About Income Tax

MEDICAL AND DENTAL PROFESSIONAL CORPORATIONS – EXECUTIVE SUMMARY

Members of certain professions in Ontario may conduct their practices through a corporation.   This option offers significant benefits as different tax rules apply when professional income is earned corporately.

Physicians and dentists[1] , for example, may benefit from income tax rules applied to professional income earned through a corporation.

SOME INCOME TAX ADVANTAGES TO CONSIDER

  1. Opportunity to convert professional income into alternate income sources (i.e. dividends) taxed at preferred rates available only through the use of a corporation.
  2. Access to low corporate income tax rates of 15.5% on the first $500,000 of active business income compared to top personal tax rates of 46.41%[2].
  3. Deferral of income tax paid of 30.91%[3] for high-income earners.
  4. Tax-free capital gains up to $800,000[4] for each shareholder on shares disposed of in the professional corporation[5]; and
  5. Income splitting with family members.

SOME OTHER CONSIDERATIONS AND CAUTIONARY NOTES

  1. Restrictions exist on who may hold shares, be directors and officers.
  2. Professional corporations must be registered with your respective governing body to qualify for Professional Corporation status.
  3. A professional corporation won’t limit your professional liability.
  4. Activities engaged in are limited to those that are related to, or ancillary to, the practice of the profession.
  5. Caution: Professional Corporations aren’t for everyone. Sufficient annual surplus income is needed to warrant the outlay and ongoing costs involved so determine your surplus income or discuss with your advisor.
  6. Caution: If you are a US citizen, be aware of US tax implications that may arise when establishing a Professional Corporation in Canada.
  7. Caution: Cumulative Net Investment Losses from prior periods may prevent access to some or all of the Qualified Small Business Corporation Capital Gains Exemption in the future in situations where the sale of a practice results in recognition of a capital gain.
  8. Caution:  If you have a mature practice but have not incorporated previously, careful tax planning will be needed to avoid incurring income tax from capital gains arising from disposing of your practice by creating a Professional Corporation in certain circumstances.

NEXT STEPS

  • If you do not currently have a Professional Corporation, you should consider one… But only if you have sufficient surplus income to take advantage of the benefits and to justify the cost involved.   Review your present and expected future income levels with your advisor to make this determination.
  • If you are not certain whether you have used some or all of your Qualified Small Business Corporation capital gains exemption in the past, then check with a qualified advisor first for assistance in making this determination…Do not ignore this issue.
  • NEW DOCTORS: You have a window of opportunity to incorporate a Professional Corporation now before capital gains tax complicates your decision in the future.   Discuss the best option suited for your situation with your business and tax advisor.
  • If you are in a partnership or cost-sharing arrangement, then identify the legal, income tax and business consequences of converting to a Professional Corporation with your partner(s), colleague(s), lawyer and a qualified tax advisor, in advance.

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© Tucker Professional Corporation, 2013

Tucker Professional Corporation (TPC) is a tax and business advisory practice primarily for doctors and dentists. Contact us for further details or a no-obligation consultation.


[1] Pharmacists and certain other health professionals, social workers, and social service workers may also incorporate.

[2] Top combined 2013 federal/Ontario income tax rates for income in excess of $128,800.

[3] A professional with $500,000 of active business income could defer income tax of $114,738.

[4] The 2013 budget proposes to index the LCGE after 2014 for inflation.

[5] A shareholder with income in the top tax bracket, who satisfies all criteria for the capital gains exemption set out in the Income Tax Act (Canada), will save $ 185,600 in income tax.

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