Your Finances with Stephen Maltby
Professionals working in such areas such as law, medicine, engineering, architecture or accounting may choose to incorporate. When incorporated the professional is an employee of the professional corporation, which, itself, carries on the business of the professional practice. Rules do vary by Province and Profession.
The legislation of most provinces restricts the activities that the professional corporation may carry on and limits the business of the corporation to the practice of the profession or “activities ancillary to the practice.” That being said, the provinces generally permit the investing of surplus funds earned by the practice to be left in the corporation and be invested therein, providing a potentially significant tax deferral advantage.
There are various tax reasons why a professional may wish to incorporate: to realize an absolute tax savings, the potential for significant tax deferral, various income-splitting opportunities with a spouse/partner or adult children, or perhaps to ultimately take advantage of the lifetime capital gains exemption on gains on the sale of the practice (assuming this is permitted and feasible in the professional’s province).
Professional clients are reminded that the mere act of incorporating a professional practice will not absolve the professional from personal liability in the case of malpractice. In other words, a doctor cannot hide behind her corporation to avoid a malpractice lawsuit. On the other hand, the use of a corporation can indeed provide limited liability with respect to normal business dealings, such as trade payables, office space lease liabilities and bank loans that haven’t been otherwise personally guaranteed.
Investment and insurance advantages are also available by sheltering in Corporate Structures.Uses of family trust structures ,holding companies and use of Corporate funds to invest in other businesses are other basic advantages.
Professionals should carefully review their structure and understand the flow of income throughout their structure.
Stephen Maltby is an Investment Adviser and Chartered Accountant with CIBC Wood Gundy. He has been in the financial services industry for more then 30 years and has held various accounting, investment and management positions with several accounting and investment firms over the years. He is in addition to his Advisor role a First Vice-President and Executive Director Atlantic Canada, CIBC Wood Gundy.