Accounting for Professional Corporations in Alberta
Doctors, dentists, lawyers, engineers, and accountants incorporate for much the same reasons other business owners do, and then find that several of the usual advantages are narrowed for them specifically.
The reason is that a professional corporation earns its money from services delivered by the professional. That single fact is what a number of the rules key on, and it is why advice written for a general small business often does not survive contact with a practice.
The regulator comes before the tax plan
A professional corporation in Alberta is not simply a corporation used by a professional. To use the words in the name, the incorporator has to provide the Registrar with an approval of the articles from the governing body of the profession, and that approval has to be less than two years old.
Your college or association also sets who may hold shares, what the corporation may be called, and what has to be kept current year to year. Those rules are the constraint the tax planning has to work inside, not the other way round, and they differ from one profession to the next. Confirm what your regulator permits before structuring anything, because a share class your association will not allow is not a plan.
Three rules that narrow the usual advice
Income sprinkling and the shares that are not excluded
The tax on split income applies the top personal rate to amounts an adult family member receives from a related business unless an exception is met. One of the main exceptions is for excluded shares, and it requires, among other conditions, that less than 90 percent of the corporation’s business income came from providing services, measured on gross business income.
A practice fails that test by definition. Services are all it sells. So the excluded shares route is generally closed to professionals, and any dividend to a spouse or adult child has to rest on a different exception, most often the one for a family member who works in the business a sufficient number of hours. Where a regulator restricts who may hold voting shares, the position narrows further still.
This is the single largest change to how professional corporations are used, and structures set up before the rules changed do not automatically still work.
Investments inside the corporation reach back into the practice
Leaving after-tax profit in the corporation to invest is one of the reasons to incorporate at all. What surprises people is that the investment income then feeds back into the tax rate on the practice.
Where adjusted aggregate investment income across the corporation and its associated corporations exceeds 50,000 dollars in a year, the business limit is reduced by five dollars for every dollar over, reaching nil at 150,000 dollars. Above that point the practice pays the general corporate rate on income that previously qualified for the small business rate.
Nothing about that makes corporate investing wrong. It makes it something to model, and to review as the portfolio grows, because the year the threshold is crossed is not the year you want to find out.
A second corporation does not mean a second limit
Associated corporations share one business limit and file an agreement allocating it between them. Professionals commonly end up associated without planning to: a practice corporation, a corporation holding the building, a spouse’s corporation, a management company. Association turns on control and share ownership tests rather than on how separate the businesses feel.
Salary or dividends, and what each one buys
The comparison is usually presented as a rate calculation, and at the level of a single year the two routes often land close together. The differences that matter are the ones outside that year.
RRSP room is built from earned income, which the CRA calculates from employment and self-employment earnings among other items. Dividends are not part of that calculation, so a professional paid entirely in dividends stops accumulating room. Salary also brings CPP into the picture, which is a cost to both the corporation and the individual and a benefit in retirement. Salary is deductible to the corporation and can be used to manage the income that reaches the small business limit; dividends are not deductible and are paid from after-tax profit.
Which mix suits you depends on your age, whether you have a pension elsewhere, what you draw personally, and what you intend to leave in the corporation. It is worth setting before the year ends rather than reconstructing at filing time.
How we work with professional practices
Sole practitioners, partners in a group, and professionals with a corporation still in its first year all sit differently. We work from what your regulator allows and what you actually take out of the practice.
- Corporate and personal returns prepared together, so the compensation decision is made once and applied consistently.
- Salary and dividend planning set before year-end, with RRSP room and CPP treated as part of the answer.
- Payroll for the corporation, including family members who genuinely work in the practice.
- Bookkeeping that separates the practice from personal and investment activity cleanly.
- GST where your professional services are taxable, and registration where they are not obviously so.
- A look at associated corporations before a second or third entity is added.
Questions we get from producers
Only if an exception to the tax on split income applies, and the usual one is not available to you. The excluded shares exception requires that less than 90 percent of the corporation’s gross business income came from services, which a practice cannot meet. Any dividend to a spouse or adult child has to rest on another exception, most commonly meaningful involvement in the business. Structures built before the rules changed should be reviewed.
It can. Where adjusted aggregate investment income across your corporation and its associated corporations passes 50,000 dollars in a year, the business limit falls by five dollars for every dollar above that, reaching nil at 150,000 dollars. Beyond that, practice income that used to attract the small business rate pays the general rate. Worth modelling as the portfolio grows.
No. Associated corporations share one business limit and file an agreement allocating it. Professionals often become associated without intending to, through a holding company, a spouse’s corporation, or a management company. Association is decided by control and ownership tests, not by how separate the businesses feel in practice.
In a single year the two often come out close. The differences show up over time. Salary is earned income and builds RRSP room; dividends are not and do not. Salary brings CPP contributions, a cost now and a benefit later. Salary is deductible to the corporation, dividends are paid from after-tax profit. The right mix depends on your age, your other pension arrangements, and what you intend to leave in the corporation.
An approval of the articles from your governing body, less than two years old, to use the professional corporation designation in Alberta. Your regulator also sets who may hold shares and what has to be kept current each year. Those rules bound the tax planning, so confirm them before structuring rather than after.
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