A professional corporation is a corporation that carries on a professional practice. Professional corporations in Ontario are governed by the Ontario Business Corporations Act, as well as the by-laws of the governing bodies of the relevant professions. Examples of professionals that may incorporate their practices include medical doctors, dentists, veterinarians, chartered accountants, certified general accountants and lawyers.
Requirements and Restrictions
There are certain requirements and restrictions that apply to the incorporation of a professional corporation. One requirement is that the applicable governing statue must permit the practice of the profession by a corporation. Once the corporation has been incorporated, a Certificate of Authorization will need to be applied for and obtained from the applicable professional governing body.
Professional corporations may not carry on a business other than the practice of the profession; however this doesn’t prevent a corporation from carrying on activities that are related to the practice of the profession, including the temporary investment of surplus funds earned by the corporation.
In addition, the corporation is required to include the words “professional corporation” or "société professionnelle" in its name. Health profession corporations are required to include the surname of one or more of the professionals of the corporation who are members of the applicable college. The corporate name must also indicate the health profession that is to be practiced, for example, Dr. John E. Doe Medicine Professional Corporation.
Benefits of Incorporating a Professional Corporation
A corporation is recognized as a separate legal entity, distinct from its directors, officers and shareholders. In the case of a professional corporation, the professional will not incur personal liability for the commercial liabilities of the corporation, such as leases or loans, unless a personal guarantee is given. However, the shareholder’s professional liability will not be affected by practicing in a professional corporation. Any shareholders of the corporation, who are members of the profession, are jointly and severally liable for any professional liability claims made against the corporation while they are a shareholder.
Generally, all issued and outstanding shares of the corporation must be legally and beneficially owned by one or more members of the same profession. However, health profession corporations are allowed to grant non-voting shares to family members. A family member includes the spouse, children or parents of the health practitioner. This allows for income-splitting opportunities through the payment of dividends on the shares of the family members. Dividends are taxed more favourably than other types of income. The professional is also able to split capital gains among the family members who hold these non-voting shares to take advantage of each family member’s lifetime capital gains exemption.
By incorporating a professional corporation the professional can achieve significant tax savings by paying tax at a much lower corporate tax rate than the personal income tax rate. The corporation may also claim the Small Business Deduction as set out in the Income Tax Act. The deduction currently provides for an 11% federal tax rate on a Canadian Controlled Private Corporation’s active business income up to a limit of $500,000.00.
What this means for professionals
The professional corporation is a very useful business entity available to professionals, which can help them achieve significant tax savings and limit personal liability. The process to incorporate a professional corporation is quite technical and you need to ensure that you comply with all requirements of your professional governing body. It is for this reason that the advice of a legal professional should be sought to assist in the incorporation process.