Doctors who are not practising through a health profession corporation may be missing out on some significant tax advantages and savings. It has been about 8 years since the Ontario government changed some of the strict ownership rules that gave special treatment to professional corporations for doctors and dentists over other regulated health professions, operating their practices through a medicine professional corporation ("MPC").
What is a professional corporation?
Similar to regular corporations, MPCs are distinct legal entities in law. However, MPCs carry restrictions on their corporate name and ownership structure. In addition, unlike regular corporations, professional corporations may not necessarily shield their shareholders from liability claims. The individual physician that operates through a MPC would still personally liable to patients and clients for any malpractice claims, and therefore maintaining professional liability insurance is essential.
How is a professional corporation different from a regular corporation?
The first restriction on a MPC to consider is the jurisdiction under which it is incorporated. An MPC must be incorporated under the laws of the Province of Ontario, and any corporation incorporated in any other jurisdiction, including federally under the laws of Canada, may not be considered a health profession corporation in Ontario.
There is also a strict restriction on the corporate name of an MPC, which must include the physician surname (the given name and/or initials are optional), the healthcare profession being practiced, and the words, "professional corporation". For example, a professional corporation for a physician may be named, "John Doe Medicine Professional Corporation".
There are also restrictions on the activities of the MPC to those related to the practice of medicine and any "ancillary" activities. While there may be some debate as to what may constitute an "ancillary" activity, it is generally held that any business or investment activity unrelated to the practice of the medicine would not be permitted. The ownership or rental of real estate (unless to a physician) in excess of what may be required to practice the profession would therefore be prohibited since it would neither be in relation to nor ancillary to the practice.
Another restriction deals with the voting shares of the MPC which may only be held by a practitioner in good standing with the relevant governing body. Holding companies may not own shares in the professional corporation.
Why should I incorporate a professional corporation?
For MPCs, a family member (a parent, spouse, or child) may own non-voting shares. This allows for income splitting with lower income family members resulting in significant tax savings. In the case of children that are under 18 years of age, a family trust may be considered, though it has its own limitations that should be reviewed with tax and legal advisors. In addition to the tax savings, dividends paid on these non-voting shares are taxed at a lower rate than other forms of income.
As a Canadian-controlled private company, the biggest tax advantage to a professional corporation is the availability of the small business deduction, which reduces the federal and provincial tax payable on active business income up to certain limits. As a result, you may achieve a significant tax advantage by paying tax at a much lower corporate tax rate (15.5%) on professional income (vs. a personal income tax rate of 49.53%). By accumulating these funds within the professional corporation, physicians can also defer their personal tax by not paying out any excess funds as dividends until required or as a private pension plan upon retirement.
What is involved with incorporating?
If you have an existing practice, certain steps should be taken upon incorporation to lock in the value of the corporation at that time, and allow other family members to subscribe for non-voting shares at a reasonable price.
Once incorporated, a certificate of authorization from the College of Physicians and Surgeons of Ontario will be required before the professional corporation may "practice" and accumulate revenues from the practice. The current fee to obtain a certificate of authorization is $350. Certificates of authorization must then be renewed annually, the current fee being $125.
Despite the restrictions on MPCs, there are many tax planning strategies and techniques currently available for physicians. Each individual practitioner's actual tax savings will depend largely on his or her individual circumstances. There are services, such as from online providers or professional body associations that can incorporate your professional corporation, but having legal, accounting and financial advisors develop a cohesive, customized approach from the outset will allow practitioners to develop a tax strategy for you that will ensure that the incorporation is done properly from the outset.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.