The Regulated Health Professions Act allows medical professionals to establish a corporation for the purpose of practicing medicine. Creating a Medicine Professional Corporation (MPC) may be financially beneficial for physicians since the tax rate of the corporation is much lower compared to the personal tax rate of the individual physician. There are many other benefits of establishing a professional corporation including the issuance of dividends or salary1 to family member shareholders, deferring tax by virtue of retaining earnings in the corporation, capital gains exemption on the sale of shares of a qualifying corporation, as well as other tax and retirement planning strategies. The amount of income paid to family members in the form of dividends or salary must represent a reasonable return on their contribution to the business. Otherwise, the income paid to these family members would be subject to the tax on split income (TOSI) rules and would be taxed at the highest marginal tax rate.
Incorporating an MPC is a complex process that requires compliance with legislation as well as the regulations set by the College of Physicians and Surgeons of Ontario (CPSO). It is recommended that the advice of a lawyer and accountant is sought when establishing your MPC.
Most bodies governing professions do not allow anyone other than members of the institute or college to hold shares of the professional corporation. However, the rules surrounding shareholders of an MPC are different. Although voting shares of the MPC must be held by a physician who is a member of the CPSO, certain family members of the physician (the spouse, children and parents of the member physician) are permitted to own non-voting shares of the MPC. The definition of "spouse" also extends to include a common-law spouse of the physician. If the physician has minor children, the shares allotted to the minor children must be held in trust for each minor child, usually by the physician or the physician's spouse, until such child is 18 years old. Once the child turns 18, the shares are transferred to the child directly.
The type and number of shares issued to the physician and each family member shareholder is typically determined by the physician's accountant and lawyer. Three of the most common types of shares that are issued are Common Shares, Special Shares and Preference Shares.
Common Shares
Common Shares are the growth shares of the corporation, meaning that the value of these shares grows as the value of the corporation grows. Common Shares may be voting or non-voting shares of the MPC and they participate in the value of the corporation. Voting Common Shares are only issued to the physician shareholder of the MPC and they must be held directly by the physician, not through a holding company. Non-voting Common Shares may be issued to family members. The attributes of Common Shares, including whether voting or non-voting, and the number of votes per share, are determined by the physician's accountant and lawyer, having regard to the circumstances of the physician and his or her family members.
Special Shares
Special Shares are typically non-voting shares and are usually issued to family member shareholders. They are usually fixed in value when they are issued, and the director of the MPC is permitted to declare and pay variable amounts of dividends to the family members holding Special Shares, provided that each family member holds a different class of Special Shares. This allows the directors of the MPC to exercise discretion when it comes to the payment of dividends. Different amounts of dividends may be paid to each family member depending on the particular class of Special Shares that they hold. Special Shares may be redeemed by the MPC at any time.
Preference Shares
Preference Shares are typically issued to the physician shareholder in the case where the physician has an existing practice which is being transferred to the MPC. Transferring the existing practice to the MPC can be done on a tax-free basis by virtue of the physician and the MPC entering into a section 85(1) rollover agreement under the Income Tax Act. In consideration of the physician transferring the practice to the MPC, the corporation will typically issue Preference Shares to the physician, which would have a value that is fixed to correspond to the fair market value of the practice at the time of the transfer.
Determining the share capital, share issuance and attributes of each class of shares of a professional corporation can be quite complex and requires the coordination of the physician's legal counsel and accountant in order to ensure that the proper structure is established.
Footnotes
1 Income splitting through the payment of dividends or salary is impacted by the tax on split income (TOSI) rules, implemented by the federal government in 2018. https://www.siskinds.com/tosi-rules/
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.
