If you practice a profession, are you taking advantage of all the tax saving opportunities available to you?
Many professionals can take advantage of specific tax saving opportunities for their practices, including the ability to incorporate.
While you can carry on your professional practice as an individual, incorporating — allowed in most provinces for certain professionals including doctors, dentists, chiropractors, optometrists, lawyers, real estate agents and accountants — has advantages.
Unlike a regular corporation, a professional corporation does not limit your liability except for non- rofessional matters.
Standard Professional Corporation For tax purposes, a professional corporation is generally treated like other small business corporations.
For example, for federal and Ontario tax purposes your corporation can take advantage of the lower tax rate for small business income under $500,000. The combined small business tax rate for Ontario corporations is 15.5 per cent in 2013.
There may also be opportunity to defer tax. If you don’t need all the income earned by your practice, you can leave some of it in the corporation to be taxed a lower rate.
You can reinvest that income in the corporation until you need the funds, or the corporation can pay off any debts it has.
For example, say your practice earns net income of $300,000 in 2013; as an unincorporated professional you would pay about $118,000 in income tax. But if your practice was incorporated, earned $300,000 and paid you $200,000, leaving $100,000 to be taxed in the corporation, the total tax paid would be approximately $87,500.
The tax deferral of $30,500 means more cash will remain in the corporation to invest and will not be taxed until it is paid to you as a dividend on your shares of the corporation. If this is several years in the future, the deferral advantage can be significant.
Another deferral opportunity is if you decide to have the corporation pay you a bonus, which it can accrue in the corporation at its year-end but defer the payment to you until the next year, up to 179 days after the corporation’s year-end. Assuming a December 31 year-end, the corporation gets a deduction in 2013 and by deferring payment of the bonus until 2014, source deductions do not have to be remitted to the Canada Revenue Agency until as late as July, 2014.
Other tax advantages of incorporation can include income splitting with family members if the regulating body for your profession allows them to be shareholders.
As shareholders, your spouse or adult children earn dividends that may be taxed at lower rates than the rate that would apply if you earned the income directly.
If the family member has no other income, he or she may be able to receive up to $40,000 in dividends from the corporation tax-free. Proper planning is needed to avoid rules that can result in dividend income being taxed at higher rates.
You may also be able to employ family members in your corporation and pay them a salary that will be taxed in their hands, as long as the amount you pay is reasonable for the work done.
If you want to sell your professional corporation in the future, you may be able to take advantage of the lifetime capital gains exemption for small business shares.
This exemption covers $750,000 in capital gains for 2013, increasing to $800,000 for 2014 and indexed for later years.
As with any business sale, you’ll need careful planning to ensure the best possible tax result for you. Personal Services Business (“PSB”) The rules discussed above do not consider a personal services business, which recently saw a significant bump in tax rate.
You would have a PSB if you provide services on behalf of your corporation to another entity and you would reasonably be considered an employee or officer of the entity to which you provide services but for the existence of your corporation.
If your corporation employs more than five full-time employees, it will generally not be considered a personal services business.
The previous tax deferral has all but been eliminated for a PSB. Income from a PSB is now not even eligible for the general corporate tax rate reduction and is taxed at a federal tax rate of 28 per cent (up from 15 per cent for 2012) for taxation years that begin after October 31, 2011. Ontario taxes of 11.5 per cent would also apply. The PSB is not eligible for the small business deduction and the expenses it can deduct are severely restricted for tax purposes – essentially only the salary and wages of the “incorporated employee.”
If you have a personal services business, you’ll need to determine the effects of the tax rate increase and decide what steps you should take.
In Summary Whether you choose to incorporate your professional practice or not, your business can benefit from a tax planning checkup to ensure you’re getting the most out of potential tax saving opportunities.