AUTHOR: April Wheeler (CPA, CGA), PAUL SPARE (CPA, CA)
Should I incorporate my practice? This is a common question for medical and dental professionals and it is one that has become increasingly more relevant since the new tax on split income (“TOSI”) rules were introduced in 2017. Determining whether or not incorporation is right for your practice is not straightforward and can be costly if you make the wrong decision.
To begin the process of determining whether or not you should incorporate, consider the following questions:
Do you currently spend all of your practice income to meet your living expenses?
Do you have a spouse in a lower tax bracket?
Does your practice have debts?
Are you considering selling your practice?
If you answered yes to the first question, incorporation may not be the best option for you. If you answered yes to any of the other questions you should consider incorporating your practice.
Advantages of incorporation include:
Unlike a sole practitioner where the professional assumes all the liability of the practice, when a practice is incorporated the liability of the shareholders of the practice is usually limited to the amount they invested in the corporation. If you are a sole practitioner, your personal assets, such as your house and vehicle can be seized to pay the debts of your practice. As a shareholder in a corporation, you can’t be held responsible for the debts of the corporation. However, there are a couple of exceptions. First, new practices often are not able to obtain financing without the personal guarantee of a shareholder, which means the advantage of limited liability is eliminated. Second, in certain circumstances, shareholders who are directors of the corporation can be held legally liable for payroll taxes and HST.
A Canadian controlled private corporation pays a much lower rate of tax on its first $500,000 of taxable income relative to what would be paid by an unincorporated business owner. In 2019, the combined federal and Ontario tax rate on the first $500,000 of active business income in a corporation is 12.5%. By contrast, a sole practitioner in Ontario with business profits pays tax on the first $220,000 of profits at rates between 20% and 50%, while business profits in excess of $220,000 attract a personal tax at a rate of 53.53%.
If you do not require all of your practice earnings to pay for personal living expenses, you can leave the earnings in the corporation and defer personal taxes until those earnings are withdrawn from the corporation. For an Ontario business owner paying personal tax at the top marginal rate, this tax deferral is approximately 41%.
As a shareholder of the corporation, you may be entitled to claim a capital gains exemption of up to $866,912 upon the sale of your shares of your corporation, provided your business meets the definition of a qualified small business corporation and certain other requirements are met prior to sale. This exemption is tied to the inflation rate so it will continue to increase over the coming years.
A corporate structure allows greater flexibility in choosing the most tax-efficient way to pay yourself, including dividends, salary, bonus or a combination thereof. Dividends or salary can be used to split income with your spouse if he or she is actively engaged in your practice.
Corporations Carry On
Unlike a practice, a corporation has an unlimited life; the corporation will continue to exist even if the practice closes, the shareholders die or the ownership changes. Selling the shares of a corporation may be more straightforward than attempting to sell the assets of a practice.
Disadvantages of incorporation include:
The incorporation of your practice can be a complicated process and it is important to seek professional advice on things like what types of shares to issue and who the shareholders of the corporation should be.
Business losses realized inside the corporation cannot be written off against other personal sources of income of the shareholders.
Often, additional accounting and legal administrative costs are incurred due to annual financial statement and corporate tax return fillings in addition to the shareholders’ personal tax returns.
Generally, incorporation can be a very attractive option for medical and dental professionals who are currently saving more than they are spending or have significant business related debt. However, you should have a discussion with your accountant regarding your specific situation to make sure that incorporation is right for you.
For more information on incorporating your practise, please contact your McCay Duff advisor.
AUTHOR: APRIL WHEELER
April provides services to a variety of clients, including small businesses, not-for-profits, hotels, and commercial leasing enterprises. She takes pride in helping businesses and organizations learn what their numbers mean and how they can contribute to strategic growth. Learn More ...
AUTHOR: PAUL SPARE
Paul joined McCay Duff LLP in 1999 after graduating from the Commerce program at the University of Ottawa. Paul specializes in tax preparation and planning, U.S. tax services and estate planning. Paul sits on the Board of Directors of the Rideau View Golf Club and is the past president of the club. Learn More ...