September 3, 2015
By Darren Salmond
If you are thinking of incorporating your unincorporated practice there are certain questions you should be asking yourself.
- Do I earn more each year than my current spending needs?
- Do I have immediate family members that are in a lower tax bracket than me?
- Do I have insurance policies?
- Do I have any leases or business loans?
If you answered yes to any of the above questions there may be a benefit for you to incorporate a professional corporation (‘PC’). Some benefits of incorporating are:
- The ability to defer taxes on your professional income. The Corporate tax rate on business profits can be considerably less than that of personal income. In Ontario, Corporate tax on the first $500,000 of active business income is 12.2%, whereas personal income over $220,000 will be taxed at 53.53%. A corporation can create a significant tax deferral and tax savings on a yearly basis if you are earning more income than your current spending needs.
- Recent tax changes significantly impacted the ability to benefit from having family members shareholders of the PC. Under the old rules with certain PCs, spouses, parents and adult children could receive dividends from the PC regardless of their involvement in the corporation. This was very effective in lowering the overall taxes as these family members could be in a lower tax bracket. The new tax rules will tax all dividends paid to family members at the highest marginal tax rate eliminating any tax benefit except if certain restrictions are met.
- The ability to have the PC pay for certain insurance expenses. This allows the policy to be paid with pre-tax income instead of personal after-tax income, which reduces the amount of cash you need from the PC and therefore reduces your overall taxes. In certain situations, the PC can also setup a Health and Wellness account that allows personal medical expense to be deducted in the company.
- The ability to have limited liability attached to your PC. The PC would not protect you against professional negligence however it would provide you with creditor protection from leases and non-personal guaranteed business loans. Another benefit is that you would be able to pay the business loans back more efficiently using corporate funds.
There are several other benefits to incorporating a PC that may be utilized differently depending on your situation.
In my next blog I will explain how operating a corporation is different from a self-employed individual.
If you have any questions about incorporation and how it can positively impact you, please contact me.