PROFESSIONAL CORPORATIONS: TAX BENFITS AND STRUCTURING ISSUES

Transcription

1 PROFESSIONAL CORPORATIONS: TAX BENFITS AND STRUCTURING ISSUES Colin Smith, 1

2 Introduction Tax Integration review of 2016 rates Advantages of Incorporation Tax Deferral Income Splitting Miscellaneous Disadvantages of Incorporation Personal Services Business Liability Issues HST Discussion of Structures and Changes to SBD rules 2 2

3 Tax Integration: With 2016 Small Business Rate and Top Marginal Personal Rate Individual (Top Rate) Incorporated Difference Income 53.5% 15% 38.5% Dividend N/A 45.3% (45.3%) Integrated Rate 53.5% 53.5% 0% 3 3

4 Tax Integration: With 2016 General Rate and Top Marginal Personal Rate Individual (Top Rate) Incorporated Difference Income 53.5% 26.5% 27% Dividend N/A 39.3% (39.3%) Integrated Rate 53.5% 55.4% (1.9%) 4 4

5 Tax Integration: Tax Integration: With 2016 PSB Rate and Top Marginal Personal Rate Individual (Top Rate) Incorporated Difference Income 53.5% 39.5% 14% Dividend N/A 39.3% (39.3%) Integrated Rate 53.5% 63.3% (9.8%) 5 5

6 Tax Deferral To the extent that the professional can maintain active income in the corporation, there is a tax deferral of 38.5%, 27% or 14% depending on whether the income is tax at the small business rate, the general corporate rate or the personal services business rate, respectively. There is also a small deferral on passive investment income. 6 6

7 Tax Integration: Passive Investment Income in Professional Corporation Income (Interest and U.S. Dividends) Capital Gains Canadian Dividends Corporate 50.2% 25.1% 38.3% Personal 53.5% 26.8% 39.3% Difference (3.3%) (1.7%) (1%) 7 7

8 Income Splitting Only doctors and dentists can have family shareholders. Other professionals typically utilize management structures to income split. 8 There is approximately a $20,000 savings on the first $50,000 of dividends directed to a shareholder with little or no other income, compared to the top marginal tax rate and approximately $30,000 of savings on the first $100,000 directed to such shareholder. 8

9 Miscellaneous Issues 9 Cheaper Non-Deductible Expenses Eg. Life insurance premiums are approximately 70% cheaper paid through a professional corporation. Consider also the non-deductible portion of meals and entertainment. Individual Pension Plans potentially will allow for a greater amount to be sheltered than RRSPs Capital Gains Exemption Most frequently used by dentists Estate Planning 9

10 Disadvantages Liability Issues Tax deferral will result in wealth accumulation directly in the hands of the professional Can be mitigated through periodic reorganizations Personal Service Business This is a material issue for physicians operating in some hospitals Very fact specific, but be weary Cost of On-going Maintenance 10 10

11 Disadvantages HST This is primarily an issue for medical professionals who are members of a partnership or an incorporated group which receives funding for research or teaching Depending on the structure and the nature of work, a corporation may change the exempt status of the service provided to a taxable supply for HST purposes Also an issue where on-call funding is received from a hospital (but incorporation does not affect the characterization) 11 11

12 OBCA Requirements Subsection 3.1(2) of the OBCA sets out requirements: Shares must be owned by members of the same profession Directors and officers must be shareholders Must include professional corporation in the name Articles must restrict activities to the practice of the profession Corporation can make passive investments 12 12

13 OBCA Requirements Subsection 3.1(6) of the OBCA provides an exception for doctors and dentists which allows for family members to hold shares This exception is what allows for income splitting 13 13

14 Medical Professionals -Share Structure Minor children can directly hold shares, but shares can also be held in trust for minor children. Consider using share terms which allow for unlimited dividends on shares held by children and also allow for redemption of those shares for a nominal amount. 14 If there is a prenuptial agreement, the same comment could be made for a spouse. 14

15 Triggering Gain on Goodwill or Partnership Interest If the practice being incorporated has goodwill associated with it or is carried on as a partner of a partnership it may be possible to trigger a gain on incorporation. 15 If a gain is triggered, the client is taxed at 26.8% on the amount of the gain but can then receive cash consideration from the corporation. The 26.8% rate is materially less than the dividend rate of 45.3% or 39.3% and is preferable where funds will be withdrawn from the corporation. 15

16 Tax Issues to Watch For Kiddie Tax U.S shareholders may create significant problems Partnership income and employment income is problematic for the small business deduction ( SBD ) Associated corporations may reduce SBD limit Avoid cross shareholdings where both spouses are professionals 16 16

17 Typical Partnership Structure Dr. Jones Professional Corporation Partnership pays professional corporation on a fee-for-service basis Medical Partnership 17 17

18 March 22, 2016 Budget 18 The March budget introduced proposed amendments which will have effect of limiting the availability of the small business deduction The rules apply for the first corporation taxation year beginning after March 22, 2016 The rules expand the specified partnership rules to treat a corporation as a partner if the corporation provides services to the partnership and a shareholder thereof is a partner of the partnership Similar rules apply to corporate structures to limit the small business deduction 18