Professional Corporations and Income Taxes: A Refined Overview 

In recent times, many professionals have the option to incorporate their practices into professional corporations, thanks to provincial legislation. This structure is increasingly common, especially among Accountants, Lawyers, and Medical Professionals in provinces with relevant professional regulations. 

Key Points: 

• Nature of Professional Corporations: 

• This article provides an income tax perspective on professional corporations, not a legal one. It’s essential to consult legal counsel for professional liability issues. 
• The content mainly focuses on the Province of Ontario, Canada. 

• Limitation of Liability: 
• One primary reason for incorporation is the limited liability benefits of a corporation. 
• For professional corporations, there’s limited liability for corporate debts, trade payables, and certain loans. 
• However, professionals don’t get personal liability protection against professional malpractice. 

• Shareholding Restrictions: 
• Provincial regulations dictate that only members of the designated profession can hold shares in a professional corporation, either directly or indirectly. 
• This limits income splitting opportunities with lower-income family members. 
• All directors and officers must also be shareholders. 

• Tax Considerations: 
• Professional corporations have some tax benefits, though they’re more limited compared to other businesses. 

• They can enjoy lower corporate income tax rates, especially if they qualify as Canadian Controlled Private Corporations (CCPC). 
• There’s a tax deferral advantage, allowing professionals to time their income distributions. 
• Income splitting with family members is generally not available due to regulatory requirements. 
• Shares of some professional corporations might qualify for the Lifetime Capital Gain Exemption (LCGE) under specific conditions. 
• Professionals often grapple with whether to draw a salary or dividends from their corporation, and the decision depends on individual tax situations. 

• Other Tax Concerns: 
• Professionals should be wary of the Personal Services Business (PSB) rules, which can classify a professional corporation as a PSB under certain conditions, leading to tax disadvantages. 
• Larger firms with multiple shareholders might face more complex tax considerations.