December 19, 2016

What is a professional corporation (PC)?

A PC is a corporation owned and operated by one or more members of the same profession (eg doctors, lawyers, accountants, dentists). The services provided by the corporation are generally restricted to the practice of the profession.

Professional corporations are now allowed in every province and territory across Canada. In each province / territory, the professional regulatory body usually determines whether its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows doctors to incorporate.

How does it differ from a common corporation?

There are some significant differences between a professional corporation and a common

Corporation such as:

  • Only members of the same profession can be shareholders of a professional corporation in many (but not all) provinces.
  • The officers and directors of a professional corporation must generally beholders of the corporation as well.
  • The professional corporation is generally subject to the investigative and regulatory powers of the regulatory body governing the profession.
  • A professional corporation will not protect a professional against personal liability for professional negligence.

As a result of these differences, some of the benefits commonly associated with a corporation may have a limited application for a professional corporation. This is further described below

Advantages of using a Professional Corporation

Potential tax savings

A reduced federal and provincial corporate tax rate is applied on the first $ 400,000 of professional income earned by a professional corporation. Some provinces apply the reduced tax rate on income of up to $ 500,000. The provincial limit variances by province. For 2010, the combined federal and provincial tax on income subject to the small business limit will range between approximately 11% and 19%. As a result of this lower rate, the combined corporate and shareholder taxes paid on professional services income is slightly lower than if such income were to be earned by you directly.

Potential tax deferral

Perhaps the most significant advantage of using a PC is the ability to defer taxes. Professional income earned through a corporation is taxed at two levels – once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income.

Since income at the corporate level is taxed at a lower rate than your personal income, a tax deferral opportunity exists when the income is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (ie you). The deferral ceases when a dividend is paid to you and you pay the tax on that divide.

Let's illustrate. If you earn a professional income of $ 500,000 per year as a sole proprietor and only need $ 200,000 of pre-tax income for personal expenses, you will be left with $ 300,000 that will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with $ 159,000 to invest.

On the other hand, if you incorporate the practice, the $ 300,000 will be …