feature Financial Adjustments Professional corporations for chiropractors By Tim Edworthy, CA, with paul philip, CFp, CLU, and Nancy philip CFp, CLU roper tax planning and implementation are important components of a success-ful financial plan. With the help of Tim Edworthy, this instalment of Financial Adjustments focuses on professional corporations, and on strategies to reduce taxes and increase your wealth. In the past several years, every province has enacted legislation that allows professionals to incorporate. For chiropractors, the legislation permits only the professional to own any class of shares of his or her professional corporation (PC). As a result, many tra-ditional tax benefits related to the operation of a private company are generally unavailable. However, advance planning may create income-splitting opportunities for the professional and family members. This article outlines the benefits and issues related to the use of a PC by a chiropractor for the operation of a business. The ability to incorporate is available to chiropractors in all provinces. A PC can provide several potential tax-deferral and tax-saving opportunities. In con-junction with the implementation of an individual pension plan (IPP) and/or a retirement compensation arrangement (RCA), a PC can be an alternative retirement savings vehicle for the individual who does not require all his or her income for living purposes. Tim Edworthy, CA, is a senior tax manager with Pricewaterhouse-Coopers LLP. Tim can be reached at [email protected]. P Tim Edworthy, CA Paul Philip, CFP, CLU LEGAL CONSIDERATIONS Because PCs are governed by specific provincial legislation, they are subject to unique corpo-rate law issues. Unlike typical corporations, PCs generally do not protect their shareholders from professional malpractice claims against the corporation. However, the professional may be able to achieve some level of protection (e.g., in respect of trade payables, lease liabilities, bank loans) for liabilities not covered by his or her personal guarantee. Provincial legislation requires that the majority of directors of the chiropractic PC them-selves be professionals licensed under the relevant provincial governing body. Additionally, the legislation generally precludes indirect share ownership of the chiropractic PC. BENEFITS OF INCORPORATION The primary benefits of incorporation of a chiropractic professional practice are the tax ad-vantages available to a corporation. Incorporation may also offer some compensation flex-ibility and facilitate access to the capital gains exemption. Low corporate tax rates Setting up a PC allows significant amounts of tax to be deferred. The corporation retains the income, paying tax at relatively low corporate rates. As the table below shows, for the calendar year 2011, all provinces provide a low rate of tax on the first $400,000 to $500,000 of active business income earned by a corporation. Maximum deferrals range from $125,000 to $176,850, depending on the province. This is calculated as the $400,000 to $500,000 limit multiplied by the difference between the personal rate at which the professional would have paid tax and the corporate rates at which the PC pays. The deferral advantage is available only while the corporation retains the funds. When the PC distributes the funds, the recipient will be subject to personal tax. If the professional needs all of the corporate funds every year, the tax deferral will largely be lost. Alternative retirement investment vehicle As noted in the table on page 19, the corporate tax rates for PCs range from a low of 11 per cent to a high of 19 per cent dependent on province. Based on the same amount of taxable income, the after-tax funds retained by a PC provide a greater pool of funds for investment purposes compared to the after-tax funds available to an unincorporated professional. paul philip, CFp, CLU, and Nancy Philip, CFP, CLU, are a dynamic sib-ling team who have been advising hundreds of chiropractors across Canada since 1992. Their firm, Fi -nancial Wealth Builders, is located in Toronto, Ontario. To learn more about building your wealth, visit their website at www.fwb-inc.com or contact paul or Nancy at 416-497-0008. Nancy philip, CFp, CLU 18 • CANAdiAN CHiROpRACTOR | MAY 2011 www.canadianchiropractor.ca
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