TaxBites – January 2014

Protect Insurance continues to provide the life and income-protection expertise that professionals have relied upon for years.  In addition, we are now pleased to offer a complete suite of financial, tax and estate planning services, tailored to our valued clients.  By way of introduction to these services, we offer our TAXBITES series of newsletters and we hope you find them valuable.

Your Professional Corporation – A True Pot of Gold

As we all know, several professional groups including dentists, optometrists and other medical professionals were finally given the right to incorporate their practices in 2006.  While many such professionals had previously organized themselves with hygiene/management companies in an effort to gain a similar advantage, only with this new regulation was the full benefit of incorporation realized.

We remember that there were several good reasons for incorporating, but with the passage of time we may have forgotten the specific reasons we were so happy to incorporate.  So let’s revisit some of the more important advantages now and recall why we think your professional corp is truly a pot of gold.

Small business limit

The first $500,000 of operating profit is taxed at 15.5% in the corporation.  Previously all operating profit was taxed personally at a rate that is closer to 46.41% or even 48.41%.

Income tax deferral

With the lower tax rate on operating income, there is an extra $155,000 in annual savings.  By retaining this amount inside the professional corporation, there is a larger pot of money that can be invested for retirement.  Only when the savings are ultimately withdrawn from the corporation is it potentially subject to another level of taxation.

Income splitting

Subsequent regulation allowed different classes of non-voting shares to be issued to immediate family members.  This gives the professional corp the ability to issue dividends to the various shareholders.  As long as the recipient is over the age of 18, the family member/shareholder is taxed at their own marginal tax rate.  In Ontario, someone with no other earned income can earn up to about $35,500 of small-business dividends and pay $0 tax in 2014.  While it’s true that the same impact can be accomplished by having family members on the payroll, this approach removes the need to justify the amount of income being paid to family members for the work they are doing (or not doing!)

Income shifting

Professional corporations are not restricted to a December 31 year-end.  Furthermore, a corporation can declare and deduct a bonus while not actually paying it out for 180 days.  By deducting the bonus in this calendar year and then paying it out in the following calendar year, there is a full-year tax-deferral on the amount.

Capital gains exemption

For some professionals, notably dentists, a primary component of their retirement plan is the sale of their practice.  There is an $800,000 life-time capital gains exemption on the sale of shares of a small business.  With minimal planning, most professional corps will meet CRA’s test for qualifying shares.  If the sale of the practice can be structured as a sale of shares, instead of assets, the tax savings from this exemption are $185,460.

Life insurance premiums

Instead of paying for life insurance with personal after-tax dollars, these premiums can now be paid with cheaper after-tax corporate dollars.  With proper beneficiary designations and Will planning the intended beneficiaries will still receive the proceeds tax-free

Medical/Dental/Vision expenses

While individual professionals were able to deduct the cost of Private Health Services plans, there were restrictive limits.  A corporation can provide these benefits to an employee (the professional) without limit to its deduction.  As a result, there is a self-insurance mechanism available that essentially renders all family health, dental and vision care expenses deductible to the corporation.  This will be the subject of a future TAXBITES.

Individual Pension Plan (IPP)

As a self-employed individual, you are responsible for your own retirement savings.  Due to the level of your earnings, RRSP limits are inadequate to meet the income replacement ratio you will require when you retire.  An IPP allows your corporation to establish its own defined benefit pension plan to fund your retirement. We will cover this strategy in greater detail in the next issue of TAXBITES.  In short, depending on a couple of variables, the level of tax-deductible savings in an IPP far exceeds that of an RRSP.

Protection from some legal liabilities

Although incorporation does not protect you from professional liability, there are other levels of protection:  Financing Obligations, leases, non-guaranteed bank loans and non-professional contingencies.  It is true that in many cases the professional’s personal guarantee is required and therefore negates some of this protection.

Estate Planning

All assets handled by a probated Will attract probate fees in Ontario.  Generally any assets above $50,000 are subject to 1.5% probate fees.  One of a professional’s largest assets may be the shares in the professional corporation.  The shares do not require a probated Will in order to change hands upon death, but if they are contained in the same Will as assets that do require probate, they will be “caught”.  By drafting two Wills, one for the probated assets and one for the non-probated assets, these fees are avoided on the value of the practice.

That’s quite a list of savings and opportunities… so each year when you get the accounting bill for your professional corp’s year end and tax return, try to remember the pot of gold that comes with it!

We hope you enjoyed this month’s TAXBITES.  Next month we’ll discuss Individual Pension Plans.  If you have any comments or questions please do not hesitate to call or email.

Todd Roberts, B.Com.

Vice President

Tel: 416-391-3764, ext. 233

Toll free: 1-866-919-3764

E-mail: todd.roberts@protect-ins.com

 

The views expressed in this commentary are those of Protect Insurance Agencies Inc. (Protect) at the date of publication, are subject to change without notice, and are not representrd to be error free. This commentary is presented only as a general source of information and is not intended as a solicitation to buy or sell specific insurance products or investments, nor is it intended to provide tax, legal or accounting advice in general or specific to your circumstances. Buyers should review all documents relating to any insurance or investment carefully before making a decision and should ask their advisors for guidance based on their specific circumstances. Protect assumes no responsibility for how you use the information you obtain from this commentary.  E. &. O.E.

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