Prior to the end of 2001, professionals could not incorporate their practices except as allowed by the laws that regulated their specific profession (all compliant professional corporations prior to the enactment of the present governing regime were grandfathered in). Today, regulated professionals are able to incorporate their practices. Thanks to Bill 152 – Balanced Budgets for Brighter Futures Act, and Bill 45 – Responsible Choices for Growth and Accountability Act, professionals can capitalize on many of the same tax and non-tax advantages enjoyed by other incorporated self-employed individuals.
However, unlike other incorporated self-employed individuals who are unregulated professionals, personal professional liability will not be limited through incorporation. The shareholders of a professional corporation are restricted to licensed members of the same regulated profession, and depending on the profession, their immediate family members. For those applicable professions, family members who are not licensed under the same regulated profession are restricted to participating only as non-controlling or non-voting shareholders. The regulated licensed or registered professionals must be the only voting or controlling shareholders and/or directors and officers of the professional corporation. The professional corporation’s articles of incorporation must restrict its business to only the practice of that profession and activities that are related or ancillary (such as the investment of retained earnings). Furthermore, the regulated professional’s governing body (e.g. Law Society of Upper Canada, The College of Physicians and Surgeons of Ontario, Royal College of Dental Surgeons of Ontario etc…) will be responsible for the certification or licensing of professional corporations that fall under their governance and jurisdiction/territory. And hence, the governing body for that regulated professional will be able to “look through” professional corporations and hold the regulated professional shareholders accountable for their actions or omissions. Other requirements are that the name must include the words “Professional Corporation” or “Société Professionnelle”, undivided, and cannot be a number name. As well, the governing body may impose additional regulations requiring the specification of the practice for that regulated profession such as “Medicine” or “Dentistry” before the words “Professional Corporation”, and the surname of one of the regulated professional shareholders of the professional corporation. Finally, most governing bodies charge an annual renewal fee as well as a one-time application fee when applying to obtain a certificate of authorization. Otherwise, professional corporations are incorporated just like any other provincially incorporated company, subject to the restrictions on business and transfer of shares provisions in the articles, and naming requirements.
Just like any other corporation, shareholders can transfer or sell their shares to others so long as the transferees or purchasers are licensed or registered members in good standing with the same regulated profession as the seller(or if allowed by the regulations of the particular regulated profession, they are licensed or registered members in good standing with the same regulated profession and sole-shareholders of the transferee or purchaser holding company restricted to the business of holding shares in the professional corporation). Furthermore, just like any other legal enterprise, a professional corporation can hire employees regardless of their profession (so long as they are not shareholders or that their remuneration entitles them to shares, unless they are members of the same profession) or enter into independent contractor arrangements. Professional corporations can be partners in General Partnerships (GPs) or Limited Liability Partnerships (LLP). Furthermore, income earned through the practice of the profession in a professional corporation will be considered active business income and eligible for the Small Business Deduction lower tax rate on the first $500,000 (as of 2012 for tax years after 2008). Generally, corporate tax rates are lower than individual personal tax rates for the higher tax brackets, and thus tax savings through deferral and thus access to cash flows, are available when money is left in the professional corporation. When selling the practice, more specifically, the shares of the professional corporation that owns the practice, the selling shareholder can use their lifetime capital gains exemption so long as the practice is a qualified small business corporation. This can be achieved by ensuring that prior to selling; surplus assets are removed/drawn from the professional corporation. The lifetime capital gains exemption allows the seller up to $750,000 in capital gains tax-free, before being taxed as taxable capital gains income. For incorporating and setting up your professional corporation, tax advise and/or estate planning, contact Jeff Levy at Levy Zavet LLP for a free consultation.
Currently, the following is a list of regulated professions that would be eligible to practice through a professional corporation:
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