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Prof Corp - Worth it?


Bob Jones

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Bob Jones
  • Lawyer

Caveat: I am not asking for legal advice. 
 

For anyone who has opened a prof corp while practising in a firm, at what income level did you decide to open it and were the financial benefits of any substantial benefit in the end, relative to the accounting costs of opening it up and operating it?
 

 

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canuckfanatic
  • Lawyer

I don't operate as a law corp, but I have assisted other professional clients in setting themselves as corps (dentists, realtors, etc.) - the same principles apply.

It's only worth setting up a law corp if you're making more money than you need for your personal expenses after making your maximum annual contribution to your RRSP/TFSA/other registered accounts. At that point, you can leave the excess in the law corp to be taxed at the lower small business rate.

The act of actually incorporating a law corp is pretty easy, as is the maintenance of said law corp. I'm not entirely sure about the cost of accounting though.

Based on the above, whether a law corp is right for you is entirely dependent on your cost of living/lifestyle.

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Turtles
  • Law Student
5 hours ago, canuckfanatic said:


It's only worth setting up a law corp if you're making more money than you need for your personal expenses after making your maximum annual contribution to your RRSP/TFSA/other registered accounts. At that point, you can leave the excess in the law corp to be taxed at the lower small business rate.

My understanding is you can only operate as a professional corporation if you are not an employee, so in the mid-sized or big law context that generally means being a partner of the LLP. The small business deduction is generally shared amongst entities operating the same business in partnership so your relative entitlement to the small business deduction would be tiny (e.g., if you're only drawing 5% of the firm's profits, only 25k of your earnings would be taxable at the preferential SBD rate, resulting in modest tax savings). The more important tax planning benefits are (i) being able to accumulate mostly pre-tax earnings inside the professional corporation to keep re-investing and growing (deferring most but not all tax until you draw from these earnings), (ii) being able to choose when to draw from the accumulated earnings which realize personal income tax (controling the timing for when you may be at lower tax bracket, e.g., in retirement), and (iii) controlling who realizes income tax (income splitting in limited circumstances to equalize tax brackets). Also keep in mind the CCPC regime counterbalances the SBD advantages with a somewhat punitive tax rate on passive income from investments, which can drive investment strategy. You could use excel to look at how much you expect to draw (discounted by the corporate income tax rate) and your expected rate of return (tax-adjusted) to figure out if it's worth the added hassles versus drawing the whole sum as personal business income. But if you're actually a partner in mid or big law, that is a question better served by a CPA. 

If you're a non-employee of another kind of structure, one would expect other concerns (e.g., liability) to draw you towards incorporation anyways.

If you're an employee who thinks you can work it out with the employer as an alternative to being classified as an employee, you'd probably want to first get a professional opinion your proposed structure would not be construed as a personal services business that may bring its own set of punitive challenges.

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Rashabon
  • Lawyer

I don't have much to add to Turtles' post since it's bang on, but I'd add that as a result of the recent capital gains inclusion rate changes, you should be talking to an advisor or running your own numbers to see if it still makes as much sense. A lot of folks stopped contributing to their RRSP in order to fund their professional corps at one point, but that the level at which that now makes sense may be different going forward.

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