ESTATE PLANNING through a Professional Corporation

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Contact our law firm for your incorporation legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Professional corporation provides the means for regulated professionals (doctors, dentists, lawyers, accountants, etc.) to access important estate planning strategies to optimize and manage their accumulated wealth. A professional corporation is a distinct legal entity that allows professionals to benefit from tax deferral opportunities, limited liability (outside of professional negligence and malpractice), and the lower small business tax rate on retained earnings. Consequently, upon the professional's death, these accumulated corporate assets and the value of the practice itself must be addressed. Effective estate planning through a professional corporation is centered on ensuring a seamless transfer of wealth, maximizing the value passed to beneficiaries, and, most critically, mitigating the substantial tax liabilities that are triggered upon death.

The primary challenge in estate planning with a professional corporation stems from the "deemed disposition" rule in the Canadian Income Tax Act. Upon the death of an individual, they are deemed to have sold all their capital property, including the shares of their professional corporation, at fair market value (FMV) immediately before passing away. This fictional sale triggers capital gains tax on the appreciation of the professional corporation's shares, which can be a massive tax burden on the deceased's final tax return. While the Lifetime Capital Gains Exemption (LCGE) offers a powerful mechanism to shelter a portion of this gain (if the professional corporation qualifies as a Qualified Small Business Corporation), careful planning is required to maintain this qualification, particularly by managing passive assets accumulated within the corporation [more on LCGE].

To navigate the intricacies of the deemed disposition and maximize tax efficiency, Canadian professionals often employ sophisticated corporate reorganization strategies. The “estate freeze,” for instance, is a foundational estate planning tool. This process typically involves converting the professional's existing common shares (which hold all future growth) into fixed-value preferred shares, while issuing new common shares to a Family Trust or other family members. The freeze caps the current shareholder’s tax liability at its present value, while all future appreciation of the practice’s value is transferred to the next generation, reducing the eventual tax bill at the professional's death.

Ultimately, successful estate planning for a professional corporation is a proactive, multi-year process that integrates corporate, personal, and succession goals. Beyond the tax planning related to the deemed disposition, the process requires structuring ownership to allow for tax-efficient income splitting, ensuring liquidity (often through corporate-owned life insurance) to enable the tax obligations to be paid upon one's death (in addition to drafting specialized "multiple wills" where probate fees on the corporate shares is a legitimate concern).

At Neufeld Legal, we have the experience and insight to assist you in structuring your professional practice as a Professional Corporation. Contact our law firm to incorporate a professional corporation or address legal matters pertaining to your professional corporation at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.