Years ago, optometrists, as healthcare professionals, could not practise through corporations like any other self-employed business people. As such, optometrists missed out on some significant tax advantages and savings. Eventually, optometrists were included in the list of regulated health professions that were permitted to incorporate but with significant restrictions. The restrictions were loosened for doctors and dentists, and there is a movement afoot in the Ontario legislature to extend this same treatment to all regulated health professions. In the meantime, it is still worth it for optometrists to consider operating their practices through a professional corporation. This article will answer some basic legal questions about incorporating an optometry professional corporation.
What is a professional corporation?
Similar to regular corporations, professional corporations are distinct legal entities in law. However, professional corporations carry many restrictions on their corporate name and ownership structure. Professional corporations can shield shareholders from operating liabilities from landlords, employees, suppliers, and other creditors, similar to regular corporations. Optometrists that operate through a professional corporation are still personally liable to patients and clients for any malpractice claims. As such, maintaining professional liability insurance is essential.
How is an optometry professional corporation different from a regular corporation?
The first restriction on an optometry professional corporation to consider is the jurisdiction under which it is incorporated. A professional corporation must be incorporated under the laws of the Province of Ontario. Incorporation under any other jurisdiction, including federally, is prohibited from being considered an optometry profession corporation in Ontario.
There is also a strict restriction on the corporate name of a professional corporation, which must include the optometrist's surname (the given name and/or initials are optional), the naming of "optometry" as the profession being practiced, and the words, "professional corporation". For example, a professional corporation for an optometrist may be named, "John Doe Optometry Professional Corporation".
There are also restrictions on the activities of the optometry professional corporation to those related to the optometry practice and any "ancillary" activities. While there may be some debate as to what may constitute an "ancillary" activity, it is generally held that any business or investment activity unrelated to the practice of optometry would not be permitted. The ownership or rental of real estate in excess of what may be required for the optometry practice would therefore be prohibited since it would neither be in relation to nor ancillary to the practice.
Another restriction deals with the shares of the professional corporation, which may only be held by an optometrist in good standing with the College of Optometrists of Ontario. Holding companies and other family members who are not licensed optometrists may not own shares in the optometry professional corporation.
Why should I incorporate an optometry professional corporation?
As a Canadian-controlled private company, the biggest tax advantage to a professional corporation is the availability of the small business deduction, which reduces the federal and provincial tax payable on active business income up to certain limits. As a result, significant tax advantages can be achieved by paying tax at a much lower corporate tax rate (15.5%) on professional income (vs. a personal income tax rate of 49.53%). Also, by accumulating these funds within the professional corporation, personal taxes can be deferred by not paying out any excess funds as dividends until required or as a private pension plan upon retirement.
To distribute income from and to its shareholders, payments can be made by way of dividends, which are taxed at a lower rate than other forms of income.
Finally, as your practice grows, more complex corporate structures can be implemented, involving management or operating corporations, which could open up other tax savings strategies.
What is involved with incorporating?
If you have an existing practice, certain steps should be taken upon incorporation to lock in the value of the corporation at that time, and be reflected in the initial issuance of shares.
Once incorporated, a certificate of authorization from the College of Optometrists of Ontario is required before the professional corporation may "practice" and accumulate revenues from the practice. The current fee to obtain a certificate of authorization is $630.00. Certificates of authorization must then be renewed annually, the current cost of which is $315.00.
Other considerations once incorporated are overall estate planning, including the preparation of a will, to ensure your estate’s access to the assets of your professional corporation.
Despite the current restrictions on optometry professional corporations, there are many tax planning strategies and techniques currently available to optometrists. Each individual practitioner’s actual tax savings will depend largely on his or her individual circumstances. There are services, such as from online providers or professional body associations, that can incorporate your professional corporation, but having legal, accounting and financial advisors develop a cohesive, customized approach from the outset will allow practitioners to develop a tax strategy for you that will ensure that the incorporation is done properly from the outset.
For more information, contact Derwin Wong (416) 368-0600 or by email at firstname.lastname@example.org.
© Morrison Brown Sosnovitch LLP, revised 2017 All rights reserved.