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“PAWS” and Consider a Professional Corporation – A Primer for Veterinarians

29/01/2016


You may know veterinarians who have professional corporations and the arrangements work very well for them. You likely know other veterinarians who don’t have professional corporations – and those arrangements work equally well for them.

So What’s the Better Option?

The fact is, this is not a one-size-fits-all decision.  Before making a choice, it’s important to carefully assess the benefits and drawbacks of having a professional corporation. Following are some of the key considerations.

Tax Advantages

Essentially, a professional corporation is a corporation that carries on the professional practice of a veterinarian.  For most professionals, the associated tax advantages offer the greatest appeal.  When you earn income in a corporation in which you are a shareholder and an employee, rather than directly from a practice operated in your name, there are certain tax advantages.

Tax Deferral

Income may be retai​ned in the corporation; professional income earned in a corporation is subject to corporate tax rates, which are generally lower than personal tax rates.  In effect, this allows you to defer significant tax until you decide you want the corporation to distribute income to you as the shareholder.

Small Business Deduction

A professional corporation can claim the small business deduction – the small business tax rate in Ontario for 2016 is 15% on the first $500,000 of taxable income. This is much lower than the top marginal tax rate for an individual in 2016 which is 53.53%. Thus if you are able to save money, you would likely benefit from establishing a corporation where you could leave your savings. This could also allow you to defer annual taxes of up to $190,000.  When you eventually withdraw the funds from the corporation, when you retire or sell the business, you will have to pay personal tax; but you will have earned investment income on the deferred tax for the years the money stayed in the corporation, which you would not have been able to do if you earned the professional income personally. I like to say that it allows you to build your investments, and your future retirement income pool, using 85% of your dollars instead of just 46.5% of your dollars.

Remuneration Flexibility

As a shareholder and an employee of your professional corporation, you have the option of taking money out of the corporation as dividends, salary, or a combination of the two. This enables you to reduce taxes in a number of situations. As an employee of your professional corporation you can choose to draw sufficient income as salary to make the maximum contribution to a Registered Retirement Savings Plan (RRSP) and the Canada Pension Plan (CPP).  If you have a cumulative net investment loss and want to claim the capital gains exemption in future, you can also opt to receive dividends. If you have child care expenses you have to consider that you have enough salary to maximize the child care expense deduction.

Some clients choose dividends, some clients choose salary, and some have a combination of both. We spend a lot of time talking to our clients about the right salary / dividend mix to determine what the best solution is for our clients; again this is not a one-size-fits all decision, and there are many factors that are considered. Some clients prefer the structure of a professional corporation, and the payment of regularly scheduled salary and / or dividends to themselves personally, as this allows them to better plan and budget their personal spending and cash flow.

Capital Gains Exemption​

When you sell the shares of your professional corporation, you can claim this exemption and receive up to $830,000 of the gain tax-free.  If you are considering a sale of your existing professional corporation shares in the short term however, you should be aware that it can take up to two years for the shares of a corporation to be eligible for the capital gains exemption.  Also, some purchasers prefer to buy the assets of a corporation, rather than shares, in order to reduce potential liabilities. Even if you are not currently incorporated you may be able to incorporate prior to a sale of your practise to take advantage of the capital gains exemption.

As a Veterinarian in Ontario, unlike a dentist or doctor, you cannot have additional non-veterinarian shareholders of your corporation.  You can, however, create a holding company that allows you to own your shares indirectly. Therefore when you sell your practice, with a holding company in place, you can move non-business related assets out of your professional corporation and into the holding company. With the proper structure in place you can move surplus funds from your professional corporation to your holding company, over time or at the time of a sale of your practise, thereby still allowing you to utilize the capital gains exemption at the time of sale of your shares of the professional corporation that you own personally. After the sale you will still have your holding company intact with all your investments that you have accumulated over the years from the income you have earned in your professional corporation.

Managing Practice Debt

When a corporation holds the debts of your practice rather than you holding them personally, the corporation’s lower tax rate typically enables you to pay off debt faster. As pointed out above, incorporating gives you 85% of your dollars to use for debt reduction versus just 46.5% if your practice is not incorporated.

If you are thinking about incorporating an existing practise, practice debt can usually be transferred into a corporation at any time, under certain conditions. You can therefore acquire limited liability for some debts by, for example, holding in a corporation loans and leases for which you have not provided personal guarantees.

Liability Limitations

A key reason many owners incorporate their businesses is to limit legal liability. Unlike sole proprietors or partners in a partnership who are liable to the full extent of their personal assets for the liabilities of their business, for the shareholder of a corporation, liability is generally limited to the amount the shareholder invested in the company. This is not the case, however, for veterinary professional corporations. Governing provincial statute imposes professional liability, therefore shareholders are liable. Only insurance can protect you from malpractice.

Savings and Costs

Many of the benefits of having a professional corporation arise from holding and investing surplus funds in the corporation. Therefore if you draw most of the profits from your practice for personal needs, there are fewer tax advantages.

On the other hand, if you currently invest surplus income after paying personal tax, keeping these funds in a corporation could allow you to invest up to 38.5% more. Additionally, if you have significant practise debt, are looking at purchasing or setting up a new practise or are looking at selling your practise there can be significant tax and cash flow advantages.

There are also costs to consider. Establishing a professional corporation involves set up costs as well as ongoing legal and accounting costs.  These include incorporation fees and annual accounting fees for financial statements and T2 corporate tax returns.

Your MNP advisor can help you work through the advantages, savings and costs of incorporating so that you can make the decision that is right for your circumstances.

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