expert Corporations - Advantages and Disadvantages

Can I Deduct Pre Tax Health Insurance Premiums - expert Corporations - Advantages and Disadvantages

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What is a pro corporation(Pc)?

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Can I Deduct Pre Tax Health Insurance Premiums

A Pc is a corporation owned and operated by one or more members of the same profession (e.g. Physicians, lawyers, accountants, dentists). The services provided by the corporation are commonly restricted to the custom of the profession.

Professional corporations are now allowed in every province and territory across Canada. In each province/territory, the pro regulatory body usually determines either its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to incorporate.

How does it differ from a coarse corporation?

There are some significant differences between a pro corporation and a common

corporation such as:

Only members of the same profession can be shareholders of a pro corporation in many (but not all) provinces. The officers and directors of a pro corporation must commonly be shareholders of the corporation as well. The pro corporation is commonly branch to the investigative and regulatory powers of the regulatory body governing the profession. A pro corporation will not protect a pro against personal liability for pro negligence.

As a corollary of these differences, some of the benefits commonly associated with a corporation may have a diminutive application for a pro corporation. This is further described below

Advantages of using a pro Corporation

Potential tax savings

A reduced federal and provincial corporate tax rate is applied on the first 0,000 of pro wage earned by a pro corporation. Some provinces apply the reduced tax rate on wage of up to 0,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on wage branch to the small company limit will range between approximately 11% and 19%. As a corollary of this lower rate, the combined corporate and shareholder taxes paid on pro services wage is slightly lower than if such wage were to be earned by you directly.

Potential tax deferral

Perhaps the most significant advantage of using a Pc is the capability to defer taxes. pro wage earned straight through a corporation is taxed at two levels - once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income.

Since wage at the corporate level is taxed at a lower rate than your personal income, a tax deferral opening exists when the wage is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. You). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend.

Let's illustrate. If you earn a pro wage of 0,000 per year as a sole proprietor and only need 0,000 of pre-tax wage for personal expenses, you will be left with 0,000 that will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with 9,000 to invest.

On the other hand, if you consolidate the practice, the 0,000 will be left in the corporation and taxed at the small company rate. Assuming a corporate tax rate of 18%, the corporation will be left with 4,000 to invest.

That's ,000 more.

Sole proprietor pro corporation

Income 0,000 0,000

Personal needs (0,000) (0,000)

Remaining funds 0,000 0,000

Taxes (,000) (,000)

Net funds 9,000 6,000

Additional funds in the

professional corporation ,000

The further funds in the corporation may be used to pay off debt, buy capital assets, derive investments or fund an insurance policy

Flexible worker benefits

As an worker of a pro corporation, you can entrance clear types of worker benefits that would otherwise not be available if you were a sole proprietor or a partner in a partnership. For example, the corporation can invent an individual Pension Plan (discussed later on) or a resignation compensation Arrangement (Rca) for you. These resignation savings vehicles can also supply you with potential creditor-protection benefits. An worker health and welfare trust can also be created to supply health benefits for you and your family.

Capital gains exemption

The Canadian tax rules permit that up to 0,000 in capital gains arising from the sale of the shares of a marvelous small company corporation may be exempt from tax. This 0,000 capital gains exemption is also available for shares of a pro corporation, provided clear conditions are met. However, the ownership of a pro corporation may not be as well transferable since, in many provinces, it can only be transferred to members of the same profession.

Flexibility in remuneration

You can select to receive a aggregate of salary and dividends from a pro corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.

Limited market liability

A pro corporation does not commonly protect you from personal liability for pro negligence. However shareholders of a pro corporation will have the same security as other corporate shareholders when it comes to trade creditors.

Income splitting

You can split wage straight through a corporation by paying dividends to adult house members who are shareholders of the corporation. This strategy may be less applicable to pro corporations situated in provinces where share ownership is restricted to members of a singular profession. However other wage splitting strategies, such as hiring house members to work in the company and paying them a cheap wage for services rendered, are still available straight through a pro corporation.

Multiple small company deductions

As a corollary of a Canada wage agency (Cra) ruling, it is potential for professionals operating straight through a pro partnership to render their services straight through a pro corporation and be able to entrance multiple Small company Deductions (Sbds).

Income earned up to the Sbd limit of 0,000 is branch to a preferential tax rate (some provinces have a higher Sbd). Historically, the Sbd had to be shared among all corporate partners. Given Cra's new ruling, professionals currently operating as a partnership should reconsider the benefits of setting up a pro corporation to take advantage of multiple Sbds.

Individual pension plan

An individual Pension Plan (Ipp) is a defined advantage pension plan that a pro corporation can set up for the professional. The Ipp provides best annual contributions than Rsp limits for those over 40. Assets in an Ipp are protected from creditors; however, they may be branch to locking-in provisions while retirement. If you would like more facts on Ipps, please consult your advisor.

Disadvantages of a pro Corporation

Costs and complexity

The costs for establishing and maintaining a Pc are usually higher than those of a sole proprietorship. Also, a pro corporation will incur more costs to file a corporate tax return, put in order T4 slips for salaries and T5 slips for dividends. A corporation is also branch to greater regulation and yielding than a sole proprietorship or partnership.

Employer health tax and Ei premiums

Corporations in any provinces have to pay a provincial health tax levy once the corporate payroll has exceeded a clear threshold. Fortunately the basic estimate you are not taxed on is fairly high (e.g. 0,000 in Ontario) so the impact of this tax on pro corporations may not be that significant.

Business losses

You cannot claim company losses incurred by a Pc on your personal tax return; whereas, in a sole proprietorship, you may use the company losses to offset your personal wage from other sources.

Liability for malpractice

As mentioned above, a pro corporation will not protect you from personal liability for pro negligence.

Who should use a pro corporation?

A Pc can supply potential tax savings and tax deferral benefits. This may appeal to you if you do not want all of your wage to live on. pro corporations may also appeal to you if you wish to save for your resignation straight through alternative means, such as a pension plan or resignation compensation arrangement, or if you would like to limit your personal exposure to market liability.

Before incorporating, you should reconsider the cash-damming strategy, which converts all your non-deductible personal debt into tax-deductible company debt. Find out more
If you have questions on any of the issues discussed in this article, please speak with your advisor.

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