Medical professional corporations:Process and tax benefits

Merlyn Fernandes

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Ontario has allowed regulated Practitioners to incorporate and reap the benefits. The Regulated Health Professions Act, 1991 (Ontario) allows a number of health professionals, including but not limited to, dentists, surgeons, audiologists, dental technicians, psychologists, nurses, midwives and massage therapists to incorporate their practices. Further, the Social Services and Social Service Work Act, 1998 (Ontario) allows the benefits of incorporation to those who are members of that College. We intend to discuss the incorporation process, structure and tax benefits and the effect professional corporations governed by these Acts can have on will drafting.

Incorporating

A Practitioner who incorporates creates a separate entity which they control, but which is independent from the Practitioner for income earning purposes. The Practitioner creates two roles for themselves as taxpayers: that of an employee and shareholder of the Corporation. They are able to collect payment through these roles, each taxed in its own manner. If the Practitioner carries on as an employee, the Professional Corporation must remit all employee deductions, including CPP, EI and certain instances, the Ontario Health Tax, insurances, and employee allowances for automobile use and leases and use of the home for employment related uses. The Practitioner must claim the income and these other benefits as income in their annual income tax return. As a shareholder, the Practitioner can be paid through receipt of dividends. This can be done at the option of the directors (normally the Practitioner itself) and is only taxed when it is received.

Generally, Practitioners who wish to incorporate must meet the general requirements for incorporations under the OntarioBusiness Corporations Act and obtain a Certificate of Authorization the regulating college. The basic requirements under the Acts are described here. All Professional Corporations must be named and not numbered, so a name search must be submitted. Similar names to those already incorporated cannot be used. The name of the Professional Corporation must contain at least one surname of a shareholder who is a member of the regulating college and may contain any given names or initials of that shareholder. The name must contain the words “Professional Corporation” and finally, in the case of regulated health professionals, it must contain the area of practice as well.

The organization of the Professional Corporation is also outlined. All directors must be members of the regulating college and all shares must be legally and beneficially owned by members of the regulating college, except in the case of physicians, surgeons and dentists, whose spouses, children (through trusts) and parents are able to hold non-voting shares of the Professional Corporation. A restriction of the business activities is also required in the Articles. Application forms, fees, statutory declarations and in some instances undertakings are also required by the various regulating colleges. The Professional Corporation should also apply for a Business Number and GST number from the Canada Revenue Agency. Initially, a Corporate Information Act Form 1 must be submitted to the Ministry of Government Services within sixty days.

Also, a minute book will need to be prepared. The minute book will need updating on a yearly basis. A Corporate Information Act Form 1 must be submitted to the Ministry of Small Business and Consumer Affairs and a Certificate of Renewal must be obtained annually from the regulating organization.

Structuring And Tax Benefits

If the Practitioner is already in practice, they will need to transfer the assets of their practice to the Professional Corporation. They will require an Asset Purchase Agreement which clearly indicates the value assigned to the assets, including goodwill, works in progress and chattels. The Practitioner can obtain a promissory note equivalent to the tax basis of the assets, which can be considered a shareholders’ loan, if the Practitioner is taking ownership of shares. This can aid the Practitioner should bankruptcy occur as secured shareholder loans are paid prior to bank debt and other secured parties. If the Practitioner has liabilities, these should be taken on by the Professional Corporation which will obtain a promissory note from the Practitioner or the liabilities can be retained by the Practitioner. The Professional Corporation cannot take on liabilities additional to the promissory note or the ability to defer taxes will be negated.

If the Practitioner is part of a partnership which decides to incorporate into a Professional Corporation, it has two options: each individual Practitioner can choose to incorporate a Professional Corporation which can then create the partnership or the individual Practitioners can directly become shareholders in the Professional Corporation. Practitioners employed outside of the Professional Corporation should not include their employment income in the Professional Corporation or they will be considered a “personal services business” and will be taxed at the highest income bracket. For instance the doctor who is employed at a hospital and has a general practice should only be including the proceeds from its general practice in the income of the Professional Corporation. The employment income from the hospital should remain personal income, unless the Professional Corporation has employed five full time employees throughout the year or provides services to an “associated company”.

A Professional Corporation can claim the Small Business Deduction as indicated in the Income Tax Act ( Canada). This Deduction is allowed to Canadian Controlled Private Corporations on the first $400,000.00 of active business income. (This amount is subject to change according to changes in the Income Tax Rules). The Deduction is taxed at a lower rate, currently 18.67%. Each individual incorporated partner of the Professional Corporation can claim the deduction as an employee, although it may need to be shared if the Professional Corporation and the Claimant are considered associated parties according to the Income Tax Rules.

In addition to the methods of paying money out of the Corporation, there are a few other methods of doing the same. First, the Corporation can issue promissory notes to the Practitioner for funds. Second, the Practitioner can obtain a salary from the Corporation. Income that is necessary to the maintenance of the Practitioner’s personal lifestyle can be disbursed as income to the Practitioner while all other funds can be maintained in the Corporation and invested. Funds in the Corporation can be withdrawn as a taxable dividend, making the tax payable deferred until the dividend is paid. Salaries can also be disbursed to family members in reasonable amounts and for work performed. By using the additional share structures such as, providing parents, spouses and children with non-voting shares, physicians, surgeons and dentists can disburse funds within the family structure and not incur additional taxes to their individual tax situation.

The Small Business Capital Gains Deduction is triggered when shares of a “qualified small business corporation” are sold. The first $500,000.00 of the sale proceeds are not taxed where non-active business assets do not substantially exist. Prior to initiating a sale of shares, this asset holding test should be canvassed. Therefore if the Practitioner wishes to sell some of his personal shares to another Practitioner qualified to hold shares, the first $500,000.00 will be tax free as long as the Professional Corporation is not substantially receiving income from passive investments, such as property rental or interest income.

A tax deferral is also available through the use of a pension plan initiation. By having the Professional Corporation pay funds into the Practitioner’s pension, the taxation of those funds is deferred until the Practitioner withdraws the funds from the pension.

Wills And Estate Matters

Possessing shares in any corporations presents will and estate issues. However, possessing shares in a Professional Corporation can create even more onerous issues. Special will planning must occur with a lawyer experienced in drafting wills for Professional Corporation shareholders. For example, one should consider the use of multiple wills. This planning process should occur early in the life of the Professional Corporation, in order to maximize the tax deferral benefits through the use of such structures as key man insurance and pension benefit plans. For more details on this planning process, the Practitioner is encouraged to speak with a tax and estate planning professional.

Professional Corporations can be useful vehicles aiding the Practitioner by providing an alternative means of conducting business and tax benefits. With proper planning, the Practitioner can save a significant amount of money, collect goodwill and establish a strong practice. By planning the use of the profits from the Professional Corporation, these profits can provide for loved ones far beyond the life of the Professional Corporation.