If you are a healthcare professional and you plan to provide professional services through a corporation, the Ontario Business Corporations Act (OBCA) requires you to set up a Health Profession Corporation (HPC). The OBCA, together with its Regulations and the governing regulatory body for your health profession provides the framework for regulating professional corporations for your health profession.
Despite the recent 2018 Federal tax changes, which arguably affected Dentists and Physicians the most due to their ability to income split with family members, incorporating a HPC may still make sense for healthcare professionals depending on your situation.
Here are our top six reasons for setting up an HPC:
Lower Corporate Tax Rate
Business income earned by a HPC is taxed at the corporate tax rate, which is significantly lower than the marginal personal tax rates. A healthcare professional earning $220,000 or more per year in personal income would be subject to the top marginal personal tax rate of 53.53%. In contrast, the current combined corporate tax rate for small businesses in Ontario is 23.5% on business income earned by a HPC up to $500,000*.
*As of January 1, 2018 the federal portion of the small business corporate tax rate was reduced to 10% from 10.5%. This rate will be reduced further to 9% effective January 1, 2019 as part of the Federal government’s announcement hat was made in October, 2017.
Lifetime Capital Gains Exemption
With a HPC, you have access to the Lifetime Capital Gains Exemption (LCGE) on the future sale of the business when you sell the shares of the HPC. The current LCGE amount for 2018 is $848,252.
Income earned from a HPC can be retained in the HPC, which is subject to the lower corporate tax rates, as compared to personal tax rates. This allows you to defer taxes until you decide you want your HPC to distribute income to you as the shareholder.
Opportunities for Income Splitting
For Doctors and Dentists, despite the new TOSI (Tax on Splitting Income) rules, there are still opportunities for income splitting. Although the rules have tightened compared to the previous regime, there are various exceptions that may apply to your situation.
Estate Planning – Bypassing Probate
Private companies, such as your HPC, are not subject to the probate process provided you have a Corporate/Secondary Will in place at the time of your death. This would result in saving the probate fees associated with your private company interests which would have been incurred if you had only a single Will in place or you passed away without a Will (intestate).
- Alternative retirement and estate planning strategies such as individual pension plans, retirement compensation arrangements, and permanent life insurance.
Before deciding whether or not an HPC is right for you, consult with a Tax Accountant to determine if this makes sense given your personal situation and current tax laws. Although there are benefits for incorporating an HPC, sometimes, it comes down to timing in order to take advantage of the benefits.
Michael E.B. Taing is a corporate lawyer with Hummingbird Lawyers LLP whose practice focuses on servicing healthcare professionals with their legal needs. For inquiries or consultation, please email firstname.lastname@example.org or email@example.com.