Kickstart Your Corporation E-Book

Andrew Feindel

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 374

Veröffentlichungsjahr: 2020

Beschreibung

A detailed look at financial planning strategies surrounding professional corporations for doctors, dentists, lawyers, business owners and other Canadian professionals. If you're a doctor, a dentist, a lawyer, or a business owner--virtually any type of professional in Canada--you strongly need to consider how incorporating fits into your financial plan. A good financial planner should acknowledge they have absolutely no control of the markets. However, taxes are completely controllable, and having a corporation is a powerful tool that allows professionals to control their tax bill.Using a mix of personal observations, real-life examples, and strategy evaluations, this book guides the professional along their path to using their corporation in the most efficient way. Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is your practical guide to controlling your tax bill and taking advantage of all that a Professional Corporation has to offer. Drawing upon decades of hands-on experience in wealth management, author Andrew Feindel provides clear and accurate advice on making the incorporation decision, setting up and investing inside your corporation, optimizing your salary and dividend compensation mix, valuing permanent insurance on your corporate balance sheet, using prudent leverage, weighing the pros and cons of active or passive investment management, using alternative strategies like a Capital Gains Strip, Individual Pension Plans and Retirement Compensation Arrangements, and much more. This must-have book: * Provides Canadian professionals with an accurate and straightforward investment and financial planning guide to incorporation * Covers the basics of incorporating for the professional and business owner, including a review of the process and the costs to incorporate, and the likely benefits * Analyzes the best financial strategy for various situations * Offers real-world advice on structuring compensation, risk management, borrowing to invest, and the role of trusts in professionals' financial plans * Written by a senior vice president at an independent leading-edge wealth management firm Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is essential reading for any professional who has incorporated and is looking to maximize benefits, and those wanting to incorporate for the first time with expert guidance.

Leseprobe

Table of Contents

Cover

Acknowledgments

About the Author

Introduction: The Value of a Coach

Chapter 1: Incorporation 101

Why Incorporate?

What Does It Cost to Incorporate?

What's the Process to Incorporate?

When Does It Not Make Sense to Incorporate?

How Does Purchasing a Home Fit into My Incorporation Timeline?

Can I Purchase My Principal Residence through My Corporation?

What about Shareholder Loans?

Does a Professional Corporation Give Me Creditor Protection?

How Could I “Supercharge” My Charitable Donation?

What Is the Lifetime Capital Gains Exemption (LCGE)?

Now That I Have Incorporated, Can I Deduct My Golf Membership Fees?

What Do I Do with My Corporation When I Retire?

Real-Life Case Example of Restructuring Shares

Notes

Chapter 2: The Compensation Decision: Salary or Dividends?

Understanding the Roots of the Compensation Question

Salary as Compensation

Dividends as Compensation

Do You Want to Put Your Savings in an RRSP or in Your Corporation?

Do We Want to Participate in the Canadian Pension Plan (CPP)?

Do We Have Investments Inside the Corporation?

What Are Some Exceptions to these Rules?

Notes

Chapter 3: Investing Inside Your Corporation

Can I Invest through My Corporation?

New Passive Income Tax Rules

Reminder: Asset Allocation Still Matters

What Are Corporate-Class Investments?

The Power of Tax-Deferred Compounding

Note

Chapter 4: Valuing Permanent Insurance on the Holistic Corporate Balance Sheet

A Review of the Basics—Permanent Life Insurance as Tax Arbitrage

The Benefits of Corporate-Owned Permanent Life Insurance

A Real-World Example: My Plan in Action

Understanding the Criticisms of Corporate-Held Permanent Life Insurance

Chapter 5: Risk Management

A Careful Examination

The Way We Think About Insurance

Wealth Insurance

Risk Insurance (Life and Disability Insurance)

Critical Illness Insurance

Long-Term Care Insurance

Chapter 6: Borrowing to Invest

What Is Leverage?

Who Are Good Candidates for Using Leverage?

Enhancing Returns in the Corporation with Leverage

Strategic Prudent Leverage: Timing

Building a Non-Registered Portfolio

Make Your Mortgage Interest Tax-Deductible

Investments That Use Leverage

When Does Leveraging Go Bad?

Note

Chapter 7: Investing: Active or Passive?

What Is Active Investing and What Is Passive Investing?

Understanding Investment Trends

A Deep Dive into Passive Management

Diving into Active Management

Wrapping Up the Debate

Notes

Chapter 8: The Role of Trusts in Your Financial Plan

Speaking the Language of Trusts

Trust Concepts

Inter Vivos Trusts

Discretionary Investment Trust for Grandchildren

Bearer Trusts

Inter Vivos Cottage Trust

Testamentary Trusts

Spousal Trust

Chapter 9: Alternative Investment Strategies

Capital Gains Strip

Individual Pension Plans (IPP and PPP)

Retirement Compensation Arrangements

Investing in Watches: Can I Buy My Rolex through the Corporation?

Art: Can I Buy My Pablo Picasso Painting through the Corporation?

Private Health Services Plans

Health Spending Accounts

Notes

Chapter 10: Pulling It All Together: Your Financial Plan

The Value of a Financial Plan

Plan Analysis Synopsis

Private Corporation Synopsis

Net Worth Statement

Net Worth Timeline

Net Worth Outlook

Cash Flow Outlook

Retirement Cash Flow Timeline

Retirement Need and Investable Assets

Detailed Estate Analysis

Utilizing Tax-Efficient Strategies

Recommendations

Cash Flow Outlook

Net Worth Timeline

Net Worth Outlook

Retirement Cash Flow Timeline

Retirement Need and Investable Assets

Detailed Estate Analysis

Closing Thoughts: Your Next Steps

Index

End User License Agreement

List of Tables

Chapter 2

Table 2.1 Ontario Scenario 1: Corporation's Income $500,000, $150,000 Salary,...

Table 2.2 Ontario Scenario 2: Corporation's Income $500,000, $67,037 Dividend...

Table 2.3 Ontario Scenario 1: Corporation's Income $500,000, $150,000 ...

Table 2.4 Ontario Scenario 2: Corporation's Income $500,000, $105,800 Dividen...

Table 2.5 Combined 2020 Federal and Provincial Tax Rates in Ontario

Chapter 4

Table 4.1 My Real-World Example: Projected Death Benefit

Table 4.2 My Real-World Example: Projected Death Benefit with Dividend Paymen...

Table 4.3 My Real-World Example: Rate of Return on Cash Surrender Value

Table 4.4 My Real-World Example: Rate of Return on Estate Value

Chapter 5

Table 5.1 Cash Value and Death Benefit

Chapter 6

Table 6.1 How Leverage Impacts Effective Returns

Table 6.2 Enhancing Returns in the Corporation with Leverage: Two Scenarios

Table 6.3 How Do Leveraged ETFs Work?

Chapter 7

Table 7.1 The Impact of Fees

Table 7.2 SPIVA: Percentage of Funds Underperforming the Index

Table 7.3 SPIVA: Equal-Weighted Fund Returns

Table 7.4 SPIVA: Asset-Weighted Fund Returns

Chapter 8

Table 8.1 Estate Trust Tax Savings: The first three years

Table 8.2 Estate Trust Tax Savings: After three years

Chapter 9

Table 9.1 Tax-Advantaged Contributions: IPP versus RRSP

Table 9.2 Countries with Tax Treaties with Canada

Table 9.3 Is Your Watch a Good Investment?

Chapter 10

Table 10.1 How Many Years Will the Money Last?

Table 10.2 How Much Do I Need for a 30-Year Retirement?

List of Illustrations

Chapter 2

Figure 2.1 After-Tax Investment Income: RRSP versus Corporate Investing

Guide

Cover

Table of Contents

Begin Reading

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Kickstart Your Corporation

The Incorporated Professional’s Financial Planning Coach

Andrew Feindel

Copyright © 2021 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

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Library of Congress Cataloging-in-Publication Data

Names: Feindel, Andrew, 1981- author.

Title: Kickstart your corporation : the incorporated professional's financial planning coach / Andrew Feindel.

Description: First Edition. | Hoboken : Wiley, 2020. | Includes index.

Identifiers: LCCN 2020028485 (print) | LCCN 2020028486 (ebook) | ISBN 9781119709138 (hardback) | ISBN 9781119709145 (adobe pdf) | ISBN 9781119709121 (epub)

Subjects: LCSH: Corporations—Canada—Finance. | Corporations—Canada—Taxation. | Incorporation—Canada.

Classification: LCC HG4090 .F45 2020 (print) | LCC HG4090 (ebook) | DDC 658.150971—dc23

LC record available at https://lccn.loc.gov/2020028485

LC ebook record available at https://lccn.loc.gov/2020028486

Cover image: © Sahara Prince/Shutterstock

Cover design: Wiley

For Tina, Jake, and Sophie & For Mel, Julia, Sophie and Sam.

Acknowledgments

I would like to thank my business partner and good friend Kyle Richie. Since working together in 2004, we have shared a vision for improving wealth management, and have implemented many of those ideas mentioned in this book. Kyle was ranked #1 by Wealth Professional in 2018 and has been a keynote speaker at investment conferences globally. As a top ranked advisor in Canada, he has successfully mentored many young financial advisors. We are both fortunate to work with each another and I look forward to many more years together.

Thank you to all the clients we have worked with over the years for their support and validation; Alexandra Macqueen for her help with streamlining the writing and asking “Why don't you write another book?”; Paul Matthews and Alexander Herman for their help with this book's title; Volt Chan, James King, Frank Santelli, Dan Collison, Sue Neal, and Ermos Erotocritou for their leadership; Serena Dang and Harpreet Wadehra for their sound accounting advice; Martin Houser, Mark Fox and Alison Minard for their legal advice which always challenges; Ty Wehrenberg and Glen McCrum for all their opinions; Jeremy Enwright, Ryan Shoemaker, Rachelle Allen, Tara McCue, Rob Gray, Erin Blair, and Edwin Pavey for making work fun; Alex Loh, Lisa Johnson, Yola Guo, Jennifer Olvet, Dylan Biggs, Coby Tiffin, and all our administrative team—thank you for putting up with us; Jack Courtney, Blair Evans, and Christine Van Cauwenberghe for their always diligent insights; the welcoming teams at Richardson GMP, especially Craig Bassinger and his team; the Horwood sisters and Bakish brothers; and the supportive team at Wiley for their input and revisions. Lastly, thank you to my family and friends, especially James Obaji for his perspective on these financial issues and our late best friend Joe Magnotta, who always wanted people around him to succeed. It was Joe's idea to hold our first financial planning seminar titled “Wealth and Wine” at his parents' winery—the first step in our journey.

100% of the proceeds of this book will be donated to charity.

About the Author

Andrew Feindel CFA, CFP, CLU, CSWP, CIM, FMA, CSA, FCSI, HBA (Ivey) Senior Vice President, Investment Advisor [email protected]

Andrew Feindel is a Senior Vice President and Investment Advisor at Richardson GMP.

Andrew is a co-author of Kickstart: How Successful Canadians Got Started (published 2008, Dundurn) where he interviewed 70 prominent Canadians including former prime ministers (Brian Mulroney), Native leaders (Matthew Coon Come), physicians (Dr. James Orbinski), business owners (Jim Pattison), cartoonists (Lynn Johnston), astronauts (Dr. Roberta Bondar), and ballet dancers (Karen Kain).

He built his career around understanding both the nuances of wealth and, perhaps more importantly in his chosen profession, the nuances of people when it comes to wealth.

A graduate of Upper Canada College's class of 2000, Andrew went on to graduate from the Richard Ivey School of Business and the Stockholm School of Economics with an honours degree in business administration. Sixteen years ago he joined Kyle's physician and dentist-focused practice and brought his deep understanding of the medical field with him — his father is a cardiac surgeon in Toronto, his grandfather was a neurosurgeon inducted into the Canadian Medical Hall of Fame, and his wife is a nurse.

Andrew has regularly appeared in the media, including the Financial Post, Globe and Mail, Reader's Digest, and CBC. He was also recognized by Wealth Professional magazine in 2017 and 2019 as one of a small group of up-and-coming young advisors poised to lead Canada's wealth management industry into the future.

Andrew holds many professional certifications, including the Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), Chartered Life Underwriter (CLU), Chartered Strategic Wealth Professional (CSWP), Chartered Investment Manager (CIM), Financial Management Advisor (FMA), Certified Senior Advisor (CSA), and is a Fellow of the Canadian Securities Institute (FCSI).

Introduction: The Value of a Coach

“Another financial planning book,” you may be thinking. “What value will this be to me?”

The shelves of your local library and bookstore are already filled with every imaginable book on finances: budgeting, business planning, investments, retirement planning, tax planning, planning your estate, how to save money, best practices for businesses, and more. What value could one more provide?

The truth is, this book is unlike any other you've encountered. Whereas most other books provide copious amounts of information and detail about financial topics, very few provide concise, targeted, and pragmatic guidance with a boots-on-the-ground perspective from a team that's “been there, done that.”

And even fewer are written for you, the incorporated professional.

This book aims to change all that. From whether and when you should make the decision to incorporate, to the proper place of insurance in your financial plan, to how and where to invest and how to keep the taxman at bay, to the use of trusts and charitable donations, what you're holding is a complete, yet concise, guide to everything that matters in your financial life as an incorporated professional.

I wrote this book because I saw a gap in the advice that's available to people like you. Together with my business partner, we've built a very successful financial planning practice serving the needs of incorporated professionals, and now is my time to give back.

In our practice, I see a lot of misconceptions and even mistakes that need course-correcting. These blunders happen because people don't have a reliable and accessible source of the guidance they need—and, I would argue, deserve—for organizing and managing their financial lives as incorporated professionals.

As you're reading along, think of this book as your own financial planning coach. Like any good coach, the book will help you look at your current state of affairs, and then provide direction to enhance the results you're getting—now and in the future. Working through the ideas in this book may involve some unlearning on your part, whether that's related to how and where you invest or the way you think about how to accomplish the goals you have for yourself and your business.

My only request is that you enter with an open mind, ready to discard some rules of thumb that you may have heard for decades but, in reality, don't work for you and your situation.

Chapter 1Incorporation 101

If you're reading this and you're not incorporated, you need to call your financial planner right now and ask them why they haven't recommended that you incorporate. One of my best friends is a very successful family doctor in Ontario. We made sure that as of day 1 in his career—before he'd even received his first Ontario Health Insurance Plan (OHIP) payment—his medical professional corporation was set up and properly structured. Over the course of his career, this single move has saved him hundreds of thousands of tax dollars. So if you're a practicing professional, and you're not incorporated, why not?

What You'll Get Out of This Chapter

This chapter covers the basics of incorporating for the professional and business owner, including a review of the process and costs to incorporate, as well as the likely benefits. We also review when incorporation may not be beneficial, and how buying a house meshes with your corporate structure.

In this chapter, you'll learn about shareholder loans, the lifetime capital gains exemption, how a corporation can provide creditor protection, and what to do with your corporation when you transition into and through retirement.

Why Incorporate?

Here's the answer: the rationale for incorporation is the difference between paying income taxes at your personal rate, which can be as high as 53.53% (Ontario's highest marginal rate in 2020 after $220,000 of income), or your corporate small business deduction (SBD) rate of 12.2% (Ontario's combined federal and provincial tax rate). But in addition to the (potentially substantial) tax benefits of incorporation, you will also get increased flexibility in choosing the government programs in which to participate and invest.

A good financial planner should acknowledge that they have absolutely no control of the markets. While we do all try our best to spot trends and mispricings, in some form or fashion, we are always riding along with the ebbs and flows of market movements.

Taxes, in contrast, we have complete control over (within the rules and parameters of the tax code). Taxes are factual, they are mathematics, they are “known knowns.” This means that we can master and control them. While we cannot avoid them, we have the ability to plan and mitigate some taxes. In our financial lives, our focus should be on controlling the controllable—and the corporation is a powerful tool that allows us to control our tax bill.

What Does It Cost to Incorporate?

Setting up your professional corporation using a lawyer should cost you less than $2,000—and less than $1,000 if you take a do-it-yourself approach. Organizing the corporation—issuing shares and creating by-laws and shareholder agreements, for example—can drive up costs, but keep in mind that you can deduct up to $3,000 of costs related to incorporation. And while it's possible to incorporate using a DIY approach, consulting with a professional can help ensure that you're set up appropriately from the get-go.1

To be frank, however, I view the cost of incorporation essentially as a “sunk cost” (a cost you have already incurred and cannot recover), as you will likely incur these organizational costs at some point in your career—the only question is when.

Also, in my conversations I always stress that you shouldn't be fooled by the myth that higher legal costs will produce better outcomes for your corporation. Incorporating is simple. The only “trick” to watch out for is ensuring you create enough classes of shareholders at the outset so your spouse (or future spouse) and/or your kids (or future kids) can all have shares—they each need to have a letter in front of their shares (Class A, Class B, and so on) so the corporation can pay them different amounts, if you like. That's the (only) “secret sauce” for your Articles of Incorporation. (With that said, if this issue has to be fixed later on, it can be, but your legal costs may be much higher.)

In general, your yearly corporate accounting fees might be in the range of $1,000–2,500/year, and ongoing maintenance fees could be as high as $500 (with a lawyer) or $150 (if you file yourself). These fees can be much higher if there is significant active and passive income. Additionally, each year, you'll need to renew the certificate of authorization, and you'll also need to keep the corporation's minute book up to date.

What's the Process to Incorporate?

(If you're already incorporated, skip ahead to the section “How Does Purchasing a Home Fit into My Incorporation Timeline?”)

We all know time is money, and addressing the added complexity of a corporation will take some of your valuable personal time. The good news, however, is that most of this extra time commitment is required only once, during the initial stages of incorporation.

The following is the basic process to incorporate.

Written Consent

In some provinces, it is required that written consent be obtained before you can license your corporation. Each province has its own rules and standard applications, which can be obtained from its appropriate provincial licensing body.

Articles of Incorporation

You will need to prepare a shareholder agreement and your articles of incorporation, usually using legal counsel. You will also need to establish a corporate bank account, advise your respective association (e.g., the Canadian Medical Protection Association (CMPA)) of your incorporation, and assign your medical services billing number to the corporation. (Professional corporations, as defined in section 248(1) of the Income Tax Act, must notify the relevant professional regulatory body of their incorporation.) You should also advise all employees, patients, suppliers, creditors, and insurers that you've incorporated your professional practice.

Payroll Remittances

Once you receive your Canada Revenue Agency business number, which will look something like 12345 6789 RP0001, the number for your corporate remittances will look something like 12345 6789 RC0001. (The two numbers will be identical, differentiated only by the RP, RT, or RC program accounts.) You do not need to make corporate remittances in the first year, but you are required to make payroll remittances. It is important to note that enrollment for payroll and/or HST accounts is not automatic—this is something your accountant will be able to help you with.

Employment Contracts

Upon incorporating, a new written contract will need to be created for the new employee/employer relationship you'll be entering into as an employee of your professional corporation. Additional contracts for your spouse, children, and any other employees will also need to be developed. Establishing written contracts may be important for future reasonability reviews, given the new tax on split income rules (more on that later).

Transferring Assets

When you incorporate, you should consult with your accountant and/or financial advisor about which assets, if any, need to be and/or should be transferred to the corporation. (Keep in mind you are, in fact, selling your practice to your corporation.)

You can transfer assets, including goodwill (an intangible asset that's made up of the value added by your reputation and customer lists to the value of your practice), tax-deferred to your corporation by filing an election with the Canada Revenue Agency—called a “section 85” election, as the rules are set out in section 85 of the Income Tax Act. This election will ensure you avoid having to pay taxes if the fair market value (FMV) of your assets exceeds their adjusted cost base (ACB).

While the greatest benefit of the section 85 election is to transfer eligible property on a tax-deferred basis (at the lower of cost or the undepreciated capital cost) to a taxable Canadian corporation, there is an opportunity to trigger a gain if it is beneficial to the individual's circumstances. Also, whether the transfer is tax-deferred or not, it is nevertheless a disposition and must be reported on the transferor's tax return.

Before you transfer any other assets to the corporation, such as real estate or insurance policies, a careful cost–benefit analysis should be carried out. The following are some high-level considerations.

Real Estate

An individual can simply sell an existing rental property to their corporation in exchange for assets or debt, but the sale would trigger any unrealized capital gains, as well as a possible recapture of any capital cost allowance previously claimed on the rental property in the hands of the individual.

An individual may also transfer personally held assets to a corporation on a tax-deferred basis by taking back shares (and possibly debt) of the corporation in exchange for the property. The value of the shares received would reflect the value of the property transferred to the corporation. Then, when the property is eventually sold by the corporation, any accrued capital gains would be taxable to the corporation and distributed to the shareholder, likely in the form of dividends.

There are other factors that would need to be considered as well before assets are transferred to the corporation. For example, in the case of real estate, you would be required to pay a land transfer tax if the property is not used for the active business of the corporation. While I have seen some lawyers work around these issues using a trust structure, it's best to assume these taxes are to be paid. It is also important to determine whether the goods and services or harmonized sales tax (GST or HST) applies.

It should be noted that some real estate transactions do avoid land transfer taxes. These include gifts for no consideration (including no assumption of a mortgage). Although the tax is triggered and a tax return should be filed, as the tax is based on the consideration, the actual amount of the tax will be nil (as the consideration is also nil).

Insurance Policies

If you're thinking about transferring a personally held insurance policy to your corporation, you need to proceed with great care, specifically comparing:

The corporate savings of the corporation paying the insurance premium (note that life insurance premiums are not a deductible expense unless specifically required as part of collateral on debt) minus the income tax due on the cash surrender value (CSV) minus the adjusted cost base (ACB) at the transfer; and

The cost of paying a lump-sum bonus this year so that, after personal income tax, you have enough remaining to pay the tax due on the taxable income.

While the March 2016 federal budget reduced the benefits of transferring insurance policies to a corporation, it recommended that consideration which is at least equal to the higher of the CSV and the ACB of the policy be paid. If this recommendation is implemented, the policy's new ACB will be the highest of the following amounts: the value of the policy (CSV), the fair market value of the consideration paid, and the ACB. This new ACB will affect the taxation of the insurance plan. If the policy is surrendered before death, there is a gain to the extent that the CSV exceeds the ACB. On death, any life insurance proceeds received, assuming the corporation is the beneficiary, are added to the CDA account, and can be paid out as a tax-free capital dividend.

Choosing Your Corporation's Year-End and Maintaining Your Corporate Records

Once you are incorporated, you will need to designate a fiscal year-end for your corporation. If you're looking to keep things simple, choose a corporate year-end of December 31, the same as your personal tax year-end.

There can be some advantages, however, in choosing an off-calendar year-end. For example, with an off-calendar year end of July 31 or later, you would be able to defer paying taxes for up to 179 days. This means you could declare a bonus in the company fiscal (non-calendar) year, but not actually take the money into (taxable) personal income into the following (calendar) year.

Your professional corporation will file its own return and pay its own taxes. The corporation's tax returns are due six months after your designated corporate year-end, but the final balance of any tax owing is due two to three months after your corporate year-end.2 As you will now be an employee of the corporation, and no longer a self-employed individual, your personal taxes will be due by April 30—and not the deadline of June 15 granted to self-employed individuals and their spouses.

A mistake that's often made in the first year of incorporation is failing to file for dividends, recorded on T5 slips, by February 28 of the following year. This oversight will result in a late fee of the greater of $100 or $10 per day.3 February 28 (or 29 in a leap year) is also the date for filing T4 slips. You will need to keep your company records for at least seven years—including invoices, receipts, cheques, and documentation of your salaried employees' duties and hours worked.4

When Does It Not Make Sense to Incorporate?

Although there are powerful potential benefits to incorporating your professional practice, there are also some (limited) situations in which it is advisable not to incorporate.

If you are retired and have no intentions of ever working again, ever, then incorporating won't be the right choice. To be crystal clear: I don't mean if you are retiring in one year, or slowing down or moving to part-time work. That's because there could still be many thousands in tax savings in those final years that could significantly change your corporate/RRSP mix, estate plans—and reduce your future tax bill, once you really are retired, as well.

In 2014, I started working with a physician in his 70s. Although he was in the process of reducing his working hours, we still had him incorporate his medical practice. By taking this one action, over the five remaining years of his working life, he achieved the following results:

His RRSP balance was reduced by $200,000, reducing the income he would take in the form of RRIF withdrawals (and thus the taxes he would eventually pay);

His corporate investment account balance was $250,000—giving him more control and lower (eventual) taxes;

The expected taxes payable on his estate were reduced, increasing his children's inheritance; and

He received five years of government benefit payments totalling close to $40,000—none of which he would have received had he not followed our advice.

If you plan on working less than a year in Canada and then move permanently to a new country, then you should not incorporate.

Notice I didn't say “if you plan to move to another province,” as your corporation can be portable. That is, the benefits of incorporation all hold true if you work in Ontario for, say, one year and then work in Alberta for the following 20 years. While oftentimes a share restructuring may be required (given the different rules in different jurisdictions), unless you are planning on working in both provinces, in most cases it is a better option to have one corporation that moves from Province A to Province B than to set up a brand-new corporation. This is called “continuing” the corporation—a corporation is said to have continued when it has moved from one jurisdiction to another. Keep in mind, however, that different regulatory bodies may have different requirements.

If you make less than $50,000 per year and you do not have a partner who earns an income, you should not incorporate. In situations where your partner does have a high income and you can incorporate, there are ways to make this beneficial for you as a collective unit.

If you are an American citizen working in Canada, you should not incorporate until you understand the pros and cons, including excessive filing requirements—as the United States and Eritrea are the only countries that tax based on citizenship, resulting in annual filings for the prorated share of the passive income earned. Before you make the decision of whether to incorporate, you will need to understand which investment strategies can be used, but also cannot be used, given your citizenship and tax position.

Additionally, in December 2017, the United States implemented a transition tax that could be punitive for U.S. citizens working in Canada. With that said, I have worked with families for whom incorporation was certainly worthwhile—as in many other things, the devil is in the details.

If you have student debt, should you still incorporate? While student debt cannot be transferred to a corporation (given the debt is not tied to a tangible asset), it's still almost always worthwhile to incorporate. Why pay 20–40% more in taxes (by remaining unincorporated) to save 4% in interest (even though national student loan interest gives you a tax credit)? However, if you're facing a substantial student loan balance, you could look into federal student loan forgiveness programs that forgive up to $40,000 of debt in a five-year period if you work a minimum of 400 hours in an underserved or remote community.5

What If You Have No Small Business Deduction?

While many professionals do not receive the small business deduction (SBD) as they are associated with a partnership (i.e., most incorporated lawyers with a large firm), most of the benefits from incorporating still apply. (Note that the 2016 federal budget introduced a number of changes to corporate taxation when income is earned in a partnership or revenue is received from another company.)

Often I see physicians who are working in partnerships where they share the SBD have solutions put forward to fix this problem, but require a majority of their colleagues to be on board. In most cases it does make sense to enter into a cost-sharing arrangement or the advisable solution put forward by the legal team.

At first it seems costly with no SBD, as your corporate taxes go up from 12.2% to 26.5% (in Ontario; this varies per province). However, you do receive an enhanced credit on your dividends that can range from 8% to 12% less in personal taxes, making up for much of that loss in having no SBD.

How Does Purchasing a Home Fit into My Incorporation Timeline?

What if you are buying a home in six months to two years' time—does it still make sense to incorporate now? In a word, yes. Your home is a leveraged investment that grows tax-free, and, because of these characteristics that are unique to the principal residence, will likely be one of your best long-term investments … like a “super-TFSA,” if you like.

You normally need between 25% and 35% of the purchase price as a down payment—and the fastest way to save the down payment is usually to incorporate.

(As a side note, I also advise clients that it is okay to potentially overreach a little more than normal on their home purchase price, to avoid having to purchase an intermediary home, and then eventually sell that intermediate home in order to purchase a long-term or “forever” home within a few years. That's because the transaction costs in real estate, such as real estate commissions paid on the sale, can be significant. When all the transaction costs are factored in, they might represent up to 10% of the purchase price—a cost that can be avoided if we could somehow speed up the process to get into that long-term home.)

Let's take a look at an example.

Saving for a Down Payment: Incorporated and Non-Incorporated Options

This example assumes the following:

John is a physician earning $400,000 per year who wants to buy a condo in Toronto for $1,000,000.

We'll assume the growth rate on the condo is 4% per year, but for the moment we'll ignore all real estate transaction costs (i.e., land transfer taxes, legal and real estate commissions, and so on).

At a $400,000 income, John's

average

tax rate will be 44%, though his

marginal

rate will be 53.53%.

Let's assume John needs $100,000 of after-tax (“take-home”) pay to meet his day-to-day living expenses.

John wants to save $250,000 as a 25% down payment on the condo.

With no corporation, based on these assumptions John could save $124,000 in the first year, and it would take him a total of two years and almost three months to make up the 25% down payment on a property that may well appreciate during John's “waiting period” (meaning his $250,000 no longer represents a 25% down payment).

If John incorporates, his average corporate tax rate would be 12.2%, and he could pay out $129,000 in dividends to fund his $100,000 lifestyle spending needs (at an average tax rate of 22%), allowing him to save $223,000 in the first year.

In this scenario, he will have a $250,000 down payment within a time frame of about 15 months—cutting an entire year off the time frame for saving the required down payment.

And not only does John save up the down payment more quickly, he also saves about $40,000 on the condo purchase price, given our projection about real estate appreciation over the waiting period. How is John able to realize his down payment savings strategy so quickly and effectively? The key is his use of a shareholder loan from his corporation, which we discuss next.

Can I Purchase My Principal Residence through My Corporation?

The answer is a qualified yes: you can purchase your principal residence through your corporation, but you usually shouldn't.

Why not? Because you'd be giving up one of the largest benefits the tax code allows, the principal residence exemption. This benefit allows all the gains in our homes to grow tax-free, but the benefit is eliminated if the home is owned by the corporation.

Let's look at the example of a family member of mine, who purchased their home in 1987 for $750,000. Fast-forward to 2017 and this same house was sold for $4,850,000 (a gain of $4.1 million over 30 years)—as a tear-down, believe it or not! Because the house qualified as their principal residence (sheltered under section 40(2)(b) of the Income Tax Act), they didn't have to pay even a cent of tax on the $4.1 million gain—compared to a tax bill of over $1 million if the corporation had owned the house. In a nutshell, if it's your plan to hold (own) the home for many years, or unless you think the house will not appreciate in value, it's best to own your home personally.

However, there are certain situations where one may want to consider owning their principal residence through the corporation.

Let's consider a situation in which you have almost all your funds in the corporation, which would result in a very large personal tax bill to come up with that 25%-plus down payment. Let's also assume we are purchasing a property to own for less than five years, so the likelihood of significant capital appreciation is relatively low.

In this case, the benefit of purchasing the property through the corporation would be to come up with the payments through lightly taxed corporate dollars, as opposed to much more heavily taxed personal dollars. However, given that the house is still a personal-use property (a tax concept that refers to items you own primarily for the personal use or enjoyment of your family and yourself), you would need to either pay rent to the corporation for the equivalent market rent—which results in having to pull out money from the corporation—or take a taxable benefit for the market rent.

The former (paying rent) allows further deductions in the corporation for many of the costs—such as interest, utilities, and hydro—but would likely result in a higher personal tax bill. That's because you would likely need to withdraw double the amount needed for rent in order to pay the tax due on the withdrawn income. This option could also create problems under the new passive income rules (which came into effect for taxation years beginning after 2018), as rental income (paid to your corporation) counts toward the $50,000 threshold.

All in all, the only situations in which we've seen it make sense to have the corporation own your principal residence is when you take a taxable benefit for the imputed rent. (This is a complicated area of tax law, where professional advice is most definitely warranted!)

In making your decision about whether to own your principal residence personally or through your corporation, you will need to estimate and weigh all these costs—loss of the principal residence exemption, potentially higher loan costs when borrowing corporately as opposed to personally—against the potential benefits, which are the savings of after-(corporate)-tax dollars versus after-(personal)-tax dollars.

What about Shareholder Loans?

As a shareholder, you can take a loan from your corporation. Here's how that works: you can personally borrow money from the corporation and will not have to repay the loan until one year after year-end, giving you a repayment window of up to 729 days. Shareholder loans can be helpful in situations like the one we've just discussed, when you need to take on debt for personal reasons—whether that's financing your personal residence, cottage, or vehicle.

On your corporate books, the loan will appear as an asset to your company and a liability to you. In repaying the loan, you will need to pay the daily prescribed interest rate (currently 2%) or have a deemed interest benefit, but this will be less than the current prime rate (currently 2.45%).6 All things considered, I would much rather see you pay the prescribed interest rate to your corporation than a higher interest rate to the bank for your debt payments.

One more note about shareholder loans: it is very important to make sure you repay any loan you receive from the corporation. If you fail to repay the loan, you will have to add the borrowed amount to your personal income tax return, and you will be charged interest by the Canada Revenue Agency (CRA) for taxes owed. Also, once you have repaid the loan, you should avoid additional shareholder loans, as the CRA could potentially penalize you for a series of loans.

Does a Professional Corporation Give Me Creditor Protection?

A professional corporation differs from a “normal” corporation in that it offers no creditor protection to its directors and shareholders, and no protection from personal liability in the case of professional negligence.

While there are certain ways to ensure creditor protection for your assets, I believe the issue of creditor protection may not be as relevant in the medical industry, given that most professionals have coverage through their association. (Professionals should check with their provincial or territorial regulatory body for details on their particular circumstances.) The professional corporation can provide limited personal liability covering non-professional liabilities (such as office space lease liabilities and bank loans that are not personally guaranteed).

With that said, you can look at forming a separate holding corporation or investing in creditor-protected assets, such as segregated funds, to help provide extra measures of credit protection. Both options, however, will result in extra accounting, legal, or management fees—which is why a cost–benefit analysis should be completed with your financial advisor before you take any action.

If you own rental properties, however, we recommend using holding corporations for creditor protection. Although you may have adequate coverage through your association for your professional activities, that won't cover your rental properties, and a disgruntled tenant could lead to a creditor issue.

How Could I “Supercharge” My Charitable Donation?

Once you have incorporated, it's probably time to rethink how you donate to charity. Whether we're talking about donations that are as small as $25 to support a colleague's charitable run or tithing 10% of your income to your church, it is important to know the basics on how to maximize the tax effectiveness of your donation.

If you donate personally, you receive a 15% federal credit