Professional Incorporations #122
CATEGORY: Legally Speaking
TAGS: Estate Planning Income Professional Incorporations Taxation
By Gerry Neely
As a result of changes in legislation, lawyers may now join the ranks of businessmen and other professionals who are allowed to incorporate their businesses or practices. Individual lawyers are now deciding whether the advantages of tax deferral, income splitting, estate planning, capital gains exemptions and potentially greater expense deductions are worth the complexities and costs of incorporation, audit, separate banking, employee records and tax returns.
Some high earning licensees in the province have incorporated their commission income businesses and those licensees who aspire to a generous six-figure income may be interested in learning their reasons. The impetus for examining this question is the small business tax rate of 23% upon income up to $200,000, which applies to a professional corporation carrying on an active business. Personal rates of tax under tax reform are 26.3% on the first $27,500 of taxable income, 40.2% on the next $27,500 and 44.8% on taxable income in excess of $55,000. An individual having $200,000 of taxable income would pay tax of $89,260 while the professional corporation would pay $46,000. (The calculation ignores the salary deduction in the professional corporation upon which personal tax would be paid). This leads to a tax deferral of $43,620 to be invested if not needed, to be paid out at a time when the licensee's personal rates of tax are lower. It must be emphasized that tax deferral is an advantage only to the extent that income is left in the corporation.
It is also possible through incorporation to choose a separate tax year end and defer payment of tax for a further year. In addition, by employing a non-working spouse and alloting non-voting shares of the corporation to the spouse, total personal income tax paid in the family unit could be reduced.
Deferring taxable income or splitting it are not the only methods of estate planning available through the use of a corporation. A gain in the value of the shares of the corporation may fall within the extended exemption of $500,000 which is available if the shares of the corporation qualify as small business corporate shares. It has also been suggested for lawyers that their deductible expenses may be greater for expenses such as the use of private health service plans, club dues and fees, and death benefits.
No amendments to the Real Estate Act are necessary to enable a high-earning salesperson to take advantage of these benefits by incorporating a Company to earn commission income the salesperson would otherwise have earned and paid tax on. However, the salesperson who incorporates a company which then applies for an agents license must meet the same requirements for licensing as any other corporate agency. Unless the salesperson holds an agents license, the salesperson must find a nominee who is prepared to be in active charge of the business of the Company. The advantages must be weighed against the cost and complexities which members of the legal profession are now examining.
Amendments to the Real Estate Act would only be required if it were decided that, as a matter of policy, a salesperson without an agent's license could incorporate a professional corporation with limited rights (for example, no right to maintain a trust account) and no need to employ a nominee.
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