pro Corporations - Advantages and Disadvantages

Are Health Insurance Premiums Pre-tax - pro Corporations - Advantages and Disadvantages

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What is a expert corporation(Pc)?

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Are Health Insurance Premiums Pre-tax

A Pc is a corporation owned and operated by one or more members of the same profession (e.g. Physicians, lawyers, accountants, dentists). The services in case,granted by the corporation are generally restricted to the custom of the profession.

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

How does it differ from a base corporation?

There are some principal differences between a expert corporation and a common

corporation such as:

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

As a supervene of these differences, some of the benefits generally connected with a corporation may have a small application for a expert corporation. This is supplementary described below

Advantages of using a expert Corporation

Potential tax savings

A reduced federal and provincial corporate tax rate is applied on the first 0,000 of expert wage earned by a expert corporation. Some provinces apply the reduced tax rate on wage of up to 0,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on wage subject to the small company limit will range between almost 11% and 19%. As a supervene of this lower rate, the combined corporate and shareholder taxes paid on expert services wage is slightly lower than if such wage were to be earned by you directly.

Potential tax deferral

Perhaps the most principal advantage of using a Pc is the capability to defer taxes. expert wage 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 wage at the corporate level is taxed at a lower rate than your personal income, a tax deferral chance exists when the wage is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. You). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend.

Let's illustrate. If you earn a expert wage of 0,000 per year as a sole proprietor and only need 0,000 of pre-tax wage for personal expenses, you will be left with 0,000 that will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with 9,000 to invest.

On the other hand, if you merge the practice, the 0,000 will be left in the corporation and taxed at the small company rate. Assuming a corporate tax rate of 18%, the corporation will be left with 4,000 to invest.

That's ,000 more.

Sole proprietor expert corporation

Income 0,000 0,000

Personal needs (0,000) (0,000)

Remaining funds 0,000 0,000

Taxes (,000) (,000)

Net funds 9,000 6,000

Additional funds in the

professional corporation ,000

The supplementary funds in the corporation may be used to pay off debt, purchase capital assets, secure investments or fund an insurance policy

Flexible laborer benefits

As an laborer of a expert corporation, you can passage obvious types of laborer benefits that would otherwise not be available if you were a sole proprietor or a partner in a partnership. For example, the corporation can organize an individual Pension Plan (discussed later on) or a relinquishment compensation Arrangement (Rca) for you. These relinquishment savings vehicles can also contribute you with potential creditor-protection benefits. An laborer health and welfare trust can also be created to contribute health benefits for you and your family.

Capital gains exemption

The Canadian tax rules permit that up to 0,000 in capital gains arising from the sale of the shares of a remarkable small company corporation may be exempt from tax. This 0,000 capital gains exemption is also available for shares of a expert corporation, in case,granted obvious conditions are met. However, the rights of a expert corporation may not be as literally transferable since, in many provinces, it can only be transferred to members of the same profession.

Flexibility in remuneration

You can pick to receive a combination of salary and dividends from a expert corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.

Limited market liability

A expert corporation does not generally safe you from personal liability for expert negligence. However shareholders of a expert corporation will have the same security as other corporate shareholders when it comes to trade creditors.

Income splitting

You can split wage through a corporation by paying dividends to adult family members who are shareholders of the corporation. This strategy may be less applicable to expert corporations situated in provinces where share rights is restricted to members of a particular profession. However other wage splitting strategies, such as hiring family members to work in the company and paying them a cheap wage for services rendered, are still available through a expert corporation.

Multiple small company deductions

As a supervene of a Canada wage division (Cra) ruling, it is potential for professionals operating through a expert partnership to render their services through a expert corporation and be able to passage many Small company Deductions (Sbds).

Income earned up to the Sbd limit of 0,000 is subject to a preferential tax rate (some provinces have a higher Sbd). Historically, the Sbd had to be shared among all corporate partners. Given Cra's new ruling, professionals currently operating as a partnership should consider the benefits of setting up a expert corporation to take advantage of many Sbds.

Individual pension plan

An individual Pension Plan (Ipp) is a defined advantage pension plan that a expert corporation can set up for the professional. The Ipp provides better annual contributions than Rsp limits for those over 40. Assets in an Ipp are protected from creditors; however, they may be subject to locking-in provisions during retirement. If you would like more facts on Ipps, please consult your advisor.

Disadvantages of a expert Corporation

Costs and complexity

The costs for establishing and maintaining a Pc are ordinarily higher than those of a sole proprietorship. Also, a expert corporation will incur more costs to file a corporate tax return, get ready T4 slips for salaries and T5 slips for dividends. A corporation is also subject to greater regulation and compliance than a sole proprietorship or partnership.

Employer health tax and Ei premiums

Corporations in some provinces have to pay a provincial health tax levy once the corporate payroll has exceeded a obvious threshold. Fortunately the basic amount you are not taxed on is fairly high (e.g. 0,000 in Ontario) so the impact of this tax on expert corporations may not be that significant.

Business losses

You cannot claim company losses incurred by a Pc on your personal tax return; whereas, in a sole proprietorship, you may use the company losses to offset your personal wage from other sources.

Liability for malpractice

As mentioned above, a expert corporation will not safe you from personal liability for expert negligence.

Who should use a expert corporation?

A Pc can contribute potential tax savings and tax deferral benefits. This may motion to you if you do not need all of your wage to live on. expert corporations may also motion to you if you wish to save for your relinquishment through alternative means, such as a pension plan or relinquishment compensation arrangement, or if you would like to limit your personal exposure to market liability.

Before incorporating, you should consider the cash-damming strategy, which converts all your non-deductible personal debt into tax-deductible company debt. Find out more
If you have questions on any of the issues discussed in this article, please speak with your advisor.

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