Is Incorporating a Professional Corporation Right for You?

We have previously discussed the advantages of incorporating a business and the benefits and costs in doing so. It should also be noted that creating a corporation brings advantages not only to business owners but also to individuals of certain professions.

A professional corporation is a subtype of a corporation that can be incorporated for an individual who practices one of the following professions: chartered professional accounting, chiropractic, dentistry, law, medicine, or optometry.

Incorporation Requirements:

There are a number of standard incorporation requirements which apply to all types of businesses, namely:

• a name for the proposed corporation which meets the legislated requirements,
• the articles of incorporation,
• the address of the registered office,
• the name(s) and address(es) of the director(s), and
• information regarding the agent for service.

Individuals looking to incorporate a professional corporation must also comply with additional specific requirements under the Alberta Business Corporations Act[1] (“BCA”). Specifically, a professional corporation must contain the words “Professional Corporation” as the last words of the name of the corporation, whether or not a professional descriptor, such as “Legal,” “Medical” or “Dental,” is used.[2] The name could be the individual’s name followed by the words Professional Corporation; for example, the John Smith Professional Corporation.

Further, a professional corporation may only be incorporated with the written approval and articles endorsement of the Alberta governing body of that profession,[3] such as the College of Physicians and Surgeons of Alberta, the Law Society of Alberta, or the College of Chiropractors of Alberta.[4]

In addition to regularly filing an annual return with Corporate Registrar, a professional corporation must also ensure to renew its regulating body permit annually. Each governing body has its requirements and timelines to complete a permit renewal[5].

Restrictions on the Professional Corporation

The applicable governing body will also impose ongoing restrictions on the professional corporation. Although each profession is governed by its specific governing body, there are a few similar requirements among them. For example, typically only actively regulated members of the governing body may hold voting shares, while family members[6] may hold non-voting shares in the capital of the professional corporation.

Although the shareholders of the corporation are generally not liable for the corporation's debts and liabilities, a professional corporation does not protect a regulated professional against personal liability for professional negligence or malpractice. The professional corporation would, however, still provide some protection from personal liability for other types of claims; for example, liability for unpaid rent or other debts of the practice where the practice location is rented by the professional corporation.

Ending a Professional Corporation

A professional corporation may only exist for as long as a regulated member holds shares in the capital of the professional corporation. If a regulated member loses its status with a governing body[7], the corporation does not necessarily need to be wound up. It may continue to exist as a regular corporation after amending its articles of incorporation. However, the professional corporation must change its name to remove the words “professional corporation.”[8]

Tax Benefits of Incorporating a Professional Corporation

The primary advantage of incorporating a professional corporation is the possibility for tax deferral. A corporation earning money through an active business will pay taxes at a lower rate than an individual taxable in the higher tax brackets who earns that money directly. While corporate taxes will be payable each year, personal tax will not apply until those funds are paid out to the individual, for example through dividends.

If the professional is earning more than they require in a given year, the funds can be maintained in the corporation until they are needed, or it makes sense to remove them. As mentioned above, even following retirement, the professional corporation can be continued as a “regular” company. Thus, the tax can be deferred for many years, past retirement, and the corporation can continue to form an important part of your estate plans.

A professional corporation may also bring opportunities for additional tax benefits. For example, the professional corporation will often qualify as a Canadian-controlled private corporation which entitles the company to additional tax benefits via the small business deduction.

There are also limited opportunities for tax efficient “income splitting” through a corporation. Income splitting is intended to allow income to flow to more than one individual (for example the professional and their spouse) to take advantage of another person’s lower marginal tax rate. While the possibilities for income splitting have been significantly curtailed in recent years by amendments to the Income Tax Act[9] which create a punitive tax on split income (“TOSI”), there are certain scenarios in which it can still be advantageous.

For example, if the professional has turned 65 years old then dividends may be paid to their spouse without triggering TOSI. Regardless of the professional’s age, other persons actively involved in the business may also be able to receive dividends without TOSI being applied.

Finally, a professional corporation will allow professionals to access individual pension plans and other potential benefits only generally available to employees, since the professional can become an employee of their professional corporation.

Takeaways:

If you are a professional accountant, chiropractor, dentist, lawyer, doctor, or optometrist, you should seriously consider incorporating your practice as a professional corporation. While there are initial set-up and required annual reporting costs, these are often significantly outweighed by the potential benefits of incorporating.

If you have any questions, any of the members of our McLennan Ross Corporate Commercial Law team would be happy to discuss your business plans and incorporation needs with you.