Kickstart Your Corporation

The Incorporated Professional's Financial Planning Coach

Andrew Feindel

• Publisher: Wiley
• Year: 2020
• ISBN:
  9781119709121
• Edition: 1
• Topic: Business
• Subtopic: Wealth Management
• Index: Business

A detailed look at financial planning strategies surrounding professional corporations for doctors, dentists, lawyers, business owners and other Canadian professionals.

If you're a doctor, a dentist, a lawyer, or a business owner—virtually any type of professional in Canada—you strongly need to consider how incorporating fits into your financial plan.

A good financial planner should acknowledge they have absolutely no control of the markets. However, taxes are completely controllable, and having a corporation is a powerful tool that allows professionals to control their tax bill.?Using a mix of personal observations, real-life examples, and strategy evaluations, this book guides the professional along their path to using their corporation in the most efficient way.

Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is your practical guide to controlling your tax bill and taking advantage of all that a Professional Corporation has to offer. Drawing upon decades of hands-on experience in wealth management, author Andrew Feindel provides clear and accurate advice on making the incorporation decision, setting up and investing inside your corporation, optimizing your salary and dividend compensation mix, valuing permanent insurance on your corporate balance sheet, using prudent leverage, weighing the pros and cons of active or passive investment management, using alternative strategies like a Capital Gains Strip, Individual Pension Plans and Retirement Compensation Arrangements, and much more. This must-have book:

• Provides Canadian professionals with an accurate and straightforward investment and financial planning guide to incorporation
• Covers the basics of incorporating for the professional and business owner, including a review of the process and the costs to incorporate, and the likely benefits
• Analyzes the best financial strategy for various situations
• Offers real-world advice on structuring compensation, risk management, borrowing to invest, and the role of trusts in professionals' financial plans
• Written by a senior vice president atan independent leading-edge wealth management firm

Kickstart Your Corporation: The Incorporated Professional's Financial Planning Coach is essential reading for any professional who has incorporated and is looking to maximize benefits, and those wanting to incorporate for the first time with expert guidance.

Chapter 1
Incorporation 101

If you're reading this and you're not incorporated, you need to call your financial planner right now and ask them why they haven't recommended that you incorporate. One of my best friends is a very successful family doctor in Ontario. We made sure that as of day 1 in his career—before he'd even received his first Ontario Health Insurance Plan (OHIP) payment—his medical professional corporation was set up and properly structured. Over the course of his career, this single move has saved him hundreds of thousands of tax dollars. So if you're a practicing professional, and you're not incorporated, why not?

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What You'll Get Out of This Chapter

This chapter covers the basics of incorporating for the professional and business owner, including a review of the process and costs to incorporate, as well as the likely benefits. We also review when incorporation may not be beneficial, and how buying a house meshes with your corporate structure.

In this chapter, you'll learn about shareholder loans, the lifetime capital gains exemption, how a corporation can provide creditor protection, and what to do with your corporation when you transition into and through retirement.

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Why Incorporate?

Here's the answer: the rationale for incorporation is the difference between paying income taxes at your personal rate, which can be as high as 53.53% (Ontario's highest marginal rate in 2020 after $220,000 of income), or your corporate small business deduction (SBD) rate of 12.2% (Ontario's combined federal and provincial tax rate). But in addition to the (potentially substantial) tax benefits of incorporation, you will also get increased flexibility in choosing the government programs in which to participate and invest.

A good financial planner should acknowledge that they have absolutely no control of the markets. While we do all try our best to spot trends and mispricings, in some form or fashion, we are always riding along with the ebbs and flows of market movements.

Taxes, in contrast, we have complete control over (within the rules and parameters of the tax code). Taxes are factual, they are mathematics, they are “known knowns.” This means that we can master and control them. While we cannot avoid them, we have the ability to plan and mitigate some taxes. In our financial lives, our focus should be on controlling the controllable—and the corporation is a powerful tool that allows us to control our tax bill.

What Does It Cost to Incorporate?

Setting up your professional corporation using a lawyer should cost you less than $2,000—and less than $1,000 if you take a do-it-yourself approach. Organizing the corporation—issuing shares and creating by-laws and shareholder agreements, for example—can drive up costs, but keep in mind that you can deduct up to $3,000 of costs related to incorporation. And while it's possible to incorporate using a DIY approach, consulting with a professional can help ensure that you're set up appropriately from the get-go.¹

To be frank, however, I view the cost of incorporation essentially as a “sunk cost” (a cost you have already incurred and cannot recover), as you will likely incur these organizational costs at some point in your career—the only question is when.

Also, in my conversations I always stress that you shouldn't be fooled by the myth that higher legal costs will produce better outcomes for your corporation. Incorporating is simple. The only “trick” to watch out for is ensuring you create enough classes of shareholders at the outset so your spouse (or future spouse) and/or your kids (or future kids) can all have shares—they each need to have a letter in front of their shares (Class A, Class B, and so on) so the corporation can pay them different amounts, if you like. That's the (only) “secret sauce” for your Articles of Incorporation. (With that said, if this issue has to be fixed later on, it can be, but your legal costs may be much higher.)

In general, your yearly corporate accounting fees might be in the range of $1,000–2,500/year, and ongoing maintenance fees could be as high as $500 (with a lawyer) or $150 (if you file yourself). These fees can be much higher if there is significant active and passive income. Additionally, each year, you'll need to renew the certificate of authorization, and you'll also need to keep the corporation's minute book up to date.

What's the Process to Incorporate?

(If you're already incorporated, skip ahead to the section “How Does Purchasing a Home Fit into My Incorporation Timeline?”)

We all know time is money, and addressing the added complexity of a corporation will take some of your valuable personal time. The good news, however, is that most of this extra time commitment is required only once, during the initial stages of incorporation.

The following is the basic process to incorporate.

Written Consent

In some provinces, it is required that written consent be obtained before you can license your corporation. Each province has its own rules and standard applications, which can be obtained from its appropriate provincial licensing body.

Articles of Incorporation

You will need to prepare a shareholder agreement and your articles of incorporation, usually using legal counsel. You will also need to establish a corporate bank account, advise your respective association (e.g., the Canadian Medical Protection Association (CMPA)) of your incorporation, and assign your medical services billing number to the corporation. (Professional corporations, as defined in section 248(1) of the Income Tax Act, must notify the relevant professional regulatory body of their incorporation.) You should also advise all employees, patients, suppliers, creditors, and insurers that you've incorporated your professional practice.

Payroll Remittances

Once you receive your Canada Revenue Agency business number, which will look something like 12345 6789 RP0001, the number for your corporate remittances will look something like 12345 6789 RC0001. (The two numbers will be identical, differentiated only by the RP, RT, or RC program accounts.) You do not need to make corporate remittances in the first year, but you are required to make payroll remittances. It is important to note that enrollment for payroll and/or HST accounts is not automatic—this is something your accountant will be able to help you with.

Employment Contracts

Upon incorporating, a new written contract will need to be created for the new employee/employer relationship you'll be entering into as an employee of your professional corporation. Additional contracts for your spouse, children, and any other employees will also need to be developed. Establishing written contracts may be important for future reasonability reviews, given the new tax on split income rules (more on that later).

Transferring Assets

When you incorporate, you should consult with your accountant and/or financial advisor about which assets, if any, need to be and/or should be transferred to the corporation. (Keep in mind you are, in fact, selling your practice to your corporation.)

You can transfer assets, including goodwill (an intangible asset that's made up of the value added by your reputation and customer lists to the value of your practice), tax-deferred to your corporation by filing an election with the Canada Revenue Agency—called a “section 85” election, as the rules are set out in section 85 of the Income Tax Act. This election will ensure you avoid having to pay taxes if the fair market value (FMV) of your assets exceeds their adjusted cost base (ACB).

While the greatest benefit of the section 85 election is to transfer eligible property on a tax-deferred basis (at the lower of cost or the undepreciated capital cost) to a taxable Canadian corporation, there is an opportunity to trigger a gain if it is beneficial to the individual's circumstances. Also, whether the transfer is tax-deferred or not, it is nevertheless a disposition and must be reported on the transferor's tax return.

Before you transfer any other assets to the corporation, such as real estate or insurance policies, a careful cost–benefit analysis should be carried out. The following are some high-level considerations.

Real Estate

An individual can simply sell an existing rental property to their corporation in exchange for assets or debt, but the sale would trigger any unrealized capital gains, as well as a possible recapture of any capital cost allowance previously claimed on the rental property in the hands of the individual.

An individual may also transfer personally held assets to a corporation on a tax-deferred basis by taking back shares (and possibly debt) of the corporation in exchange for the property. The value of the shares received would reflect the value of the property transferred to the corporation. Then, when the property is eventually sold by the corporation, any acc...