For a number of years, provincial governing bodies of regulated health professionals (1) and other professional organizations (2) have allowed the incorporation of the professional practice. The major tax advantage of incorporation, is the ability to defer tax by retaining income in the corporation that would otherwise be taxed at a much higher personal tax rate if you earned the same income as a sole proprietor or as a partner.

Commencing in 2006, family members of doctors and dentists may hold non-voting shares of the professional corporation. Other professional corporations may not have family members as shareholders.

Non-voting shares may include both non-voting common and non-voting special shares. Common shares participate in the value of the corporation, preferred or special shares do not. The advantage in having family members as shareholders is that the corporation may pay your parents, adult children and spouse, dividends taxed at lower tax rates to finance tuition and other personal expenditures as opposed to you receiving the income and having to pay more tax at your marginal tax rate to finance the same expenditure. Dividends are not paid to minor children because they will be subject to top rate tax or what is commonly called “kiddie tax”.

For 2018 a single family member residing in Ontario with no other income may receive about $31,000 in (non-eligible) dividend income without tax.

Effective for 2018,  the new TOSI (tax on split income) rules as amended take effect. Prior to this date, we paid dividends to the non-professional over 17 years of age to be taxed a their lower marginal tax rate. Now, the individual must be generally be active in the company putting in at least on average 20 hours a week (with some modifications) to be taxed at their marginal tax rate. If the individual is does not meet this “excluded business” test, the dividend is taxed at the top rate of about 46.84%.


The licenced professional must hold the voting common shares directly as opposed through a holding corporation. The licenced professional is the only individual that may be an officer or director of the corporation. Veterinarians are the only professionals that may hold shares indirectly through a holding corporation. Pharmacists must own 51% of each class of issued shares, other family members may own 49%.

The non-voting shares held by family members must be held directly by them. Shares held for a minor child may be held by an inter-vivos family trust until the child turns 18. Alternatively, the shares may be held legally by trustees acting in trust for the minor child.

Professional liability

The difference between non-professional and professional corporations, is that there is no limit on the professional liability of a professional under the legislation governing the particular practice. Absent of a shareholder or individual guarantee, other corporate liabilities are limited.

Tax advantages

For those residing in Ontario, by using a corporation, the first $500,000 of active business income is taxed at 13.5%; income above that threshold is taxed at 26.5% for 2018. If you are already at the 2018 top individual marginal tax rate of 53.53%, you have a tax deferral of about 40% which is the difference between the corporate tax and the personal tax if the professional income is earned by a PC or earned directly by you. (See my webpage for combined Federal/Ontario tax rates

If you are already at the 2018 top individual marginal tax rate of 53.53%, corporate income is $500K or less, and you personally withdraw the entire after-tax corporate income as a dividend, there is a slight absolute tax cost of .49% because the concept of integration between private corporations and individuals is not exactly neutral on earning active business income if you are at the top tax bracket. If you are not at the top individual marginal tax rate, the deferral will be less but the savings will be more because of how the dividend tax credit works.

For 2019, there are new rules that will increase the taxation burden if passive income earned in the PC (or corporation) exceeds $50K in the prior year, as defined under the Income Tax Act (“ITA”). Effectively, the limit to which the PC gets the small business deduction is ground down and is eliminated when passive income exceeds $150K. If the SBD was lost, the tax rate is 26.5%, resulting in a tax deferral of 27%, but with an absolute tax cost of about 2%. This would also occur if you had no passive income and your active business income was over the $500K small business limit.

You may consider an IPP (“individual pension plan”) or RCA (“retirement compensation arrangement”) to lower the active business income (especially if you are significantly over $500K of income) and provide for retirement planning. These vehicles can be somewhat complex but they are worthwhile exploring.

At whatever personal tax bracket you are at, if you income split with lower tax-bracket family members, the combined savings will be greater.

Income splitting may be in the form of salary or dividends.  For salary to related parties, it should resemble what  would be paid for similar work to an unrelated party, or let’s say reasonable  in the circumstances.

For dividend income, with family members holding non-voting shares, additional savings are available. For example, if you are in the top Ontario tax bracket and you need to pay $10,000 in tuition, you have to draw about $21,520 in salary (ignoring CPP contributions) or about $18,800 in dividends from the corporation in order to have disposable income of $10,000 to finance the tuition. As noted above, you may pay an individual with no other income about $31,000 in (non-eligible) dividends and they will have no tax payable. With their tuition and educational refundable tax credits, with amount will be higher.

For 2018, the new TOSI (“tax on split income”) rules will cause the dividend paid to other shareholders who are not working  on average 20 hours a week in the year or in any of the  5 prior years to be taxed at the top rate of 46.84% defeating  the income splitting advantage. If the hour test ( with some exceptions) is not met, then it is a question of fact if the individual is actively engaged in a regular, continuous and substantial basis

As expected, the new TOSI rules and changes to the taxation of passive income  are designed to reduce the benefits of incorporation (PC or otherwise), where we have  passive shareholders and say over $1M of investment capital.

Management companies

With some professions, a sister corporation owned by your spouse and other family members may be incorporated to perform the administrative and other non-professional services of your PC. Properly structured, the corporations will not be associated corporations. If they were associated, both corporations would have to share in the $500,000 small business limit. The sister company may bill your corporation cost plus a 15% mark-up which is generally the profit to the sister corporation.

For example, if your corporate taxable income is $700,000, your company would pay 26.5% tax on the income above $500,000 or $53,000. Assume the PC has $173,913 in transferable expenses. Provided the two corporations are not associated corporations, the sister corporation may bill your corporation $200,000 including the 15% mark-up, leaving your corporation with taxable income of $500,000 taxed at the 13.5% rate. The sister corporation will have income of $200,000 with expenses of $173,913, leaving a profit of $26,087 subject to tax at the 13.5% rate or $3,521. This translates into an annual tax savings of about $49,500.The sister corporation will have less restrictions on ownership and more income splitting opportunities.

One should note that effective for 2017, the ITA curtailed the small business limit on service payments  paid by a  partnership to a CCPC where the CCPC is a partner of the PC partnership or where the shareholder() of the CCPC is related to a partner. The former would occur where the partner PC bills the partnership for its professional services. The latter could occur if the partnership pays a non-associated corporation (as outlined earlier) a fee for the transferable expenses. In the  case of the latter, unless if  the partner PC elects  to reduce it’s SBL and allocate a portion to  the sister corporation, effectively, that fee received by the sister corporation will be taxed at the 26.5% rate.

A contract outlining the services to be performed by the sister corporation should be prepared to support the services provided by the sister corporation to your PC and all invoices rendered by the sister corporation must be paid by the PC.

Doctors and dentists will prefer to use a technical service corporation as opposed to a management corporation because the HST payable on management fees is not recoverable by the PC. Services provided by a technical services company such as X-rays, providing lab work and providing reports may be an exempt supply not subject to HST.

Cost vs. benefits

You must weigh the tax savings and income splitting opportunities with the additional fees for accounting and tax preparation, light of the recent changes to the small business limit, taxation of corporate passive income and the TOSI rules.

The professional corporation must carry on the business relating to the profession. It may invest surplus funds but may not invest in another non-professional business.

Access to the $848,252 (2019-$866,912)) capital gains exemption on the sale of qualified small business corporation shares may be available on the sale of shares or on the deemed disposition arising at death. Holders of non-voting common shares may be entitled to use their available capital gains exemption thereby multiplying the exemption by the number of eligible shareholders. Care must be taken to ensure not more than 10% of the fair market value of the assets are attributable to passive investments.

Tax instalments are not required in the first year of the corporation. The corporation may select an off-calendar taxation year if it is not a partner of a partnership. If a July year end is selected, accrued bonuses do not have to be paid until January which defers personal tax until the following year, providing the corporation with a deduction for the current year.
Flexibility with the remuneration, mix of salary vs. dividends, RRSP and Canada pension plan planning.


  • Regulated health professionals may include:
    • Doctors, dentists, chiropractors, pharmacists
    • Audiologists, chiropodists, podiatrists, dental hygienists, opticians, optometrists, physiotherapists, psychologists, occupational therapists, nurses
  • Other professionals may include:
    • Lawyers, accountants
    • Veterinarians
    • Social workers
    • Architects, engineers