Dissecting the Medical Professional Corporation – Part 3

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

KEY STEPS IN MPC INCORPORATION

Having reviewed the advantages and pre-incorporation considerations of an MPC, if a physician or a group of physicians should decide to incorporate, the key steps towards successfully incorporating an MPC listed below would apply.

  1. Assemble Advisers

Incorporating a medical practice can be a complex process. It is advisable that practitioners start by assembling a team of advisers including legal, accounting/tax and financial expertise.

  1. Incorporation

Once a lawyer has the following requisite information to file the application for incorporation, receiving the approved Articles of Incorporation from the government generally takes 1-2 days. The necessary information is as follows:

  1. Jurisdiction: MPCs must be incorporated as a provincial corporation under the Business Corporations Act (Ontario).
  2. Name: Naming an MPC requires adhering to strict rules. A corporate name must include the physician’s surname as it appears on College of Physicians and Surgeons of Ontario’s (“CPSO”) register. It may also include given names or initials and “Dr.”. If the prospective MPC has more than one physician member, its name only requires one of their respective names. The name must also include the words “Medicine Professional Corporation”.
  3. Issuing Shares: The type and number of shares being issued to the physician(s) and their family members is most often determined by coordinating with the physician’s accountant and lawyer. Three common classes of shares that are often issued include:
    1. Special Shares: Special shares have their values frozen upon issuance (e.g $1.00 per share) and are typically issued to family members. The MPC’s board of directors is then able to declare variable amounts of dividends (or no dividends at all) to the family member shareholders assuming they each hold a different class or series of shares. The board of directors may easily redeem the Special Shares at any time because their value was frozen at issuance.
    2. Common Shares: Common Shares are usually issued to the physician shareholder and are also the voting shares of the MPC.
    3. Preference Shares: Transferring an existing medical practice to an MPC can be accomplished on a tax-free basis by having the physician and MPC engage in a section 85(1) rollover agreement (as permitted under the ITA). This “rolls over” the practice from the physician to the MPC at its tax values. As part of the consideration for the rollover, the MPC issues Preference Shares to the physician at the fair market value of the practice as at the time of transfer.
  4. Restrictions: There are several nuances between a standard for-profit corporation and an MPC. For example, the Articles of an MPC must provide that “the corporation cannot carry on a business other than the practice of medicine and activities related to or ancillary to the practice of medicine”. Furthermore, restrictions should be put in place ensuring that only shareholders who are members of the CPSO can become officers or directors of the MPC.
  1. Certificate of Authorization

Once the MPC has been incorporated, a copy of the Articles can be used to establish a corporate bank account or change the name on the existing account. An application to the CPSO is also required and must be submitted along with a fee of $350.00 in order to obtain a Certificate of Authorization. Without this certificate, the corporation is not permitted to practice. It generally takes about two to three weeks to obtain a Certificate of Authorization from the CSPO, but the Certificate will be dated and take effect from the date CPSO received the completed application.

  1. Statutory Declaration

A statutory declaration executed by a director of the MPC must be completed not more than 15 days prior to submitting the application to CPSO. It certifies that the MPC is in compliance with applicable law, will only carry on the business of practicing medicine and that the information provided to CPSO is accurate and complete. This must be signed in the presence of a lawyer or notary public.

  1. Organize the Corporation

As with every corporation, the physician’s lawyer will prepare a comprehensive minute book that contains all the required corporate records such as by-laws, resolutions, certificates and officer/director/shareholder registers.

  1. Miscellaneous (if necessary):
  1. Rollover Agreement to Transfer Practice to the MPC: If transferring an existing practice to the MPC, the physician’s lawyer and accountant will prepare a Section 85(1) Rollover Agreement.
  2. Assign Lease: If the physician’s existing practice is operating as a tenant under a lease it may be necessary to get the landlord’s consent prior to assigning the lease to a new entity (i.e. the MPC). The lease provisions should be reviewed to ensure the appropriate assignment process is followed.
  3. Employment Agreement: It may be beneficial to prepare an employment agreement whereby the physician personally agrees that all services being provided to patients are being made on behalf of the MPC and the physician as trustee for the MPC holds payments received by the physician personally. It may be that if a physician receives these payments personally without an agreement the Canada Revenue Agency will tax the physician at personal income tax rates rather than at corporate tax rates in the MPC.
  4. Renewal of Certificate of Authorization: MPCs must apply for renewals of authorization on the anniversary of the certificate’s date of issue. Administrative filing charges will apply.

 We are always happy to discuss any of the steps enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.

Dissecting the Medical Professional Corporation – Part 2

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

PRE-INCORPORATION CONSIDERATIONS

Prior to incorporating as an MPC, there are several considerations that a physician and their professional advisers must consider. These considerations include:

  1. Transfer of Practice (if applicable)

After the MPC is incorporated, the physician will need to transfer their existing practice to the new entity. To avoid tax repercussions, assets and liabilities must be transferred to the MPC at fair market value (“FMV”). The medical practice (including goodwill etc.) could be sold to the MPC triggering a capital gain that could be used against any capital loss carry forwards. Another option is a tax-efficient option that would transfer the existing medical practice to an MPC on a tax-free basis using a Section 85 Rollover as permitted under the Income Tax Act (Canada) (“ITA”). This involves following the provisions of the ITA to transfer the medical practice to the MPC in exchange for non-voting shares and/or debt equal to the FMV of MPC. Any accumulation of goodwill could result in capital gains or additional legal and accounting fees. It is recommended that physicians considering transferring an existing practice to an incorporated entity consult a tax professional to avoid these additional costs.

  1. Structuring Retained Earnings and Tax Deferral

Careful planning will be required in order to optimize the approach the MPC will adopt in remunerating the physician via a mix of salary and/or dividends in order to keep the physician in a lower personal income tax bracket with the excess taxed in the MPC. This planning should also take into account minimizing the additional personal tax payable on earnings retained in the MPC that are paid out as income in the future.

  1. Structuring Income Splitting

An MPC is only permitted to issue voting shares to registered physicians. If the physician wishes to engage in income splitting, the MPC must issue non-voting shares to family members in order to allow them to receive dividends on those shares. The recipients of those dividends will then be taxed at their marginal personal income tax rate. Family members include the physician’s spouse, parents and adult children (this includes step-parents, step children and common law spouses). If the physician has minor children (under 18 years old) the physician must hold the shares for them in trust until they turn 18 at which time the shares will be transferred to that child directly.

  1. Multiple Practitioners (if applicable)

Where an MPC is in partnership with other MPCs or practitioners, it is important to note that the physician must share the SBD with these partners. Physicians and their advisers must consider this consequence prior to engaging in any such partnerships. When the MPC is in a partnership, the financial year end of the MPC must be December 31st.

  1. Additional Costs

Corporations must issue financial statements, file corporate income tax returns, prepare payroll-reporting forms and maintain up-to-date corporate governance records. These requirements involve additional annual costs and should be considered prior to incorporating an MPC.

  1. Sale of Corporation

Selling an unincorporated practice may result in substantial capital gains. However, an MPC that qualifies under the small business capital gains exemption rules would be exempt from capital gains up to the first $800,000 (or as adjusted upwards for inflation). The value of the lifetime capital gains exemption could be further multiplied by the number of family members who own shares. As such, ensuring that an MPC is structured in a manner to take advantage of the small business capital gains exemption rules can be extremely valuable.

We are always happy to discuss any of the considerations enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.

Dissecting the Medical Professional Corporation – Part 1

Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees.  For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:

i) Part 1: Advantages of incorporating as an MPC

ii) Part 2: Pre-incorporation considerations

iii) Part 3: Key steps in MPC incorporation

ADVANTAGES OF INCORPORATING AS AN MPC

Corporations are separate legal entities from their owners (i.e. shareholders). This separate legal status can offer shareholders certain financial benefits, such as: tax deferral, income splitting, deducting business expenses and limited personal liability.

  1. Tax Deferral

Physicians practicing in Ontario are probably subject to the highest marginal personal income tax rate. In contrast, on the first $500,000 of income, MPCs can take advantage of the Small Business Deduction (“SBD”) and only pay the lower corporate income tax rate (in Ontario 15.5%). When compared to the highest Ontario personal tax rate (49.53%) this represents a 34.03% tax deferral – i.e. for every $100,000 left in the company, the net tax savings will be $34,030. To enjoy these savings, the earnings must be left in the MPC. However, any earnings left in the MPC may be invested as they would be outside of the MPC, which is an effective approach for the physician to accumulate savings in a tax-efficient manner.

  1. Income Splitting

Income splitting is another approach to limiting a physician’s personal tax burden by allowing income from an MPC to be reallocated to eligible family members (i.e. spouse, parents, adult children and trusts for minor children). These recipients are able to take advantage of lower tax brackets and available credits and deductions to minimize overall tax obligations. Typically, this is achieved by family members receiving non-voting (preferred) shares and having dividends declared on those shares. Dividends are treated more favorably than other types of income. For instance, a family member with no income can receive non-eligible dividends of approximately $35,500 without paying federal income tax. It is recommended that a tax adviser be consulted regarding provincial income taxes, Ontario Health Surtax and Alternative Minimum Tax implications.

  1. Paying life insurance through your corporation

Paying life insurance where the MPC is the beneficiary allows the physician to pay the premiums with pre-personal tax dollars. Although the premiums are not deductible by the MPC (unless insurance is required by a financial institution as a condition for financing) there is a net cash benefit of paying the premiums with dollars that have not been subject to the high personal tax rates. The insurance proceeds are then paid out tax-free using the company’s capital dividend account.

  1. Limiting Personal Liability

While physicians are still liable for their professional work when providing services via an MPC and subject to discipline from their licensing body, there may be some modest liability advantages with respect to non-professional matters (e.g. loans, leases). In such non-professional business transactions, the corporation will only be liable to the extent of the corporation’s assets, not the shareholder’s personal assets, unless the transaction implicates some legal wrongdoing and exposes the shareholder to personal liability.

We are always happy to discuss any of the advantages enumerated above, and answer any questions you may have about establishing an MPC.

Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.