How the Professional Corporations Statutes Amendment Act may affect you
The Professional Corporations Statutes Amendment Act is expected to come into force in Alberta in early 2010 having received Royal Assent on November 26, 2009. This Act provides amendments to the Regulated Accounting Profession Act, the Legal Profession Act and the Health Professions Act extending non-voting share ownership to family members of regulated professionals. This legislation partially aligns Alberta practice with that of other provinces and allows professional businesses to include family members in a manner similar to small businesses in Alberta.
Read more to learn how this change in Alberta law may affect you.
The following professions (“regulated professionalsâ€) are affected by these changes:
- Doctors,
- Dentists,
- Chiropractors,
- Optometrists,
- Lawyers,
- Chartered Accountants,
- Certified Management Accountants,
- Certified General Accountants.
Prior to this Act coming into force, only members of the regulated professions were permitted to hold shares in their respective professional corporations. Although a professional corporation does not shield professionals from personal liability, the primary advantages of a professional corporation are the income tax benefits that can be accessed, such as income splitting, the small business deduction, access to the capital gains exemption and the deferral of income tax until amounts are paid out to the professional as a shareholder.
The new legislation now adds advantages allowing professional corporations to issue non-voting shares to:
- The regulated professional,
- A spouse or Adult-Interdependent-Partner of the regulated professional,
- A child of the regulated professional, and/or
- A trust, with limitations. [1]
The Professional Corporations Statutes Amendment Act changes how regulated professionals can structure their businesses. The most significant change is the ability to split income and capital gains with spouses and children, allowing for an over-all tax savings. By issuing dividends to all shareholders of the corporation, many family members will be taxed at a lower rate than the professional would have been. In addition, if the shares issued to family members qualify for the enhanced capital gains deduction it may be possible to shelter all, or a portion of, the capital gains that could be realised on sale of the shares. In order to take advantage of these new opportunities the corporation’s articles of incorporation must allow for the new, non-voting, shares to be issued and must allow for a payment of dividends to the non-voting class of shares.
The total amount of tax savings will vary depending on the structure chosen and the income of each party, however, a basic calculation shows that a spouse or adult child with no income will pay approximately $700 tax on $30,000 of income transferred to them through the professional corporation.
Nevertheless, only some of the advantages available to other Alberta corporations have been made available to Professional Corporations in Alberta. Holding companies and family trusts are not permitted to hold shares in the professional corporation. One effect of these prohibitions is that income splitting with minor children, even through a trust, is rendered largely ineffective due to the “kiddie tax†application.
Issuing shares in a corporation also creates risk for the regulated professional that did not exist when the corporation had only one shareholder. It may be advisable to create a Unanimous Shareholders Agreement to govern how the shares will be dealt with in the event of the death of a shareholder or of marital breakdown. Another potential issue arises if the professional corporation accumulates significant “passive†assets. These “passive†assets could cause the professional corporation to become ineligible for capital gains deductions unless the assets are separated from the professional corporation.
In deciding how to use the opportunities created by the Professional Corporations Statutes Amendment Act, some of the factors to consider are:
- The income of the regulated professional’s spouse,
- The effect of tax provisions on the regulated professional’s spouse and children, and
- The corporate structure that will best serve the family’s goals.
Your accountant may have suggestions on how to issue shares to your family members through a traditional estate freeze, a stock split, a Family Limited Partnership, or another method.
The lawyers at Walsh Wilkins Creighton can help you analyse your current structure as either a professional corporation, or as an individual, to help you learn more about your business and income options.
[1] The trust beneficiaries can only be the regulated professional’s minor children, and a beneficiary must, within 90 days of the child’s 18th birthday, either be removed as a beneficiary or must receive the shares to hold directly.
