Another tax hit may be coming to doctors and lawyers.
If your doctor or lawyer seemed a b- it grumpy during your most re cent visit, it may have something t-o do with looming potential tax chan ges for incorporated professionals and business owners who run their practice or business through a Canadian- Controlled Private Corporation or CCPC.
I-n their election platform, the Liber als stated that the small business tax rate for CCPCs drop to nine per cent from 11 per cent over the next few years, and that the government “will ensure that … CCPC status is not used to re duce personal income tax obligations for h-igh-income earners rather than sup porting small businesses.” The platform document quotes University of Ottawa professor Mi-chael Wolfson’s recent re s-earch, which estimates that “approxi m-ately $500 million per year is lost, par ticularly as high-income individuals use CCPS status as an income splitting tool.”
W-hile the rules vary by province, prac ticing members of most professions, such a-s law, medicine, engineering, architec t-ure and accounting, often choose to in corporate for tax purposes, for reasons including the potential for significant tax savings or deferral, various incomesplitting opportunities with a spouse/ partner or adult children and perhaps to ultimately take advantage of the lifetime capital gains exemption on the sale of the practice, assuming this is permitted and feasible in the professional’s province.
Fo- r example, the use of a corpora tion has often been heralded as a great tax deferral mechanism, provided the b-usiness owner or incorporated profes sional “does not need all her cash” and can afford to leave some money in her corporation for investment purposes. T-he reason this works is that the corpor ation, assuming it qualifies for the small business tax rate, pays tax on its first $500,000 of corporate income at a rate that is substantially lower than the top marginal personal tax rate. As a result, there can be a significant tax deferral a-dvantage by leaving the after-tax cor porate income inside the corporation as opposed to paying it out immediately.
What could the government do to make good on their promise to curb abuse of CCPCs? The simplest fix would b-e to take a page out of the recent Que bec budget and “refocus” access to the s-mall business tax rate to private cor porations that employ a minimum n- umber of employees. In Quebec, be ginning Jan. 1, 2017, businesses in the service and construction sectors will no longer be eligible for the Quebec small business deduction unless they have more than three full-time employees.
The other possibility is for the government to restrict the ability for professionals to income split with a spouse/partner or adult children by imposing a version of the “kiddie tax” t- hat currently applies to private com p-any dividends payable to minor chil dren, by taxing them at the highest marginal rate and thus removing the incentive to income split.
This past week the Ontario Medical A- ssociation sent an email blast to On tario physicians informing them that the Canadian Medical Association (CMA) is “advocating on behalf of phys icians on this matter.”
Prior to the election, the CMA wrote to senior federal government officials outlining the “unique nature of medical practice as a business” and stating that “- physicians are highly skilled profes s-ionals who provide an important pub l-ic service and are significant contribu tors to the knowledge economy.” The CMA also added that as self-employed s-mall business owners, physicians typically do not have access to pensions or health benefits and must, in many cases, provide for their own benefits.
Any changes to the small business tax rules would likely come as part of the Liberals’ first budget, expected in February or March 2016.