Professional Corporation 101: The Advantages of a Professional Corporation in Canada

By: Jonathan Gottesman, Wealth Advisor, Pearl Financial Group, iA Private Wealth

In Canada, professionals such as doctors, lawyers, accountants, and others have the opportunity to operate their practices through professional corporations—a legal structure with numerous advantages. While specific benefits may vary across provinces and territories, setting up a professional corporation in Canada can bring significant rewards. Let's dive into some advantages that make it a compelling choice:

Income/Tax Deferral: A notable tax benefit is the ability to defer income within a professional corporation. Instead of immediately being subject to personal income taxation, professionals can defer tax payments until they choose to withdraw funds by retaining earnings within a professional corporation. This enables the corporation to retain earnings for future business investments or reinvestment in their practice. The flexibility of having funds in the corporation also empowers the corporation and the corporation owner to manage personal tax obligations strategically while bolstering their tax planning strategies.

Investing: By retaining earnings within the corporation, professionals can use those funds to invest in stocks, bonds, GICs etc., using funds that are subject to more favourable tax treatment. Corporate accounts have the same advantages that non-registered accounts have; capital gains tax rules, carry forward of capital losses, no contribution limits etc.

Lower Corporate Tax Rates: Professional corporations are subject to corporate tax rates, which are generally lower than personal tax rates for high-income earners. By leaving income within the corporation and paying corporate taxes on it, professionals defer personal taxes until they withdraw funds. In Ontario, the general corporate tax rate on the first $500,000 of active business income is 12.2%, while the rate on income above $500,000 is 26.5%. In contrast, personal income tax rates can reach as high as 53.53% in Ontario[1].

Below is an example to show the effect of taking advantage of the lower tax rate (for simplicity, we will be using the marginal tax rate):

Access to Deductions and Expenses: Professional corporations enjoy access to various deductions and expenses that individuals operating as sole proprietors or partners do not. By deducting expenses such as rent, utilities, office supplies, and professional development costs from the corporation's income, professionals can reduce their tax liability effectively. Something to note, is that corporations with more than $50,000 of passive investment income in the previous year will see a reduction, and possible complete loss, of the small business deduction.

Insurance: Purchasing insurance with corporate assets is an additional benefit of professional corporations. By utilizing corporate funds to secure insurance policies, professionals can obtain coverage using funds that are subject to lower taxation compared to their personal income.

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In short, establishing a professional corporation in Canada presents many advantages. It is important to see if incorporating makes sense for you as it could help with optimizing your financial well-being and lay a solid foundation for future growth and success.

Disclaimer: This information has been prepared by Jonathan Gottesman who is an Investment Advisor for iA Private Wealth Inc. Opinions expressed in this article are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth Inc. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada.

[1] ?(Corporate investment income tax rates – 2023, EY) https://assets.ey.com/content/dam/ey-sites/ey-com/en_ca/topics/tax/tax-calculators/2023/ey-tax-rates-corporate-investment-2023-01-15-v1.pdf