Oral Health Group
Feature

More reasons to incorporate your practice?

December 1, 2005
by John McMillan, LL.B. & Jeffrey Sum, CA


It has been announced in the 2005 Ontario Budget that physicians and dentists will (once implemented) be permitted to issue non-voting shares in their professional corporations to “family members.”

Currently, the main advantages of incorporating a professional practice are as follows:

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1. A Small Business Deduction (SBD) is available to Canadian Controlled Private Corporations (CCPC), whereby the first $300,000.00 of active business income is taxed at a preferred tax rate of 18.62 percent compared with the regular corporate tax rate of 36.12 percent and the top personal tax rate of 46.41 percent.

2. The sale of shares of a CCPC may qualify for the personal lifetime capital gains exemption of $500,000.00.

3. Surplus funds earned by the corporation may be invested.

4. The corporation may offer protection from trade creditors.

Example: Where a dentist has practice net income of $200,000 and needs $120,000 of pre-tax income, $80,000 can remain in the corporation, sheltered from further tax until subsequently drawn out creating a tax deferral of approximately $20,000.

Once the concessions in the Ontario Budget are implemented, in addition to the possibility of tax deferrals available through retaining earnings in the corporation, tax savings can be realized through income splitting with family members (through dividends to non-voting shares). Using the example above, under certain circumstances (if the dentist has adult children in university and/or a spouse without income), tax savings of $30,000.00 may be possible. Discuss your particular circumstance with your accountant.

While the recent Ontario Budget announcement is encouraging, there are a number of points that deserve mentioning.

Family members?

At the time of writing, it is unclear which relatives of the dentist will be included in the term “family member.” While we can safely assume that the married spouse and children will be included, it is not yet clear whether parents (of the dentist and the dentist’s spouse) grandchildren or common law spouses will be included. Clearly, the broader the definition the better. Unfortunately, we can take little guidance from other jurisdictions, as the definition of “family members” (in various contexts) varies.

Family trusts and holding companies?

Another unsettled question at the time of writing is whether family trusts will be permitted to hold the non-voting shares, with the trust naming (eligible) family members as beneficiaries. If trusts are not permitted, flexibility in distributing dividend income would need to be replaced with other dividend strategies. Speak to your lawyer and accountant.

Another possible scenario that is not yet resolved is the use of holding companies (for capital gains and asset protection purposes) to own the non-voting shares of the PC.

Therefore, at this point it would be prudent to structure new professional corporations with all possible scenarios in mind.

When?

The Minister of Health and Long Term Care has committed to take all possible actions to ensure that the changes are effective from January 1, 2006. However, at the time of writing (November), Bill 197 — the Budget Measures Act, 2005 (omnibus legislation that contains the required amendments to the Business Corporations Act and the Regulated Health Professions Act) has only recently received second reading in the Legislative Assembly, with the Committee stage (if the Bill is not unanimously supported at second reading) and third reading yet to be completed before Royal Assent.

Depending on your circumstance, this may be a good time to consult with your lawyer and accountant to discuss whether you should consider (or re-consider) incorporation and if you are already incorporated, several matters will likely need to be reviewed and discussed.

John McMillan, LL.B. is a Toronto corporate/commercial lawyer serving dental professionals. He can be reached at johnmcmillan@bellnet.ca

Jeffrey Sum, CA is Manager, Advisory Services with the accounting firm Horwath Orenstein LLP. He can be reached at jsum@hto.com


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