Professional Corporations in Ontario: Who Can Incorporate and What It Changes

Doctors, dentists, lawyers, accountants, engineers, architects, veterinarians and several other regulated professions in Ontario can incorporate, but not in the ordinary way. A professional corporation is a distinct creature with its own rules, and the differences are the whole point.

The first thing to understand is what it does not do.

It does not limit your professional liability

An ordinary corporation shields shareholders from the company’s obligations. A professional corporation does not shield you from claims arising out of your own professional work. You remain personally liable for your own negligence, and your regulator retains jurisdiction over you personally.

What it does limit is ordinary commercial liability: a lease, a supplier dispute, an equipment loan. Useful, but not the reason anyone does it.

The reason is tax deferral.

The tax case, honestly

Income earned in a Canadian-controlled private corporation and left there is taxed at the small business rate on active income up to the small business deduction limit. That rate is far below the top personal marginal rate.

The saving is a deferral, not an elimination. When the money comes out to you it is taxed personally, and Canada’s integration mechanism means the combined total lands close to what you would have paid earning it directly.

So the benefit is real only if you can leave money in the corporation.

That last row is the important one. If your arrangement looks like employment with a corporation inserted, the personal services business rules deny the small business deduction and most expense deductions. The result is worse than not incorporating. Associates and contractors serving a single payer should settle this question before anything else.

Who can own the shares

This is the sharpest difference from an ordinary corporation, and it is set by your regulator, not by tax law.

Broadly, voting shares must be held by members of the profession. Some professions permit family members to hold non-voting shares, and some do not. The health professions have historically had wider latitude here than the legal profession.

Do not assume. Check your own College or Law Society rules before designing a share structure, because the tax planning that family shares enable is only available if your regulator allows them at all.

And even where family shares are permitted, the tax on split income rules determine whether dividends to those family members are efficient. Ownership alone does not achieve income splitting. The rules are covered in income splitting.

The other constraints

• The name must include your name and the words “Professional Corporation”, in the form your regulator prescribes
• The activities are limited to practising your profession and activities ancillary to it. A professional corporation cannot operate an unrelated business
• A certificate of authorization from your regulator is required, on top of incorporating with the province through the Ontario Business Registry
• Annual renewal with the regulator, separate from your corporate filings

What it costs to run

Incorporation is the cheap part. The recurring cost is what people underestimate:

• Corporate tax return each year, which is a different exercise from a personal return
• Annual financial statements
• Regulator renewal fees
• Minute book maintenance
• Payroll administration if you pay yourself a salary

Budget a few thousand a year in professional fees. If your expected tax deferral does not comfortably exceed that, incorporating is a cost, not a saving.

The sale exit

For a practice with genuine transferable value, the lifetime capital gains exemption on qualified small business corporation shares is substantial. It is currently $1.25 million per individual.

Qualifying is not automatic. There are asset-composition tests looking back 24 months, and a corporation holding significant passive investments can fail them. If a sale is part of the plan, the structure needs to be checked well before the sale, not during it. That is covered in the capital gains exemption.

The passive investment trap

Once retained earnings accumulate and get invested, passive investment income inside the corporation reduces access to the small business deduction above a threshold. Grow the investment portfolio far enough and the deferral advantage that motivated incorporating starts to erode.

This is not a reason to avoid incorporating. It is a reason to plan what happens to the retained money, rather than letting it accumulate unexamined.

The decision

Incorporate if you can genuinely retain income, your regulator permits a structure that suits you, you are not caught by the PSB rules, and the annual cost is comfortably less than the deferral.

Do not incorporate because a colleague did, because it sounds like what a successful practice does, or because someone told you it limits liability. On the last point, it mostly does not.

If you are weighing it and want the numbers run on your actual income rather than a general rule, that is a straightforward exercise and it answers the question definitively either way.