Many professionals like veterinarians, lawyers and dentists have traditionally carried on their businesses in a simple form referred to as a sole proprietorship, often because professional regulations prohibited incorporation. Under this type of business organization, the professional usually operates the business alone and is personally responsible for the liabilities of the practice. Nowadays, more and more regulated professions permit corporations and professionals prefer incorporating their business as a professional corporation thanks to the tax advantages that cannot be utilized by a sole proprietorship. This article will focus on Veterinary Professional Corporations (VPC).
What is a Professional Corporation?
Unlike a regular corporation, a professional corporation is operated and owned by one or more members that are of the same profession and the services provided by the corporation are generally limited to the practice of the profession. The officers and directors typically all come from the shareholders of a professional corporation, which means they must be of the same profession as well. It is the profession’s regulatory body that determines whether the members may incorporate and a professional corporation will generally not protect a member against personal liabilities for professional negligence. Therefore, all shareholders of a VPC must be licensed veterinarians and if there is a holding company of the professional corporation, the same rule applies to the holding company’s shareholders. However, family members who are not of the same profession are generally not allowed to own any shares subject to the regulatory laws of the jurisdiction where a VPC is incorporated.
Tax Advantages of a Veterinary Professional Corporation
There are several significant tax advantages for a Veterinary Professional Corporation, for example:
Income earned by a sole proprietorship is taxed at the individual’s marginal tax rate while certain active business income earned by a corporation is usually taxed at a lower rate. Income earned by a professional corporation is generally considered active business income (ABI) which is subject to a federal tax rate of 15% plus the applicable provincial rate. Furthermore, a VPC will likely qualify as a Canadian Controlled Private Corporation (CCPC) which benefits from the small business deduction for its first $500,000 of its ABI at a even lower combined federal and provincial rate (12% in Ontario in 2021).
Lifetime capital gain exemption
Each Canadian resident individual is entitled to a cumulative amount of lifetime capital gain exemption ($913,630 in 2022) on the disposition of qualified small business corporation (QSBC) shares. Therefore, the shares of a VPN may qualify as a QSBC share which can shelter some of the growth from tax when a veterinarian eventually sells his business. In addition, the laws of certain jurisdictions in Canada allow a veterinarian’s family members who are not in the same profession to hold non-voting shares of a VPN. This opens the possibility of multiplying the LCGE by bringing a veterinarian’s family members as non-voting shareholders. However, Tax on Split Income (TOSI) rules have significantly eliminated the tax advantage from income splitting and it is highly recommended to consult with an experienced Canadian tax lawyer to avoid triggering the adverse tax consequence.
A VPC offers different forms of renumeration such as salaries, dividends or bonuses which allow a veterinarian to take advantage of tax deferral while benefiting from RRSP and more importantly a private pension plan. In addition, incorporation also offers certain types of employee benefits or retirement saving plans such as an Individual Pension Plan (IPP) or a Retirement Compensation Arrangement (RCA) and private pension plans that are not available for a sole proprietorship.
How to Incorporate a Veterinary Professional Corporation in Ontario
a. Name Search Requirement
Under the Veterinarians Act, licensed veterinarians are permitted to establish a corporation in the Province of Ontario for the purpose of practicing veterinary medicine. The most important aspect of incorporating a VPC is the name requirement due to regulations set out by the governing body such as the College of Veterinarians of Ontario (CVO). The rules regarding the name of a VPC is listed below:
- The name must end with the words “Professional Corporation”;
- The name must include the surname of one or more current shareholders of the corporation who are active listed members;
- The name may also include the shareholder’s given name, one or more of the shareholder’s initials or a combination of his or her given name and initials; and
- The name must also include the words “veterinary medicine” or its equivalent in French.
Once the business name is approved by the governing body such as the CVO, the incorporation begins with the Nuans Name Reservation which reserves the business name for 90 days.
b. Application for Certificate of Authorization
A VPC must obtain the Certificate of Authorization (the “Certificate”) before its operation to demonstrate it has been recognized by the CVO. The application for the Certificate can be submitted through the Professional Practice Portal along with the following documents:
- A copy of the Articles of Incorporation;
- A copy of the Corporation Profile Report that is dated no more than 30 days from the date of application;
- A copy of the Certificate of Incorporation; and
- A copy of every certificate of the corporation that has been endorsed under the Business Corporation Act (Ontario) as of the day the application is submitted.
A VPC is required to renew its Certificate annually to maintain good standing with the CVO, otherwise the registrar of the CVO will revoke the Certificate. A VPC that does not renew its Certificate on time will no longer be authorized to practice its professional services.
Pro tax tips – Incorporation Offers Tax Advantages
A veterinarian who runs a profitable business is recommended to seek expert tax planning advice from a certified Specialist in taxation may entice lawyer regarding whether or not to incorporate the business as a VPC due to the tax advantages that not available for other business forms such as a sole proprietorship or a partnership. Our experienced Canadian tax lawyers have helped many professionals incorporate their professional corporations so feel free to call our office to speak with a tax lawyer for a consultation.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."