Tax Planning for Professional Corporations: Physicians, Dentists, and Lawyers in Ontario
# Tax Planning for Professional Corporations: Physicians, Dentists, and Lawyers in Ontario
Professional corporations (PCs) offer significant tax advantages for physicians, dentists, lawyers, and other regulated professionals in Ontario. However, maximizing these benefits requires strategic planning and deep knowledge of CRA rules, Ontario professional regulations, and tax optimization techniques.
By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA
If you’re a physician in Mississauga, a dentist in the GTA, or a lawyer in Toronto considering incorporationor if you’ve already incorporated but want to optimize your tax positionthis guide will walk you through the most effective tax planning strategies for professional corporations in Ontario.
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Why Professional Incorporation Makes Sense in Ontario
Professional incorporation allows eligible professionals to earn business income through a corporation rather than personally. The tax advantages are substantial:
1. Lower Corporate Tax Rates
Active business income eligible for the Small Business Deduction (SBD) is taxed at approximately 12.2% federally and provincially in Ontario (combined), compared to personal marginal rates that can exceed 53.5% for high earners.
2. Income Splitting Opportunities
Professional corporations can pay reasonable salaries or dividends to family members who perform legitimate services or are shareholders, subject to the Tax on Split Income (TOSI) rules.
3. Deferral of Personal Tax
Income retained in the corporation is taxed at the lower corporate rate. Personal tax is only paid when funds are withdrawn as salary or dividends.
4. Retirement Planning Flexibility
Corporations can pay higher RRSP contributions through T4 compensation, and professionals can establish Individual Pension Plans (IPPs) for even greater retirement savings.
5. Liability Protection
While the primary benefit is tax optimization, professional corporations also offer some degree of liability separation (though professional liability insurance remains essential).
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Regulatory Requirements for Professional Corporations in Ontario
Before diving into tax strategies, it’s important to understand the regulatory framework:
Professional Regulatory Bodies
- Physicians and Dentists: Regulated by the College of Physicians and Surgeons of Ontario (CPSO) and Royal College of Dental Surgeons of Ontario (RCDSO)
- Lawyers: Regulated by the Law Society of Ontario (LSO)
- Other Professions: Accountants (CPA Ontario), engineers (PEO), architects (OAA), etc.
Each regulatory body has specific requirements for professional corporation structure, including:
- Naming conventions (e.g., “[Name] Professional Corporation”)
- Ownership restrictions (only licensed professionals can be shareholders)
- Voting control requirements
- Annual reporting and compliance obligations
Critical: Consult your regulatory body before incorporating to ensure compliance with profession-specific rules.
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Tax Planning Strategies for Professional Corporations
1. Optimize Compensation Mix: Salary vs Dividends
The most fundamental decision for professional corporation owners is how to extract incomesalary, dividends, or a combination.
#### Salary Advantages
- Creates RRSP contribution room (18% of earned income, up to $31,560 in 2026)
- Allows for CPP contributions (mandatory up to the Year’s Maximum Pensionable Earnings$68,500 in 2026)
- Deductible business expense for the corporation, reducing corporate taxable income
- May allow for IPP contributions for professionals over 40 with high incomes
#### Dividend Advantages
- No CPP contributions required (saves ~$7,500 combined employer/employee for max earners)
- Lower administrative burden (no payroll remittances)
- May result in lower overall tax when combined with corporate tax credits
Best Practice for Ontario Professionals: Many physicians, dentists, and lawyers in Mississauga and the GTA use a hybrid approach:
- Pay sufficient salary to maximize RRSP room ($175,000 salary generates max RRSP room)
- Withdraw additional funds as dividends to minimize CPP costs
Insight Accounting CPA Recommendation: Work with a CPA who specializes in professional corporations to model your specific situation. The optimal strategy depends on your total income, family situation, retirement goals, and TOSI exposure.
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2. Income Splitting with Family Members (Subject to TOSI)
Professional corporations can pay reasonable compensation to family members who provide legitimate services, subject to the Tax on Split Income (TOSI) rules introduced in 2018.
#### What is TOSI?
TOSI applies the highest marginal tax rate (~53.5% in Ontario) to certain income received by family members from a private corporation. However, there are important exclusions:
##### Excluded Individuals
- Spouses age 65+: Dividends received by a spouse over 65 are exempt from TOSI
- Adult children age 25+: May be excluded if they work 20+ hours per week in the business, or if they own 10%+ voting shares and the corporation earns less than 90% of its income from providing services
##### Reasonable Compensation Exception
Family members who are paid reasonable salaries for services actually rendered are not subject to TOSI, regardless of age.
Example: Dr. Smith’s professional corporation in Mississauga employs his wife as office manager (20 hours/week). She is paid a reasonable salary of $50,000/year for administrative duties. This salary is deductible to the corporation and not subject to TOSI.
Critical: CRA scrutinizes professional corporations for unreasonable compensation to family members. Always document work performed and benchmark salaries to market rates.
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3. Passive Income Planning and the GRIP Account
One of the most complex aspects of professional corporation tax planning is managing passive investment income and its impact on the Small Business Deduction.
#### Passive Income Limit Rules
If your professional corporation earns more than $50,000 in investment income annually, your Small Business Deduction (SBD) is reduced $5 for every $1 of passive income over $50,000.
Example: Dr. Patel’s dental corporation in the GTA earns $70,000 in investment income. The excess over $50,000 is $20,000. Her SBD limit is reduced by $20,000 5 = $100,000.
#### GRIP Account (General Rate Income Pool)
The GRIP account tracks income taxed at the general corporate rate (not eligible for the SBD). Dividends paid from the GRIP account are eligible dividends, which receive better personal tax treatment than non-eligible dividends.
Tax Planning Opportunity: If your professional corporation has maxed out the SBD or earns significant passive income, paying eligible dividends from GRIP can reduce overall tax.
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4. Holding Company Structure for Asset Protection and Tax Deferral
Many high-income professionals in Mississauga and Toronto establish a holding company (Holdco) alongside their operating professional corporation (Opco).
#### How It Works
1. Opco (Professional Corporation) earns active business income
2. Opco pays tax-free intercorporate dividends to Holdco
3. Holdco holds investments, real estate, or other passive assets
4. Investment income is taxed in Holdco, isolating it from Opco’s active business income
#### Benefits of a Holdco Structure
- Creditor protection: Excess cash is moved out of the operating corporation, reducing exposure to professional liability claims
- Estate planning: Holdco shares can be structured with different classes (voting, non-voting, growth shares) for family succession planning
- Tax deferral: Income accumulates in Holdco at corporate tax rates until personally needed
Example: Dr. Chen, a physician in Brampton, incorporates Holdco to receive dividends from her medical PC. Holdco holds an investment portfolio of $2M. Investment income is taxed in Holdco rather than personally, allowing tax-deferred growth.
Caution: Holding companies add complexity and administrative cost. They’re typically recommended for professionals with $500K+ in investable assets or specific estate planning needs.
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5. Retirement Planning: IPPs, RCAs, and Deferred Compensation
Professional corporations offer advanced retirement planning tools beyond RRSPs.
#### Individual Pension Plans (IPPs)
An IPP is a defined benefit pension plan for one person (or a small group). It’s particularly attractive for professionals over 40 with high incomes.
Advantages:
- Contribution limits are actuarially determined and often exceed RRSP limits, especially for older professionals
- For a 50-year-old physician earning $300K, annual IPP contributions can exceed $50,000 vs the $31,560 RRSP limit
- IPP contributions are tax-deductible corporate expenses
- Past service contributions may be available
Drawbacks:
- Higher administrative cost (~$2,500$5,000/year)
- Mandatory actuarial valuations every 3 years
- Termination costs if you wind up the plan early
Best For: Ontario physicians, dentists, and lawyers over 45 with stable corporations and long-term retirement horizons.
#### Retirement Compensation Arrangements (RCAs)
An RCA is a supplemental retirement plan that allows for unlimited contributions, but comes with a 50% refundable tax on contributions.
When RCAs Make Sense:
- Professionals maxing out RRSP and IPP limits
- Income over $500K annually
- Need for additional retirement savings beyond registered limits
Caution: RCAs are complex and require actuarial advice. They’re typically only beneficial for very high earners ($500K+ in professional income).
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6. Corporate-Owned Life Insurance (COLI)
Corporate-owned life insurance is a powerful tax and estate planning tool for professional corporations.
#### How COLI Works
1. Professional corporation purchases a permanent life insurance policy (whole life or universal life)
2. Premiums are paid with after-tax corporate dollars
3. Cash value accumulates tax-free inside the policy
4. Upon death, the death benefit is received by the corporation tax-free
5. The corporation can pay a capital dividend (tax-free to beneficiaries) equal to the death benefit minus the policy’s adjusted cost basis
#### Benefits of COLI
- Tax-free growth: Investment returns inside the policy are not taxed annually
- Estate equalization: Useful if you have multiple children and a professional practice to leave to one child
- Creditor protection: In Ontario, life insurance policies are generally protected from creditors
- Capital Dividend Account (CDA) planning: Death benefits create CDA room for tax-free distribution to heirs
Example: Dr. Ahmed, a Mississauga physician, purchases a $3M whole life policy through his medical PC. Upon his death, the corporation receives $3M tax-free. After paying out the adjusted cost basis (~$500K), the remaining $2.5M can be distributed to his estate as a capital dividend (tax-free).
Best For: Professionals with significant estate planning needs and stable corporate cash flow.
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7. Tax-Efficient Business Expense Planning
Professional corporations can deduct a wide range of business expenses, reducing both corporate and personal tax.
#### Common Deductible Expenses for Ontario Professionals
- Professional development: Continuing medical education (CME), legal CPD courses, dental conferences
- Professional dues and memberships: CPSO, RCDSO, LSO, medical associations
- Home office expenses: If you maintain an office at home for administrative work
- Automobile expenses: Business use portion of vehicle costs (keep detailed logs)
- Staff salaries and benefits: Employees (including family members performing legitimate services)
- Technology and equipment: Computers, software, medical or dental equipment
- Accounting and legal fees: Professional fees for tax planning, corporate compliance, and legal advice
Key Planning Opportunity: Many Ontario physicians and dentists miss deductible CME travel expenses. The CRA allows deductibility of two conferences per year in Canada, and international conferences if directly related to your specialty.
Insight Accounting CPA Tip: Keep detailed records. CRA audits of professional corporations often focus on personal vs business use of expenses, especially automobiles and home offices.
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8. Capital Dividend Account (CDA) Planning
The Capital Dividend Account is one of the most valuable tax planning tools for professional corporations in Ontario.
#### What is the CDA?
The CDA tracks certain tax-free amounts received by the corporation, including:
- Capital gains: 50% of realized capital gains (the non-taxable portion)
- Life insurance proceeds: Death benefits minus the policy’s adjusted cost basis
- Capital dividends received: From other corporations
Amounts in the CDA can be distributed to shareholders as capital dividends, which are received completely tax-free.
#### Strategic Uses
- Estate planning: Life insurance proceeds create large CDA balances for tax-free distribution to heirs
- Investment dispositions: Selling appreciated investments? Distribute the tax-free portion via capital dividends
- Business exit: On sale of shares, structure the transaction to maximize CDA utilization
Example: Dr. Nguyen, a Toronto dentist, sells her practice for $1.5M (capital gain of $800K). The non-taxable portion ($400K) is added to her corporation’s CDA. She can withdraw this $400K as a capital dividend, tax-free.
Critical: CDA elections must be filed correctly (Form T2054) within specific deadlines. Errors can result in penalties and personal tax exposure.
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9. Professional Services Income vs Investment Income
CRA closely scrutinizes professional corporations to ensure they earn active business income rather than passive investment income.
#### Why It Matters
- Active business income: Eligible for Small Business Deduction (~12.2% tax rate on first $500K)
- Passive investment income: Taxed at ~50% (plus triggers SBD clawback as discussed earlier)
#### Personal Services Business (PSB) Rules
If your professional corporation is deemed a Personal Services Business, the SBD is denied, and strict expense deduction limits apply.
A PSB exists when:
1. Services are provided to one entity (or related entities)
2. You would be considered an employee of that entity if not for the corporation
3. You don’t employ more than 5 full-time employees
Common Trap: Locum physicians or contract dentists working exclusively for one clinic may be caught by PSB rules.
How to Avoid PSB Status:
- Work for multiple unrelated clients
- Employ 5+ full-time employees in the corporation
- Provide services that go beyond what an employee would do
- Demonstrate independent business activity (marketing, own office, etc.)
Insight Accounting CPA Recommendation: If you’re a contract physician or dentist in Mississauga or the GTA, consult a CPA specializing in professional corporations to assess PSB risk.
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10. Estate Planning and Succession for Professional Corporations
Proper estate planning ensures your professional corporation is efficiently transitioned upon retirement or death.
#### Key Estate Planning Strategies
1. Share structure: Use multiple share classes (voting, non-voting, preferred, common) to facilitate gradual transfer of ownership to family members or junior partners
2. Estate freeze: Lock in current value for senior generation; future growth accrues to next generation (typically via family trust structure)
3. Buy-sell agreements: For professional partnerships (medical clinics, law firms), establish clear valuation and purchase terms
4. Life insurance funding: Ensure sufficient liquidity to pay out estates without forcing asset sales
5. Capital Dividend Account maximization: Structure estate distributions to leverage CDA for tax-free payouts
Example: Dr. Sharma, a Brampton family physician, completes an estate freeze at age 60. He transfers future growth shares to his adult children via a family trust. Upon his death, the life insurance proceeds create a large CDA balance, allowing tax-free distributions to his estate.
Critical: Estate planning for professional corporations requires coordination between CPAs, lawyers, and insurance advisors. Start planning 510 years before planned retirement for optimal results.
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Common Professional Corporation Tax Mistakes to Avoid
1. Failing to Document Family Member Services
Paying family members without proper employment agreements, timesheets, or service descriptions invites CRA scrutiny and TOSI exposure.
2. Ignoring Passive Income Thresholds
Accumulating too much investment income in your professional corporation can cost you $100K+ in lost SBD room.
3. Improper CDA Elections
Missing filing deadlines or calculating CDA balances incorrectly can result in penalties and personal tax on amounts that should have been tax-free.
4. Not Planning for PSB Risk
Contract professionals often don’t realize they’re at risk of PSB designation until a CRA audit reveals the issue.
5. Neglecting Estate Planning
Many Ontario physicians, dentists, and lawyers assume their corporation will “figure itself out” upon death. Without proper planning, estates face unnecessary tax and liquidity issues.
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How Insight Accounting CPA Helps Professional Corporations in Mississauga, GTA, and Ontario
At Insight Accounting CPA, we specialize in tax planning for physicians, dentists, lawyers, and other professionals across Mississauga, Toronto, Brampton, and the Greater Toronto Area.
Our Professional Corporation Services Include:
- Incorporation planning: Regulatory compliance, optimal share structure, Holdco setup
- Tax optimization: Salary vs dividend planning, income splitting strategies, TOSI planning
- Passive income management: Investment portfolio structuring, SBD preservation strategies
- Retirement planning: RRSP maximization, IPP setup, RCA design
- Estate planning coordination: CDA planning, estate freezes, insurance integration
- CRA audit defense: Representation and resolution of professional corporation audits
- Annual compliance: T2 corporate returns, T4/T5 preparation, CDA tracking
Why Choose Insight Accounting CPA?
- 20+ years of combined CPA experience serving Ontario professionals
- Deep expertise in CPSO, RCDSO, and LSO compliance requirements
- Proactive tax planning: We model strategies before year-end, not after
- AI-enhanced financial insights (leveraging our patent-pending AI governance framework for real-time decision support)
- Personalized service: Direct access to senior CPAs who understand your profession
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Frequently Asked Questions (FAQs)
1. Should I incorporate my medical practice in Ontario?
If you’re a physician earning over $200K annually and have cash flow beyond personal living expenses, incorporation typically provides significant tax savings. However, factors like retirement timeline, family situation, and liability concerns should be evaluated.
2. What are the tax rates for professional corporations in Ontario?
Active business income eligible for the Small Business Deduction is taxed at approximately 12.2% (combined federal and Ontario rates). General corporate income (over $500K or passive income) is taxed at roughly 26.5%.
3. Can I income split with my spouse through my professional corporation?
Yes, subject to TOSI rules. Spouses over 65, or those working 20+ hours/week in the business, can receive dividends without TOSI. Reasonable salaries for actual services are always allowed.
4. How much does it cost to maintain a professional corporation in Mississauga?
Typical annual costs include: accounting fees ($3,000$10,000), legal fees ($1,000$2,500), bookkeeping ($1,500$5,000), and audit fees if required ($5,000$15,000). Costs vary based on complexity.
5. What is an Individual Pension Plan (IPP), and should I set one up?
An IPP is a defined benefit pension plan for one individual (or small group). It’s beneficial for professionals over 45 with high incomes ($200K+) who want to contribute more than RRSP limits allow. Annual contributions can exceed $50K for older professionals.
6. Can my professional corporation own real estate?
Yes, but it’s often tax-inefficient. Rental income earned by the corporation is taxed as passive income (reducing your SBD), and capital gains on sale are taxed corporately. A holding company structure is usually preferable for real estate investments.
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Take the Next Step: Optimize Your Professional Corporation Tax Strategy
If you’re a physician, dentist, lawyer, or other professional in Mississauga, Brampton, Toronto, or the GTA, proactive tax planning is essential to maximize your after-tax income, protect your wealth, and plan for retirement.
At Insight Accounting CPA, we provide comprehensive professional corporation tax planning tailored to your specific profession, income level, and personal goals.
Ready to Optimize Your Professional Corporation?
Contact Insight Accounting CPA today:
- Phone: (905) 270-1873
- Website: insightscpa.ca
- Office: Serving Mississauga, Toronto, Brampton, and all of Ontario
Schedule your professional corporation tax consultation today and discover how much you could be saving.
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Insight Accounting CPA Professional Corporation
Mississauga, Ontario | Serving the GTA
(905) 270-1873
insightscpa.ca
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