Professional corporations are popular in accounting, medicine, and law, and the tax benefits are limited compared to other incorporated businesses because of the regulatory requirement of shareholding.
One of the main benefits of using corporate structures is the lower corporate income tax rate, which is an attractive feature that Canadian Controlled Private Corporations (CCPC) can take advantage of. They will get preferential tax rates at both federal and provincial levels, and most professional corporations fall within this category if they practice in a relevant province. CCPCs are allowed a small business deduction that will bring down the corporate tax rate on the first $500,000 of Active Business Income. There are rules, of course, when it comes to sharing the $500,000 business limit. These are in place to prohibit the multiplication of small business development through several corporations. If, for example, a professional has other corporations, the business limit would have to be allocated amongst them all.
It’s also important to note that lower corporate tax rates are effective only with asset retention, so if the earnings are distributed to shareholders, the dividend gross-up will be applied to add the same income at a personal level. This income will then be taxed at the marginal rates of individuals, and a dividend tax credit is available to eliminate double taxation. Using a professional corporation will also allow you to defer tax, which is another advantage you can experience. Professional corporations do require that the shareholders, directors and officers be members of the regulatory body, so income splitting is not available with lower-income family members.
There is a lot of information you have to consider, and you must look at your personal tax situation and your goals. This will help you decide how to withdraw from the professional corporation if that is what you want to do and whether it should be a salary, a dividend, or a mix of both. You should also be aware of Personal Services Business rules, as this can lead to other tax issues you may face.
There are differences between small practices and larger firms with multiple shareholders, so you need to discuss the details of your situation with a professional accountant to see what they recommend. They will help you proceed in the right direction and guide you to make informed decisions.
The experts at Oasis LLP will provide you with more information regarding this matter. We offer several services, including audits and accounting, bookkeeping, taxes and advisory services, so you can always rely on our chartered professional accountants. We will help you take your business to the next level and will make sure you achieve all of your goals, so if you are looking for personalized accounting services, contact us today!
