What is a professional corporation (PC)?
A PC is a company owned and operated by one or more members of the same profession (eg doctors, lawyers, accountants, dentists). The services provided by the company are usually tied to the implementation of the profession.
Professional firms are now allowed in each province and territory of Canada. In each province / territory, professional inspection usually determines whether the members can incorporate. For example, the regulatory body for doctors, in all provinces and territories, allows doctors to incorporate.
How is it different from a public corporation?
There are some significant differences between professional companies and joint
corporation such as:
- Only members of the same profession can be shareholders in a professional company in many (but not all) provinces.
- officers and managers and professional companies generally need to be shareholders in the company as well.
- The professional company is usually subject to investigative and regulatory powers of the regulatory authorities governing the profession.
- A professional company will not protect professional from personal liability for professional negligence.
As a result of these differences, some of the benefits generally associated with the company have limited the application of professional firms. This is further described below
Benefits of Using Professional Corporation
potential savings tax
A reduced federal and provincial corporate tax rate is applied to the first $ 400,000 of professional income with a professional company. Some provinces apply a lower tax rate on income up to $ 500,000. The Provincial limits vary by province. For 2010, the combined federal and provincial taxes on income subject to the small business limit will range between approximately 11% and 19%. As a result of this lower rate, the combined company and shareholder taxes paid professional services revenue is slightly lower than if such income were earned by you directly.
Potential tax suspension
Perhaps the most important advantage of using a PC is the ability to defer taxes. Professional income through the business are taxed at two levels -. Once at the corporate level and then again at the shareholder level when profits are distributed to you as dividends
The income on the corporate level is taxed at a lower rate than personal income tax deferral opportunity exists when the income is taxed at the company (the lower rate) and is not distributed to shareholders (ie you). Suspension shall stop when dividends are paid to you and you will pay tax on the dividends.
Let’s show. If you get professional income of $ 500,000 a year as a single owner and only need $ 200,000 of income for personal expenses for taxes, you will be left with $ 300,000 will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with $ 159,000 to invest.
On the other hand, if you incorporate practice $ 300,000 will remain in the company and taxed at the small business rate. Assuming a corporate tax rate of 18%, a company will be left with $ 164,000 to invest.
That is $ 87,000 more.
Sole Proprietor Professional Business
Revenues $ 500,000 $ 500,000
Personal needs ($ 200,000) ($ 200,000)
remaining equity $ 300,000 $ 300,000
Taxes ($ 94,000) ($ 54,000)
Net equity $ 159,000 $ 246,000
professional company $ 87,000
The additional funds of the corporation can be used to pay off debt, purchase of capital assets, make investments or capital guaranteed
As an employee professional business, you can access certain types of remuneration that would otherwise not be available if you were the sole owner or partner in cooperation. For example, the company can establish individual Pension Plan (discussed later) or Retirement Compensation arrangements (RCA) for you. These retirement savings vehicle can also provide you potential benefits creditor-protection. An employee health and welfare trust can also be created to provide health benefits for you and your family.
Capital gains exemption
The Canadian tax rules permit up to $ 750,000 in capital gains arising from sale of shares of a qualified small business enterprises can be exempt from tax. This $ 750,000 capital gains exemption is also available for equity and professional firms, provided certain conditions are met. However, ownership of a professional company may not be as easily transferable since, in many regions, it is only to transport members of the same profession.
flexibility in remuneration
You can choose to receive a combination of salary and dividends from a professional company. The decision is based on the combined company and shareholder taxes paid in your province.
Limited commercial responsibility
A professional company generally does not protect you from personal liability for professional negligence. However shareholders professional company will have the same protection as any other company shareholders when it comes to trade creditors.
You can split income through a corporation by paying dividends to adult family members who are shareholders in the company. This policy can be reduced to professional firms located in regions where equity is limited to members of a particular profession. However, other methods of income splitting, such as hiring family members to work in the business and pay them a reasonable salary for services rendered, are still available through a professional company.
small deduction business
As a result of the Canada Revenue Agency (CRA) decision, it is possible for professionals working through professional collaboration render its service activities through professional business and be able to access multiple Small Business Reduction (SBDs).
income up to SBD limit of $ 400,000 is subject to preferential tax rate (some provinces have more SBD). Historically SBD was to be part of all corporate partners. Get new ruling cra is employed professionals partnership should consider the benefits of setting up a professional company to take advantage of many SBDs.
Individual Pension Plan (IPP) is a defined benefit pension related to professional companies can set up for the professional. The IPP provides better annual contributions, the RSP limit for the 40 assets in the IPP are protected from creditors; However, it may be subject to lock-in provisions for pensions. If you want more information on IPPs, please contact your advisor.
cons Professional Corporation
cost and complexity
costs for establishing and maintaining a PC are usually higher than private companies. It is also a professional company incurred additional costs to file corporate tax returns, preparing T4 slips for wages and T5 slips for dividends. A corporation is also subject to greater regulation and compliance than sole proprietorship or partnership.
employer health taxes and EI premiums
Corporations in several provinces pay provincial health tax levy once the laws of the payroll has been a certain limit. Fortunately, the basic amount that you are not taxed on is pretty high (for example, $ 400,000 in Ontario) so the impact of this tax on professional companies may not be significant.
You can not claim business losses caused by computer on a personal tax return; As a private company, you can use the business losses against personal income from other sources.
Responsibility for malpractice
As noted above, a professional company will not protect you from personal liability for professional negligence.
Who should use a professional company?
A PC can provide potential savings tax and the tax deferral benefits. This may appeal to you if you do not need all of your income to live on. Professional companies can also appeal to you if you want to save for your retirement by other means, such as pension or retirement compensation arrangement, or if you would like to limit personal exposure to commercial risk.
Before incorporation, you should consider cash-activation strategy, which converts all non-deductible personal liability in the tax-deductible corporate debt. Find out more
If you have any questions about any of the issues discussed in this article, please talk to your advisor.