Since 2001, the Professional Code has allowed the 45 professional orders in Quebec to practice. Their profession is through a joint-stock company (SPA) or a limited liability partnership (SENCRL). Since then, several professional orders have specified the methods of application of the Act to their members. According to their philosophy and their code of ethics.
Many tax and financial advantages are now available to professionals who choose to incorporate. Here is a short guide to assessing whether incorporation is advantageous for a professional.
The main benefit of incorporating professionals is the possibility of collecting income within a SPA in order to be taxed at the corporate rate, which is lower than the professional tax rate. The professional will obviously be taxed like any other citizen when he pays himself a salary or dividends, or when the SPA is sold.
Incorporation becomes advantageous especially when the professional does not need all his income to live. He will then be able to accumulate capital in the company and benefit from numerous tax and legal advantages, according to the requirements of each of the professional orders.
❚ DEFER INCOME TAX
The money accumulated in the professional’s SPA can be used to repay debts, make investments, or buy fixed assets. The tax to be paid on the liquidities of the SPA is then postponed, which represents a significant tax advantage. If the needs all his income to live Business Law, there is no liquidity left in the SPA and therefore few advantages. With the additional cash accumulated in the SPA, which results from the tax reduction, business debts can be more easily repaid.
❚ INCOME SPLITTING
Incorporation offers the possibility of applying an income splitting strategy with family members or even of creating a family trust through M&A advisory. However, it is necessary to verify the requirements of each of the professional orders regarding the flexibility of the shareholding of the SPA. For example, a dentist could pay his son, who is studying at university, income in the form of a dividend, which would be taxed at a marginal rate rather than at a rate of 48.2%.
DID YOU KNOW?
The maximum marginal tax rate for an individual on business income in Quebec (2008) is 48.2%. The 2008 active business corporations (ABES) rate is 19% for the first $500,000 and 30.9% for the excess.
❚ CAPITAL GAINS EXEMPTION
On the sale of the shares of the corporation, if it qualifies as an active corporation, the shareholder will be able to benefit from a Business Law capital gain exemption of $750,000. This is a tax benefit that materializes through significant tax savings in the event of the sale of the shares.
❚ LIMITED LIABILITY
A financial liability is limited to the obligations of the company and not to those of the professional (shareholder) with the help of M&A advisor. Thus, the SPA protects the professional against ordinary creditors. However, the shareholder remains entirely responsible for his professional acts.
ELEMENTS TO CONSIDER BEFORE INCORPORATING
THE FINANCIAL COMPONENT
❚ PERSONAL ASSESSMENT AND COST OF LIVING
Does the professional need all his income to live? Normally, for the incorporation to be advantageous, the professional must leave approximately $45,000 of annual net income in the SPA.
❚ FAMILY STATUS
Does the professional have a spouse who earns little or no income? Does the have dependent children over the age of majority who will be attending post-secondary institutions in Business Law? It is possible, in certain situations, to pay a family member a dividend of approximately $30,000, tax-free. In this way, the post-secondary education of an adult child can be paid for. In whole or in part, by the payment of dividends.
