Professionals and Incorporation – the “Tax In’s and Out’s”

The ability to incorporate.
In Ontario, most professionals have had the option of carrying on their practice through a Professional Corporation “PC” for several years. In addition, the Ontario Business Corporations Act was recently amended effective January 1, 2006 to allow more flexibility with respect to the ownership of shares of PC’s. The amendments now permit certain family members to own non-voting shares in PC’s and more income splitting opportunities for some types of professionals. Unfortunately, these recent changes were only made available to physicians and dentists.

The benefits of incorporation.
Incorporation can provide many benefits to a professional, some of these benefits are as follows:

The steps involved in incorporating.
In order to incorporate, a professional must file articles of incorporation. This is generally done by a lawyer, with instruction and input from an accountant. This is no different from most non-professional corporations; however, the PC must obtain a certificate of authorization from their governing body and meet certain restrictions with respect to naming the PC.

In order for the practice to be transferred to the PC on a “tax deferred” basis a special election form is filed. The lawyer also generally prepares the related transfer agreements and appropriate resolutions that support the elected amounts.

The PC must open a bank account and register for the appropriate income and payroll tax account numbers with the various government agencies. It is very important that all of the steps are carried out properly and the transfer is properly reported to the Canada Revenue Agency (“CRA”).

The PC must keep a separate set of books and records and prepare an annual financial statement and file a Federal and Provincial corporate tax return annually.

Making the decision.
In order to make an appropriate decision on incorporation, the professional must analyze the benefit of paying expenses and debt down in the PC versus personally, determine the amount of income that can be retained in the PC that can be taxed at a lower rate (i.e. a tax deferral) and determine the savings associated with splitting income annually with other family members via a corporate structure. This decision must be done on an individual case by case basis as each professional’s circumstances will be different. It is a good idea to visit your accountant to perform the appropriate analysis to compare the cost of incorporation versus the benefits that will be realized.

As a guideline, the initial fees for an incorporation (including legal fees, disbursements, and accountant’s fees) can range from $5,500 - $9,000 depending on the complexity. In addition, the annual incremental compliance costs of completing a financial statement and corporate tax returns will be approximately $2,000 - $3,000.

In order for a PC to be a viable option, the benefits must overcome the initial costs (generally in the first year) and annually outweigh the incremental compliance costs.

If you are considering whether or not to incorporate or wish to be consulted on your current corporate structure contact one of the DJB tax specialists.