is incorporated, it must be incorporated under provincial (or territorial) legislation. Following incorporation, a Certificate of Authorization is applied for and issued by your licensing body. This certificate permits income to be earned by the PC but only from within that provincial jurisdiction! One would not want to incur costs to incorporate a PC in one province, only to discover its use in another is denied. A physician in this situation would be well advised to delay incorporating until after relocation has occurred.
(Where a PC already exists in one jurisdiction and the physician-shareholder relocates to another, Articles of Continuance may be filed to continue the corporation in the new jurisdiction. By this, we mean the corporation moves from one jurisdiction to continue its existence under a new jurisdiction’s legislation. A lawyer should be engaged to complete this. This process will incur costs of transfer. Also, professional tax advice should be obtained when changing a corporation’s jurisdiction.)
When income is earned in multiple jurisdictions:
Only practice income earned within the province of incorporation is permitted to flow through a medical PC. Out-of-province practice income cannot be earned by a PC. So, this out-of-province income becomes self-employed income of the individual who earned it, subject to tax at combined marginal tax rates. Of course, a separate PC could be incorporated and authorized to operate in each applicable province where income is earned. This is permitted. But in most instances, this would not be considered viable for tax, administrative and practical reasons.
This is a further scenario when it would not be good to incorporate.
When a Canadian physician is also a US citizen:
US citizens will want to obtain Canadian and US tax advice before incorporating a PC, given the complexity of Canada-US cross-border tax issues. Income earned in a PC is treated differently for US tax purposes. Conflicting tax regulations between jurisdictions can have adverse tax consequences to shareholders of Canadian PCs. This is just one example. That is not to say that incorporation is not an option, but this is another situation when incorporating a PC may need to be delayed.
Conclusion. There are other considerations to those cited here, which is why every physician should consult a professional accountant and a lawyer prior to incorporating. No matter how simple the scenario may seem to be, every individual has their own story and set of facts to be considered before incorporating.
If you are considering incorporating your practice and have not consulted with a Chartered Professional Accountant, contact Jonathan Tucker.
Have Questions?
If you are considering incorporating your practice and have not consulted with a Chartered Professional Accountant, contact Jonathan Tucker.
