FOR PROFESSIONALS AND SELF-EMPLOYED INDIVIDUALS
Creating a professional corporation is different from creating a business corporation as it requires in-depth knowledge of each professional order's regulations.
There are currently over 40 professional orders in Quebec, each having adopted their own set of rules regarding incorporation. Our vast experience in this field allows us to ensure that your corporate structure not only corresponds to your needs but also respects the restrictions and rules prescribed by your professional order's regulations. Our services are most notably recognized for the incorporation of the following professionals:
DENTISTS (Ordre des Dentistes du Québec)
DOCTORS (Collège des Médecins du Québec)
OPTOMETRISTS (Ordre des Optométristes du Québec)
PSYCHOLOGISTS AND PSYCHOTHERAPISTS (Ordre des Psychologues du Québec)
PHARMACISTS (Ordre des Pharmaciens du Québec)
REAL ESTATE BROKERS (OACIQ)
ENGINEERS (Ordre des Ingénieurs du Québec)
WHO CAN INCORPORATE?
In 2001, the Professional Code was amended in order to allow members of certain professional orders to carry on their professional activities within a corporation.
Each professional order establishes its own criteria for incorporation and its own set of rules. Here is a non -exhaustive list of just some professionals that are allowed to incorporate but there are many more.
IF I WANT TO INCORPORATE, WHAT SHOULD MY CORPORATE STRUCTURE LOOK LIKE?
There are three key elements to consider when incorporating a professional practice. In order to maximize annual tax savings, you must ensure that you have a corporate structure that is adapted to your needs, which should include one or a combination of the following tax vehicles: a professional corporation, a holding corporation and a family trust. Not every professional will need all three vehicles immediately when they incorporate. Our tax advisors can help determine the right structure for your situation.
WHAT IS A HOLDING CORPORATION AND WHAT IS ITS ROLE?
A holding corporation is the same type of vehicle as the professional corporation but its activities are reserved for investing. The main objectives of a holding corporation are:
Investing surplus revenue;
Allows for more efficient retirement planning;
Ensures better protection from your creditors;
Payment of surplus income by way of a tax-free inter-corporate dividend between a professional corporation and the holding.
WHEN SHOULD SOMEONE INCORPORATE THEIR PRACTICE?
It is never too early or too late to benefit from the advantages offered by incorporation.
Before deciding to incorporate, one must take the following factors into consideration:
Personal tax rate;
The income of other family members in the household;
Short-term projects (purchase of a home, pregnancy planning etc..)
Short-term plan to purchase or open a clinic
Incorporation and proper tax planning will allow for better tax savings in the short and long term whether you are early in your career or a few years away from retirement (ideally at least 5 years years from retirement).
Incorporation should be considered when your income before taxes (all sources taken into consideration) is greater than your expenses (excluding RRSP, TFSA contributions).
Even though a professional may not be a good candidate for incorporation throughout their career, they should however do so prior to selling a private practice in order to minimize the tax consequences associated with the sale of a medical or dental clinic (see explanation on Lifetime Capital Gains Exemption).
SHOULD A PERSON WITH DEBT INCORPORATE OR SHOULD THEY PAY OFF THEIR DEBT FIRST?
For the most part, and contrary to popular belief, debt is not an obstacle to incorporation. Often, the tax savings realized through incorporation can allow for a quicker reimbursement of debt when properly planned out.
On the other hand, if someone is carrying bad debt (for example, not being able to reimburse the capital on a credit card), it may be preferable to pay such creditors before incorporating.
Debts that do not affect incorporation: Home mortgage, line of credit or low interest loans (student loan, for example).
Debts that impede incorporation: Credit card (only if you are not able to reimburse the entire capital each month), loans at an interest rate that is higher than the market rate (+6%).
Incorporation has many benefits but its timing is crucial. Our tax consultants can help you better assess the optimal time to incorporate your practice.
HOW CAN INCORPORATION HELP ME SAVE TAXES?
Incorporation offers the flexibility to better manage your finances by allowing for the deferral of taxes on professional income and benefiting from lower corporate tax rates.
Personal tax rate (highest marginal tax rate): 53%
Corporate tax rate: 17.5%
Instead of being taxed at a rate of 53% on all of the income you earn, any surplus income that is not necessary to support your lifestyle can be retained inside your corporation and taxed at a rate of 17.5%, achieving a tax deferral of 35.5%. The surplus money in the corporation can then be invested for retirement allowing you to have access to more capital to invest. During retirement or during times when you find yourself in a lower tax bracket (sabbatical, maternity leave), when you really need the money (during retirement or a sabbatical).
INCORPORATION AND THE LIFETIME CAPITAL GAINS EXEMPTION
Certain professionals, such as dentists, chiropractors, owners of medical clinics as well as others, may sell their practice to another professional. This may generate a substantial capital gain which is normally taxable.
However, once incorporated, a professional may sell the shares of their practice and be sheltered from paying taxes on the first $883,000 of capital gain generated (the limit changes depending on inflation and is $883,000 in 2020).
To be entitled to the capital gains exemption, your corporation must first qualify as a Small Business Corporation (SBC).
If your corporation is not eligible for the capital gains exemption, it may need to be purified using specific tax strategies.
Should the amount of capital gains realized on the sale of your practice exceed your personal limit of $883,000, it is possible to put into place a strategy that would shelter the difference using a family trust.
INCORPORATION AND ESTATE PLANNING BENEFITS
Following the death of an incorporated professional, the corporation can pay the estate $10,000 tax-free. In order to do this, appropriate legal documents must be drafted beforehand.
This amount may be used, for example, to help defray the costs of the funeral arrangements or to settle the estate.