Tax Planning for Incorporated Professionals

Why professionals incorporate

Many regulated professionals in Alberta can practise through a professional corporation, subject to their regulatory body's rules. Consultants and other unregulated professionals typically use a regular business corporation. The main benefits are similar:

• Tax deferral on income left in the corporation, which may be taxed at the lower small business rate
• Flexibility in how and when you pay yourself
• Access to the corporation's lower tax rate to build savings or pay down business debt

Liability protection is often limited for regulated professionals, since you generally remain responsible for your own professional work. For a broader look at the decision, see When Should a Small Business Consider Incorporating?

1. How you pay yourself

Your compensation strategy is one of the most important annual decisions:

• Salary creates RRSP contribution room and CPP benefits, and supports personal borrowing such as a mortgage.
• Dividends are simpler to administer and avoid CPP contributions, but create no RRSP room.
• A mix is common and can change from year to year.

The right approach depends on your personal cash needs, retirement plans and family situation. See Salary vs. Dividends for Canadian Business Owners.

2. Investing inside the corporation

Many professionals earn more than they need to live on, and surplus cash builds up in the corporation. Investing it there can be effective, but there are important rules:

• Passive investment income is taxed differently from business income inside a corporation and doesn't get the small business rate.
• High passive income can reduce the small business deduction available on your professional income in the following year.
• The type of investment income matters. Interest, dividends and capital gains are taxed differently, and the choice can affect both corporate tax and the small business limit.
• Getting money out later requires planning, including the use of tax accounts such as the capital dividend account and refundable tax balances.

A coordinated plan between your accountant and your investment advisor is valuable here.

3. Family members and income splitting

Since the tax on split income (TOSI) rules were expanded, paying dividends to family members has become much more restricted. Dividends paid to a spouse, adult children or other relatives may be taxed at the top personal rate unless an exclusion applies.

Options can still exist, for example:

• Reasonable salary to family members who actually work in the practice
• Exclusions that may apply in some situations, such as for a spouse once the owner reaches a certain age
• Spousal RRSPs and other personal planning tools outside the corporation

Professional corporations may also be subject to rules from your regulator about who can own shares. Review both before changing ownership.

4. Planning for retirement

Incorporated professionals have several ways to fund retirement:

• RRSPs, funded with salary-based contribution room
• Corporate investment portfolios built from retained earnings
• Individual pension plans (IPPs), which may suit some older, higher-income professionals who take salary
• CPP, if salary is paid

The best combination depends on your age, income, expected retirement date and how you plan to draw income later.

5. Insurance and estate planning

• Corporate-owned life insurance can be used in some cases to fund estate liabilities or move funds out of a corporation efficiently.
• Wills should specifically account for the shares of your corporation and who can hold them after your death.
• Succession or wind-up planning matters, since regulated professional corporations often have specific requirements when the professional retires or dies.

6. Staying compliant

A professional corporation adds obligations: corporate T2 and Alberta AT1 returns, payroll filings if salary is paid, GST registration where required, annual registry filings, and keeping the minute book current. Missing them can cost more than any tax saved. See our Corporate Tax Return Checklist for Alberta Businesses.

Common questions

This article is general information only and is not tax, legal or investment advice for your specific situation. Professional corporation rules vary by regulator; refer to your professional body and the Canada Revenue Agency for current requirements.