March 2001 volume 5, issue 1 

In the last issue of Prosperity, we highlighted that pending legislation will allow professionals to incorporate. Since the last issue, the legislation has been passed by Queen's Park, but at the time of publication it had not yet been proclaimed. In other words, the ability of professionals to incorporate is in fact law, but a law that has not yet come into effect.

There are several important points in this new legislation:

• All of the issued and outstanding shares of the corporation can only be owned by one or more members of the same profession. This means your spouse nor your children will be able to own shares in the professional corporation unless they are a member of your profession.
• All officers and directors of the corporation shall be shareholders of the corporation.
• The name of the corporation shall include the words "Professional Corporation" and shall not have a number name.
• The articles of incorporation shall provide that the corporation may not carry on a business other than the practice of the profession.

Although these conditions limit the establishment of complicated income splitting structures professionals can still take advantage of the main tax benefit from incorporation: tax deferral. Corporations provide a tax deferral due to the fact that active business income is taxed at a rate lower inside a corporation than the highest individual tax rate. As a result, funds kept inside a corporation will attract less tax than if the funds were paid out to the individual. This results in a tax deferral of approximately 26 per cent on every dollar left in the corporation up to a maximum of $200,000. This could result in a maximum annual tax deferral of $52,000.

When looking at your ability to make use of this tax deferral advantage, consideration should be made for any business debts you may have. Transferring these business debts into the corporation will allow you to pay these debts down with cash that has only attracted 20% tax versus cash that has attracted personal tax of up to 46%.

Another tax advantage that will be important for some will be the availability of the $500,000 enhanced capital gains exemption. This capital gain exemption will be available to most professionals that can sell shares to a third party. Careful planning is required to ensure the availability of Capital Gains Exemption–planning that Wilkinson & Company has been doing for many years for many of our business clients.

There are some unique challenges that need to be addressed if you are considering incorporation. These might include the requirement to share the small business deduction, and the requirement to include in income the remaining 10-year reserve that was created in 1995 by sole proprietors and members of partnerships who had a non-December year-end.

The partners and staff of Wilkinson & Company LLP, are very familiar with these new and complex tax changes and can expertly guide you through the process of incorporation. Please call us for more information.

Steve Thompson, CA, CFP, TEP is a tax partner and Certified Financial Planner with Wilkinson & Company LLP. He is a graduate of the Canadian Securities Course, and author of the best-selling tax guide, Beat the Taxman: Easy Ways to Save Tax in Your Small Business.