Oral Health Group

Finance: New Retirement Options For Incorporated Professionals

December 1, 2002
by Angelo Vicere

Some of Ontario’s professional class including members in the dental profession are smiling these days. Long hampered with inadequate retirement contribution limits, they, and other regulated professionals, can now form Professional Corporations (PCs) and will finally have a few new tools to lower their taxable incomes and boost their self-funded retirement plans. For years, the only tool professionals had was the RRSP, which limits annual contributions to a maximum of $13,500 (equivalent to 18% of a $75,000 income). With many professionals regularly topping $250,000 in net earnings the RRSP offered only a small fraction of the necessary savings required to fully fund a proper retirement. It’s no wonder many opted to move to the United States or invest in tax shelters of dubious quality over the years.

The new legislation will allow Ontario professionals to form PCs with restricted shareholder rules and limited liability (except for professional malpractice). Owners of PCs will enjoy many of the tax and non-tax advantages enjoyed by other incorporated small business owners, the most significant of which is the lower tax rate on the first $200,000 of active business income. For example, for 2002 the general combined federal and Ontario corporate tax rate of about 38.6 percent is reduced to about 19 percent for the first $200,000 of a CCPCs active business income. That’s much better than the current 46.4% top marginal tax rate for individuals in Ontario. A sole practitioners’ PC or a very small partnership may be better able to utilize the Small Business Deduction (SBD) on the first $200,000 of a Canadian Controlled Private Corporation’s (CCPC) active business income than could a large incorporated group since the SBD is spread over more professionals rather than each one using the $200,000 SBD.

There are other advantages as well such as determining a most beneficial salary-dividend mix, an initial staggered year end, an accrual of year end bonuses, additional allowances for deducting more than two conventions annually, own group sickness and income maintenance policies and life insurance and even set up a scholarship plan for employees’ children. Incorporated professionals may even avail themselves of the $500,000 capital gains exemption upon sale of the practice or upon death (if there is no spousal rollover) and can facilitate estate planning in the long run.

Professionals may be happiest about their new pension options. A PC allows for the creation of an Individual Pension Plan (IPP), Retirement Compensation Arrangement (RCA), an Employee Profit Sharing Plan (EPSP) and even the newest perk, the Health and Welfare Trust (HWT).

Keep in mind many of the tax perks of incorporation do come at a cost and a continual commitment to fund pensions and benefits. So if your practice doesn’t generate excess income beyond your annual lifestyle needs incorporation may not be for you. If you can afford to leave some excess profits inside the corporation to be taxed at the low small business rate and then re-invested towards a platinum plated customized retirement and benefits plan then incorporation could result in significant long term tax savings and can easily justify the upfront cost of incorporating and the annual accounting and legal costs.

In many cases the IPP allows the corporation to make substantial tax deductible current service contributions on behalf of the employee/owner up to retirement in amounts usually far in excess of traditional RRSP limits. The IPP can also include other key employees especially any family members that are employed by the corporation. If the owner retires prior to age 65 the corporation may make additional tax deductible top-up funding payments into the pension plan. Gordon Lang and Associates, Actuaries and Consultants, based in Alberta and Ontario, offer an example: a professional aged 55 with an income in 2002 of $200,000, could have the corporation make a tax deductible pension contribution of up to $20,300 into the IPP, increasing 7.5% per annum thereafter. If he chooses to retire at age 60 instead of 65 the corporation could make an additional tax deductible contribution of $40,000 at that time.

The RCA allows the corporation to defer large sums on behalf of its owners in order that they can be received in future years, when income tax rates to the owner are lower, or other more complex tax strategies.

The objective of the EPSP is to remove the need to make Employer and Employee Contributions to the CPP for owners/professionals and their employee family members and create an equivalent private savings account.

The HWT can be used to pay uninsured medical or dental expenses related to owner/professional and their families and be fully tax deductible to the corporation.

Many of the accountants that I have spoken to are currently busy introducing this idea to their professional clientele and reviewing all options. While the issues are complex a knowledgeable accountant or investment specialist can outline the benefits and the pitfalls for professionals. As more and more regulatory and licensing bodies amend their constitutions to allow for their professionals to incorporate, this can only improve the retirement and savings options for highly taxed professionals in Ontario and perhaps keep them working happily in Ontario.

Angelo Vicere, CFA, is a Senior Financial Advisor with Berkshire Securities Inc. in Hamilton. His articles have appeared in the Hamilton Spectator, Physicians’ Management Manual, the Canadian MoneySaver and he has appeared as a commentator on business and investment topics on Global, CTV and CNBC World.

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