TSG (Tax Specialist Group) - Professional Incorporation - Doctors' & Dentists' Family Members (Professional Incorporation)

Professional Incorporation - Doctors' & Dentists' Family Members

Subject: Professional Incorporation
Number: 06-04
Date: 2/3/2006

There are new changes to the OBCA allowing family members to be non-voting shareholders

On December 22, 2005, the Ontario Government quietly released regulations to the Ontario Business Corporations Act ("OBCA") clarifying which family members can own non-voting shares in professional corporations set up by doctors or dentists. The regulations allow family members to own non-voting shares in one of the following ways:

The shares are legally and beneficially owned, directly or indirectly, by a member of the medical or dental profession;
The shares are legally and beneficially owned, directly or indirectly, by a "family member" of the doctor or dentist; or
The shares are owned legally by one or more individuals, as trustees, in trust for one or more minor children of a doctor or dentist shareholder.

A "family member," in relation to a shareholder, is defined as the shareholder's spouse, child, or parent. "Spouse" is defined as, "in relation to a shareholder, a person to whom the shareholder is married or with whom the shareholder is living in a conjugal relationship outside marriage."

There are some interesting points to note in the new regulations. It appears that a trust can only be used for minor children, not for a spouse or an adult child. A spouse or an adult child must own their shares in the professional corporation either directly or indirectly. "Indirectly" appears to mean that a holding company can be used.

There is no guidance when a trust has been created for minor children and they become adults. Does this mean that the professional corporation breaches the OBCA because the trust owns shares for an adult child? It would appear that, on the child's 18th birthday, shares must be distributed by the trust so that the child owns the shares directly. It would also appear that a trust with beneficiaries other than minor children would not qualify, since the trust could be holding shares in a trust for the spouse and adult children, which is not in accordance with the regulations.

The good news is that there is now clear guidance as to who can own non-voting shares and how they can be held. Many medical and dental practitioners should now consider incorporating or, if already incorporated, should consider reorganizing the shareholding of their professional corporation to allow family members to become non-voting shareholders.

The main benefit of having minor children own shares is for the use of the capital gains exemption and capital gains tax planning.

It is best to have a lawyer involved in the incorporation so that there are proper classes of shares.

Overall, the new regulations benefit the medical and dental professions. Other professions hope the regulations will be extended to them.

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