Business Law

If you are a sole proprietor, we would strongly recommend incorporation. Incorporation provides you with limited liability to protect your personal assets from creditors, and tax advantages that will help you grow your business and your wealth.

A corporation is a legal entity distinct from its shareholders. The obligations, debts and liabilities of the business are those of the corporation and not of its shareholders. The protection from creditors is a significant advantage, particularly for businesses that are inherently risky. As a sole proprietor you are currently liable for every debt, liability, obligation and claim against your business.

Active business income earned by a corporation is taxed at a much lower tax rate, approximately 15.5% in Ontario on income up to the small business limit of $500,000. This presents two wealth planning opportunities. A growing business requires working capital. As a sole proprietorship, growing working capital is hard because profits are taxed at your personal marginal rate. By incorporating, you can grow your working capital at a much faster rate because of the low rate of corporate tax.

A corporation also provides for legal tax splitting with members of your family, if they are made shareholders of your corporation.

If your active business corporation is generating cash in excess of what you need, a cost-efficient solution is the creation of a holding corporation. The holding corporation structure, when designed properly, allows excess money from your active business corporation to be paid by dividend to the holding corporation, tax free.

The holding corporation is a separate legal entity, and is generally insulated from claims against your active business corporation. Care is required that the desired tax treatment is achieved in the structuring of the holding corporation. There are other financial planning considerations, such as ensuring the availability of the lifetime capital gains exemption, which must be addressed by the new structure. This type of corporate structuring may also be implemented as part of a broader strategy for business succession and included as part of your estate planning.

As a physician, you are generally permitted to create a physician corporation. The Ontario Business Corporations Act (OBCA) and the Regulated Health Professions Act govern physician corporations. Once incorporated, a Certificate of Authorization from the College of Physicians and Surgeons of Ontario (CPSO) is required for your professional corporation to practice medicine in Ontario.

There may be significant benefits to incorporation arising from income splitting through the payment of dividends to adult shareholders and the deferral of tax through retention of excess cash and investing in the corporation.

A professional corporation carries on the practice of medicine with you as both a shareholder and employee of your corporation. It is important to note that under the provisions of the OBCA, a professional corporation does not shield the shareholders from professional liability. All voting shares of the corporation must be held by a member of the CPSO. Non-voting shares can be held by a parent, spouse or child (and minor children must have their shares held in trust).

A lawyer with experience in incorporating professionals can help you set up your professional corporation such that your objectives may be realized.