What you need to know about health professional incorporation
Most health professionals have been able to incorporate their practice since 2001. This opened the door for health professionals to enjoy similar benefits that other regular corporate businesses have been able to use for years. However, there are important restrictions unique to health professional corporations that are not found in other corporation set-ups such as restrictions on who can be shareholders of the health corporation and types of acceptable income generated within a health professional corporation, to name a few.
Shares of a health professional corporation may qualify for the lifetime capital gains exemption, which is $883,384 for 2020. Therefore, if a health practitioner plans to be able to sell the shares of their health professional corporation (or any qualifying corporation), the first $883,384 of the sale price will be tax free. Depending on their personal marginal tax rates, this could represent a saving of at least $199,523 from taxes in Ontario based on the sale price of the practice at $883,384 for the shares.
There are a few criteria that must be met in order to qualify for the capital gains exemption, such as limiting total passive investments in the professional corporation and the ownership period. If selling the shares is a possibility for someone’s practice, then careful planning is necessary to ensure that the exemption is available at the time of the sale.
Under certain conditions, an unincorporated health professional could even incorporate prior to selling their practice in order to take advantage of the capital gains exemption.
2. Capitol Gains Exemptment
A health professional corporation may not carry on a business other than the practice of the profession, unless it is ancillary to the practice of the profession. Health professional corporations may re-invest their surplus funds for example in mutual funds, GIC, on the TSX, etc. but they shouldn’t get loans in order to fund the purchase of investments. The purchase of real estate to use for your own practice should be considered an acceptable ancillary activity, but the purchase of real estate for purpose of earning rental income would not.
Keep in mind that at retirement, the health professional corporation will require to be amended to no longer be a professional corporation, and therefore the corporation will no longer have these investment restrictions.
2. Activities and investments
In a regular corporation, liability is usually limited to the assets in the corporation and not to the shareholders. For a health professional corporation, the shareholders have the added benefit of protection against civil liability, but not for professional negligence. Even though incorporation might be a good solution for your practice, having a health professional corporation might not be the best solution for your situation. It is important to properly consult with your college and discuss with your lawyer and accountant to find out if there are other corporate structures that are allowed for your profession that are more suitable.
Income splitting is not easily achieved with professional corporations for various reasons. At the top of that list is the limitation on who can be a shareholder. Professional health corporations, apart from doctors and dentists, can only have professionals as shareholders of their professional health corporation, therefore limiting the possibility of income splitting with dividends. In addition, the federal government recently introduced “tax on split income”, or TOSI, further limiting the access of income splitting possibilities with family members. (For an in-depth read on TOSI rules, please refer to www.robertcpa.ca/corporate-tax-update).
However, there are still ways to income split with family members. For starters, reasonable salaries could be given to family members as long as the salary is reasonable to the work performed.
In the case of doctors and dentists, there are two main possibilities to successfully income split by giving shares to family members:
Other arrangements can also be made to create management corporations, which could in turn charge an administration fee to the health professional corporation for managing everything non-health related. This management corporation would not be restricted to the health professional corporation rules since it is not a professional corporation and would not offer health related services. However, the application of TOSI might curtain some of its use.
Holding corporations could also be contemplated where the health professional corporation could make loans to the holding in order for the holding corporation to make investments that the health professional corporation would not be allowed to do, as well as have no restrictions on who may be a shareholder, but again we must not forget the potential applications of TOSI affecting these types of structures.
For the health professionals whose governing bodies have accepted that they can practice through clinics type corporations, those would have an easier time to income split (as long as they respect the TOSI rules) since there would be no restrictions on who can be a shareholder or how to invest the funds. Those types of corporation would also be able to effectively multiply the capital gain exemption with family members at the time of the sale. For an example of this refer to www.robertcpa.ca/income-splitting).
2. Income splitting
3. Retirement planning
Conventional retirement planning for health professionals would have consisted of maximizing RRSP and TFSA which have a limit of $27,230 and $6,000 in 2020 respectively, and then investing the rest in unregistered investments that are fully taxable. When you are incorporated, you have the flexibility to start investing by using the corporation as an investment vehicle instead of having personal unregistered investments. Keep in mind, in our earlier example, our health professional who only needed $80,000 for their living expenses, had an excess between $74,259 to $79,186 in the corporation to reinvest, while they would have only $45,621 if they weren’t incorporated. Giving them $28,638 to $33,565 more money to reinvest in what could be a retirement fund, and then used to grow every year, and only removed later in retirement. Having a corporation means having the option and flexibility of having investments in RRSP, TFSA, and in a corporation as an investment vehicle.
Appropriate planning is required to decide on the proper mix of RRSP, TFSA and corporate investments. For some, a corporate investment is a better option than RRSP and TFSA. Others will want to contribute the maximum to RRSP and TFSA while leaving the excess in the corporation to reinvest and grow. Every situation is different and unique and needs to be properly analyzed. There are also specific types of investments that should be prioritized inside a corporation rather than in RRSP and TFSA and vice versa.
Owning life insurance is an important part of any proper family and estate planning. As being an incorporated business, you will have the option of having the corporation own the life insurance policy through the corporation and the corporation can be the beneficiary of the policy, compared to owning the policy personally and having family members as beneficiary.
Life insurance payments, in most cases, are not deductible in the corporation, in the same way as they are not deductible on a personal tax return. However, since the corporation is taxed at a lower tax bracket, it is often much cheaper to own the policy through the corporation. For example, let us compare a policy that costs $10,000 per year for a health professional at a marginal tax bracket of 40% or at their corporate tax rate of 12.5%. That individual will require $16,667 of personal income to pay the personal life insurance of $10,000, but the corporation requires only $11,428 to pay for that same policy. Therefore, we would have a yearly saving of $5,239 in cash flow to finance the same policy.
Owning life insurance through a health professional corporation could be an interesting option but is not for everyone. For example, if this is a practice where we plan to sell in a few years, we might not want to put the life insurance policy in the same corporation that will be sold, since it could be very costly for the professional to remove that policy before an eventual sale therefore careful planning is required.
If you are considering incorporating your health profession, be sure to get in touch with us so that we can put forth the proper planning unique to your needs.
It is also a good idea to get in touch with your governing body to find out what conditions need to be met in order to incorporate your specific profession.
For more information, please feel free to contact me at [email protected] or 613-841-6040.
Alain Robert, CPA,CA, M.Tax, CFP, TEP
1420-6 Youville drive
Orleans, Ottawa, K1C 7B3
4. Insurance planning
1. Tax deferral
The main benefit of incorporation for a health professional is the tax deferral that arises from the difference between the corporate tax rate and the personal tax rate. Currently, an active business corporation is subject to a combined corporate tax rate of 12.5% in Ontario on its first $500,000 of income and 26.5% for each dollar after. In contrast, the highest personal tax rate for individuals in Ontario is 53.53%.
Incorporation, in most cases, for a health professional should only be considered when that professional generates more money than they need to subsidize their family personal living expenses and RRSP contributions when applicable or desired. If, in the case where every single dollar generated is needed for yearly expenses, then incorporation might not be the appropriate option.
For example (figure 1), a health professional who makes $200,000 a year but only requires $80,000 after taxes to subsidize their living expenses would be left with only $45,621 to reinvest after taxes. If this same health professional was instead incorporated, after removing the $80,000 required for living expenses in the form of either salary or dividends, they would have $74,259 or $79,186 remaining in the corporation to reinvest as they choose. In this case, incorporating the practice leads to an additional $28,638 to $33,565 in excess funds to reinvest in the corporation, leading to growth of the business, reserve funds, or additional retirement funding.
HEALTH PROFESSIONAL INCORPORATION: ADVANTAGES
Apart from the restrictions of the professional incorporation, there are other disadvantages including:
All of these factors should be considered when deciding if incorporation is the right choice for your practice.
1. If the family member works 20 hours a week for the health professional corporation, then they are entitled to dividends.
2. Once the professional reaches the age of 65, they are able to distribute dividends to their spouse without further restrictions.
HEALTH PROFESSIONAL INCORPORATION: DISADVANTAGES
One of the most important restrictions for health professional corporations is regarding the ownership of the corporation. Currently, only professionals are allowed to be shareholders of a health professional corporation. For example, in a physiotherapist’s professional corporation, only individuals registered with the College of Physiotherapists are allowed to be shareholders, therefore, a spouse who is not a physiotherapist cannot be a shareholder. Holding corporations and family trusts are also prohibited from being shareholders of health professional corporations in Ontario.
Fortunately for doctors and dentists, the legislation was amended to allow family members to be shareholders of non-voting and non-participating shares, as well as trust for the benefit of minor beneficiaries. These exceptions currently do not apply to other health professional corporations in Ontario.
There are situations where some of the health professions governing bodies will accept health professionals to operate under clinics or management corporations instead of being a professional corporation. For example, it is very common for physiotherapists to organize their practice as an incorporated clinic instead of a professional corporation. This is because the College of Physiotherapists of Ontario usually accepts a structure where a clinic hires a physiotherapist to provide treatment for the clinics’ patients, instead of the clinic being a professional corporation itself. This then allows the clinic to be considered a regular corporation without the restriction of only having a physiotherapist as shareholder, but instead allowing for any individual to be a shareholder, as well as avoid in other restrictions unique to professional corporations. Unfortunately, not all professional colleges accept this structure, for example, doctors, dentists and chiropractors will not accept these types of structures.
Another exception to the general rule is that a pharmacist in Ontario is allowed to operate a pharmacy in a regular corporation as long as 51% of all voting and participating shares are held by a pharmacist.
In order to fall within some of the exceptions of being able to operate your business under a regular corporation, the governing body must have a policy to accept those types of structure. If not, you must operate under a health professional corporation and abide by the regular restrictions that come with having one.
HEALTH PROFESSIONAL INCORPORATION: RESTRICTIONS
HEALTH PROFESSIONAL INCORPORATION: POTENTIAL PLANNING OPPORTUNITIES
As shown in figure 1 where the health professional earning a net of $200,000 but only required $80,000 to subside their living expenses, that same individual can decide to pay themselves either in the form of a salary or a dividend. Figure 1 demonstrates that a dividend was less costly by $4,927 compared to a salary, which shows that there would be an overall savings of $4,937 by distributing a dividend instead of a salary to the health professional in order to net out $80,000 after taxes. Of course, other factors must be considered, such as the value of CPP contributions, the creation of RRSP room, various personal credit that might require salary income, etc. The answer is never as simple as the result of the math, but this is a flexibility that is afforded only to those who are incorporated. Those individuals can also control how much funds they want to remove year to year from the corporation in order to defer taxes to another fiscal year. It is important to discuss the option of salary and dividend or a mix of both with your accountant in order to put forth a good game plan.
1. Flexibility: Salary vs dividend
*Rates are effective as of January 1, 2020 and are subject to change. The assumption given in this example is that 100% of the income came from the professional practice, if passive income was generated in the corporation then these rates might change, we invite you to see the potential tax consequences of earning passive income in a corporation by reading the following articles, www.robertcpa.ca/2018-fall-economic-update and www.robertcpa.ca/corporate-tax-update.
Here are health professionals who can currently incorporate their practice:
This article is written with the goal of helping health professionals understand the important advantages, disadvantages, restrictions and planning opportunities involved with incorporating a health practice.
Physicians and Surgeons