Health Insurance Claim Form 1500 Template - pro Corporations - Advantages and Disadvantages
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A Pc is a corporation owned and operated by one or more members of the same profession (e.g. Physicians, lawyers, accountants, dentists). The services provided by the corporation are ordinarily restricted to the practice of the profession.
Professional corporations are now allowed in every province and territory across Canada. In each province/territory, the professional regulatory body regularly determines either its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to incorporate.
How does it differ from a common corporation?
There are some needful differences in the middle of a professional corporation and a common
corporation such as:
Only members of the same profession can be shareholders of a professional corporation in many (but not all) provinces. The officers and directors of a professional corporation must ordinarily be shareholders of the corporation as well. The professional corporation is ordinarily branch to the investigative and regulatory powers of the regulatory body governing the profession. A professional corporation will not protect a professional against personal liability for professional negligence.
As a follow of these differences, some of the benefits ordinarily linked with a corporation may have a minuscule application for a professional corporation. This is further described below
Advantages of using a professional Corporation
Potential tax savings
A reduced federal and provincial corporate tax rate is applied on the first 0,000 of professional earnings earned by a professional corporation. Some provinces apply the reduced tax rate on earnings of up to 0,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on earnings branch to the small company limit will range in the middle of almost 11% and 19%. As a follow of this lower rate, the combined corporate and shareholder taxes paid on professional services earnings is slightly lower than if such earnings were to be earned by you directly.
Potential tax deferral
Perhaps the most needful advantage of using a Pc is the quality to defer taxes. professional earnings earned straight through a corporation is taxed at two levels - once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income.
Since earnings at the corporate level is taxed at a lower rate than your personal income, a tax deferral opening exists when the earnings is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. You). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend.
Let's illustrate. If you earn a professional earnings of 0,000 per year as a sole proprietor and only need 0,000 of pre-tax earnings for personal expenses, you will be left with 0,000 that will be taxed at the top marginal rate. Assuming a marginal tax rate of 47%, you will be left with 9,000 to invest.
On the other hand, if you incorporate the practice, the 0,000 will be left in the corporation and taxed at the small company rate. Assuming a corporate tax rate of 18%, the corporation will be left with 4,000 to invest.
That's ,000 more.
Sole proprietor professional corporation
Income 0,000 0,000
Personal needs (0,000) (0,000)
Remaining funds 0,000 0,000
Taxes (,000) (,000)
Net funds 9,000 6,000
Additional funds in the
professional corporation ,000
The further funds in the corporation may be used to pay off debt, buy capital assets, procure investments or fund an assurance policy
Flexible employee benefits
As an employee of a professional corporation, you can access safe bet types of employee benefits that would otherwise not be ready if you were a sole proprietor or a partner in a partnership. For example, the corporation can construct an private Pension Plan (discussed later on) or a withdrawal compensation Arrangement (Rca) for you. These withdrawal savings vehicles can also furnish you with inherent creditor-protection benefits. An employee health and welfare trust can also be created to furnish health benefits for you and your family.
Capital gains exemption
The Canadian tax rules permit that up to 0,000 in capital gains arising from the sale of the shares of a qualified small company corporation may be exempt from tax. This 0,000 capital gains exemption is also ready for shares of a professional corporation, provided safe bet conditions are met. However, the rights of a professional corporation may not be as indeed transferable since, in many provinces, it can only be transferred to members of the same profession.
Flexibility in remuneration
You can pick to receive a blend of salary and dividends from a professional corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.
Limited market liability
A professional corporation does not ordinarily protect you from personal liability for professional negligence. However shareholders of a professional corporation will have the same protection as other corporate shareholders when it comes to trade creditors.
Income splitting
You can split earnings straight through a corporation by paying dividends to adult house members who are shareholders of the corporation. This strategy may be less applicable to professional corporations situated in provinces where share rights is restricted to members of a singular profession. However other earnings splitting strategies, such as hiring house members to work in the company and paying them a cheap wage for services rendered, are still ready straight through a professional corporation.
Multiple small company deductions
As a follow of a Canada earnings department (Cra) ruling, it is inherent for professionals operating straight through a professional partnership to render their services straight through a professional corporation and be able to access manifold Small company Deductions (Sbds).
Income earned up to the Sbd limit of 0,000 is branch to a preferential tax rate (some provinces have a higher Sbd). Historically, the Sbd had to be shared among all corporate partners. Given Cra's new ruling, professionals currently operating as a partnership should consider the benefits of setting up a professional corporation to take advantage of manifold Sbds.
Individual pension plan
An private Pension Plan (Ipp) is a defined advantage pension plan that a professional corporation can set up for the professional. The Ipp provides great yearly contributions than Rsp limits for those over 40. Assets in an Ipp are protected from creditors; however, they may be branch to locking-in provisions while retirement. If you would like more information on Ipps, please consult your advisor.
Disadvantages of a professional Corporation
Costs and complexity
The costs for establishing and maintaining a Pc are regularly higher than those of a sole proprietorship. Also, a professional corporation will incur more costs to file a corporate tax return, get ready T4 slips for salaries and T5 slips for dividends. A corporation is also branch to greater regulation and compliancy than a sole proprietorship or partnership.
Employer health tax and Ei premiums
Corporations in several provinces have to pay a provincial health tax levy once the corporate payroll has exceeded a safe bet threshold. Fortunately the basic whole you are not taxed on is fairly high (e.g. 0,000 in Ontario) so the impact of this tax on professional corporations may not be that significant.
Business losses
You cannot claim company losses incurred by a Pc on your personal tax return; whereas, in a sole proprietorship, you may use the company losses to offset your personal earnings from other sources.
Liability for malpractice
As mentioned above, a professional corporation will not protect you from personal liability for professional negligence.
Who should use a professional corporation?
A Pc can furnish inherent tax savings and tax deferral benefits. This may request for retrial to you if you do not require all of your earnings to live on. professional corporations may also request for retrial to you if you wish to save for your withdrawal straight through alternative means, such as a pension plan or withdrawal compensation arrangement, or if you would like to limit your personal exposure to market liability.
Before incorporating, you should consider the cash-damming strategy, which converts all your non-deductible personal debt into tax-deductible company debt. Find out more
If you have questions on any of the issues discussed in this article, please speak with your advisor.
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