1. Introduction to the Professional Corporation Regime

In Ontario, where the practice of a profession is governed by provincial statute, an Ontario corporation is only permitted to practise that profession if expressly permitted within the operative legislation. Historically, this statutory permission has been available to only a very limited number of professions, including, architects and engineers.

In the 2000 Ontario Budget, the provincial government indicated its intention to extend the right of incorporation to all regulated professionals in an effort to “level the playing field with other self-employed individuals who can choose whether or not to operate their businesses through a corporation”. The amending legislation providing for the establishment of these so-called “professional corporations” (or “PCs”) came into force at the end of last year.

Under the new scheme, the governing body of each profession must work with government to enact the necessary by-laws and regulations to implement the changes. As a result, the PC has been and will become available to some professions before others.

Professions Affected

The new legislation provides that the following regulated professions will be entitled to practice by way of a PC:

1. Accountants (regulated under the Public Accountancy Act);
2. Lawyers (regulated under the Law Society Act);
3. Veterinarians (regulated under the Veterinarians Act);
4. Social Workers and Social Service Workers (regulated under the Social Work and Social Service Work Act); and
5. Audiologists, Chiropodists (including Podiatrists), Chiropractors, Dental Hygienists, Dental Surgeons, Dental Technologists, Denturists, Dieticians, Massage Therapists, Medical Laboratory Technologists, Medical Radiation Technologists, Midwives, Nurses, Occupational Therapists, Opticians, Optometrists, Pharmacists, Physicians and Surgeons, Physiotherapists, Psychologists, Speech Language Pathologists, and Respiratory Therapists (all of which are regulated under the Regulated Health Professions Act).

Advantages of Incorporation

The potential savings or deferral of income tax will typically be the motivating factor for the professional in making the decision to incorporate. When a professional operates a professional practice directly, the net income generated by the professional practice is taxable to the professional at graduated marginal tax rates applicable to the professional. On the other hand, the net income of PCs up to certain limits would be taxed at a rate applicable to small business corporations significantly lower than the top marginal tax rate applicable to individuals.

If the higher personal marginal tax rates do not apply to the professional or if the professional withdraws most or all of the net income of the PC (by way of salary, bonus or dividend) so that such amounts are taxed in the hands of the professional, then there would be minimal or no advantage to incorporating a PC from the point of view of saving or deferring income tax otherwise payable by the professional operating an unincorporated professional practice.

Further, when it comes time to consider the sale of an incorporated professional practice, the $500,000.00 capital gains exemption for qualifying small business corporations shares may be available to exempt up to $500,000.00 of capital gain realized on the sale of shares in the PC.

Professional Liability

The new legislation expressly provides that the liability of a member of a profession for malpractice claims is not affected by the fact that the member is practising through a PC. Therefore, the other usual advantage of limited (personal) liability typically available by incorporation is restricted in the case of a PC. Further, the standards of professional practice expected and required of all members of a profession are not to be diminished by the fact that the member is practicing through a PC.

Restrictions on Professional Corporations

The governing legislation provides that:

1. all of the issued and outstanding shares of the professional corporation must be owned, directly or indirectly, by one or more members of the same profession;
2. all officers and directors of the professional corporation must be shareholders of the corporation;
3. the name of the professional corporation must include the words “Professional Corporation” and no professional corporation may have a number name; and
4. the activities of the PC must be restricted to the practice of the profession.

Under the new rules then, the practice of “income splitting” whereby a spouse or other family member can receive dividend income from a corporation (which is subsequently taxed in their hands at lower marginal tax rates) is effectively precluded because of the rule requiring all shareholders to be members of the same profession.

Certificates of Authorization

The new legislation defines a “professional corporation” as a corporation incorporated or continued under the Ontario Business Corporations Act that holds a valid certificate of authorization issued under an Act governing a profession. Therefore, the first step in establishing a professional corporation is the formation of the underlying corporate entity, and the second is the acquisition of a valid certificate of authorization.

As suggested from the definition of professional corporation set out above, the specific requirements for obtaining a certificate of authorization will vary from profession to profession. These requirements are typically set through a combination of governmental legislation and regulation, and the internal by-laws of the governing bodies of the various professions which are granted the power to issue certificates of authorization.

2. Which Professions Can Now Incorporate and What are the Requirements?

At the present time, accountants, lawyers, veterinarians and certain of the professions governed by the Regulated Health Professions Act, including doctors and dentists, can proceed with incorporating their practices. The various other regulated health professions will soon follow suit.

What follows is a discussion of the progress and status of the professional corporation scheme as it relates to veterinarians, doctors and dentists.

Veterinarians

The regulations under the Veterinarians Act were recently amended in order to provide for the establishment and regulation of veterinarian professional corporations (“VPCs”). Under the amended regulations, a VPC may be eligible to receive a certificate of authorization provided:

1. The articles of incorporation provide that the VPC may not carry on a business other than the practice of the veterinary profession and activities related to or ancillary to the practice of the veterinary profession;

2. The name of the VPC complies with the requirements set out in the Ontario Business Corporations Act and in the regulations made under the Veterinarians Act;

3. Each shareholder of the VPC holds a licence to practice;

4. The member has obtained approval of the College for the proposed name of the VPC and has taken the necessary steps to incorporate the professional corporation;

5. None of the shareholders of the VPC have been involved as shareholder of a VPC whose certificate of authorization was suspended or revoked unless the College is satisfied that it is unlikely that the certificate of authorization being applied for will be suspended or revoked.

6. The VPC has filed an application for a certificate of authorization and has paid the prescribed fee of $200.

Once approved, the College will maintain a registry of all VPCs containing the following information:

7. The name and address of the VPC;

8. The name of the managing director (every VPC must name a managing director) and all shareholders; and

9. Information regarding terms and conditions imposed on a certificate of authorization and suspensions, revocations and terminations of certificates of authorization.

The forms of application for a certificate of authorization for a VPC are available at the following website: www.cvo.org/incorporation.htm.

Doctors and Dentists

In February 2002, the Ministry of Health and Long Term Care passed a regulation under the Regulated Health Professions Act (O. Reg. 39/02) setting the framework for the establishment of health professions corporations (“HPCs”). This general regulation is not, however, the final piece of the puzzle. Each individual College must now pass by-laws to implement the professional corporation regime and make it available to its individual members.

Both the Ontario College of Dental Surgeons and the Ontario College of Physicians and Surgeons have now passed the required by-laws, and as a consequence, doctors and dentists are able to incorporate their practices. The general eligibility requirements for a certificate of authorization for a HPC are set out in the regulation passed by the Ministry in February, and include the following:

1. The articles of the HPC must provide that the corporation cannot carry on a business other than the practice of the profession governed by the College and activities related to or ancillary to the practice of that profession;

2. Each shareholder of the HPC must hold a certificate of registration issued by the Registrar of the College;

3. The name of the HPC must:
   
   
   1. meet the requirements set out under the Ontario Business Corporations Act;
      
      
   2. not violate the provisions of any other Act; and
      
      
   3. include the surname of one or more shareholders of the HPC and must indicate the health profession practiced by the shareholders;
      
      
4. The HPC must apply for a certificate of authorization in a form approved by the College and must include the following with the application:
   
   
   1. The application fee required by the by-laws of the College;
      
      
   2. A certificate of status of the HPC issued by the Ministry of Consumer and Business Services not more than 30 days before the application is submitted to the College, which indicates that the HPC is active;
      
      
   3. A certified copy of the certificate of incorporation of the HPC;
      
      
   4. The name of each person who is a shareholder of the HPC as of the day the application is submitted and his or her business address, business telephone number and registration number with the College;
      
      
   5. The names of the directors and the officers of the HPC as of the day the application is submitted;
      
      
   6. The address of the premises at which the HPC carries on activities.

Changes to the name and articles of incorporation are permitted provided the HPC promptly notifies the College and provides the College with a copy of a certificate of the HPC endorsed under the Ontario Business Corporations Act indicating the change.

Certificates of Authorization are subject to annual renewal upon the payment of a renewal fee set by the College.

3. How We Can Help

The question whether or not to practise a profession by way of a PC is an issue that will be largely driven by income tax considerations. Once a decision is made to incorporate a PC, there may be some flexibility in the organizational structure of the PC which may involve both the PC which operates the professional practice and holding companies to receive and retain net income of the PC.

We would be pleased to assist you in the incorporation of your professional practice in accordance with the regulations and by-laws relevant to your profession. Feel free to contact Eric Bennett or Andrew Bonham for further information.