Tax Tips

• Tax Tips Archive

Professional Incorporation Update

Subject: Professional Incorporation Number: 06-09 Date: 3/17/2006

Holding companies cannot be used to hold shares of a professional corporation

Further to the recent Tax Tip (06-04), Ontario now allows family members of doctors and dentists to own non-voting shares in professional corporations.

The regulations developed by the Ontario Government included the phrase "directly or indirectly" in describing how the shares could be held. It was our initial understanding that this meant that a holding company could be used by the health professional or a family member. Following a further review and discussions with the governing bodies, we now understand that a doctor or dentist cannot use a holding company to hold shares of a professional corporation. The College of Physicians and Surgeons of Ontario has made it clear that "holding companies may not own shares in medicine professional corporations."

Given these regulations, there are limited creditor-proofing possibilities for medical and dental professionals. Assets retained by a professional corporation are subject to claims by creditors. Medical and dental corporations have never had creditor protection in respect of professional services. However, it was anticipated that holding companies would be allowed, giving protection against other liabilities. This is not permitted at present.

The accumulation of funds could affect the client's ability to claim the capital gains exemption. If the professional corporation's business assets are less than 90% of the total assets, the shares of professional corporation will not qualify for the $500,000 capital gains exemption.

This revised interpretation should be taken into account in determining whether a professional corporation is appropriate for a medical or dental professional.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.