Professionals Should Incorporate Too
Many people have heard of professional corporations but do not know what they are. Maybe you have seen the term at your doctor or dentist’s office. It is important to set up these corporations correctly to reap the tax benefits.
What is a Professional Corporation?
Professional corporations are like any other corporation in many respects. They are allowed for and regulated by governing bodies such as the College of Physicians, law societies, dental associations, etc. Since a corporation cannot hold a medical degree or law degree, a professional corporation allows for an individual doctor or lawyer to provide their services through a corporate entity.
Which Professions Can Operate as a Professional Corporation?
Many different professional associations allows the professionals whom work under them to set up and operate a professional corporation. For example, in Alberta, the following examples exist:
• Medical Doctors;
• Veterinarians (in some jurisdictions);
• Certified General Accountants;
• Certified Management Accountants;
• Chartered Accountants;
• Engineers (in some jurisdictions); and
Advantages of a Professional Corporation
There are many advantages to using a corporate entity as a professional. For example, the following benefits exist:
• Professional Corporations for Income Tax Savings
Canadian tax rates for individuals are much higher than the tax rates for professional corporations. Your company pays the lower rate and you pay tax only on the income you draw. With a company, you are also able to take out a dividend which may be taxed at a lower rate than your personal income tax.
• Professional Corporations to Pay Taxes Later
When you earn money as an individual, i.e., you are a dentist without a professional corporation, you are taxed in the year that you make the money. When you incorporate, you are able to take out the money that you need and pay tax on that amount but any money that you do not need, can stay in the company and not be taxed at your personal income tax level.
• Professional Corporations to Income Split
Canada has a graduated tax scale. As you make more money, your tax bracket and tax rate gets higher. With a professional corporation, your corporation can pay income to all employees and dividends to all shareholders (even if that shareholder has no right to vote or control the company). This means that a married couple may be able to pay less tax on the same amount of household income if they are incorporated. Not all professional corporations can do this so speak with our team or obtain independent legal advice.
• Individual Pension Plan
Individual pension plans are a type of self governed retirement plan. Professional corporations allow individuals to have Individual Pension Plans for their employees. These may allow higher contribution limits than RRSPs. This allows greater tax savings.
• Health Spending Accounts
Setting up a health spending account saves money by using before-tax money to pay for medical related costs. A large variety of options exist for health spending accounts so many clients choose to utilise this option under their corporate entity. For instance, the spending account may pay for glasses and sunglasses that exceed limits on traditional health benefits.
A Word About Limited Liability
Professional corporation do not offer the same liability protection as other corporations. You cannot avoid this as most of the regulations around industry specific professional corporations aim at protecting the public. However, this means that practitioners cannot avoid liability for professional negligence by incorporating. In other words, governing bodies allowed for professional corporations as a way of allowing tax savings but not a way around dealing with problems if you make a mistake professionally.