Small Business Deduction

First off, Toronto Accountants state that a Professional Corporation owned by an individual belonging to a professional within Ontario will be considered to be a Canadian Controlled Private Corporation. An advantage for CCPC’s, is that they are eligible to claim the small business deduction which allows businesses with a maximum net income of $500,000 to reduce their federal and Ontario taxes to 15.5%, from a general rate of 26.5%.

Partnerships

If a business is carried as a partnership, Toronto Accountants state that the small business deductions apply differently. Moreover, for partnerships planning on incorporating, they have the option to either incorporate as a sole Professional Corporation, or each of the partners have the option to incorporate separately. However, once the partners have decided to incorporate separately, the partnership is only eligible for one small business deduction for one of the partner’s corporations, which will be shared amongst the entire partnership.

Income Splitting amongst Family Members

It must be noted that, although recent changes have enabled family members to be shareholders as well, minors would still be ineligible to hold shares within the Professional Corporation. Therefore, the only eligible holders of shares would be spouses or adult children.

Splitting Income with a Spouse

Toronto Accountants advise that once Professionals attempt to split income with a spouse, there may be an issue that could potentially arise, known as the “Corporate Attribution.” Moreover, if a professional transfers property or makes a low-interest loan to a corporation where the spouse is or will become a shareholder, the imputed interest penalty on the amount of loan or property will be added onto the income. However, it is reduced by the interest and by the taxable amount of any dividends that the shareholder actually receives from the corporation. The transfer of property in exchange for fixed value preferred shares can give rise to these rules.

Fortunately however, Accountants of Toronto state that the corporate attribution rules do not apply for any period throughout which the corporation qualifies as a small business corporation (SBC), which is when it is a Canadian-Controlled Private Corporation, and if all, or 90% of the assets used in business are active in Canada. Please contact Toronto Accountants for more information regarding income splitting and attribution rules.

Income Splitting with Adult Children

If a professional would prefer to split income with adult children, the procedure would be similar to the one for spouses. However the positive aspect of splitting income with adult children is that the Corporate Attribution rules won’t be a concern. It would become possible to freeze, and allow children to subscribe for shares of a professional corporation which doesn’t qualify as a Small Business Corporation. However, Toronto Accountants state that one cannot hold shares for the benefit of adult children in trust.

Capital Gains Exemption for Qualifying Small Business Shares

Toronto Accountants suggest that another tax advantage that may be available, once incorporation is made after the professional or a family member disposes of shares of the professional corporation for a gain, is the capital gains exemption for qualifying small business corporation shares. During this case scenario, up to $800,000 of gross gains can be exempted from taxes, for each individual.

However, to qualify for the Capital Gains Exemption, the following conditions must be met:

• During the time of disposition, at least 90% of the corporation’s assets must have been used for business.
• Additionally, more than 50% of the corporation’s assets must have been used in an active business carried on primarily in Canada throughout the 24-month period, immediately before sale.
• Also, shares must not have been owned by anyone other than the vendor, or someone related, 24 months prior to the sale.

We have offices in Mississauga and Toronto have assisted a large number of professionals incorporate their practices. We also work virtually with our clients from all over Canada and globally. Our tax consulting and SR&ED partners assist Physicians, Dentists, Periodontists, Endodontists, Surgeons and other health-care specialists to incorporate.