RETIREMENT 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

Retirement planning for regulated professionals (doctors, dentists, lawyers, accountants, etc.) is fundamentally enhanced by the use of a Professional Corporation. The primary financial benefit lies in the ability to achieve significant tax deferral. Income earned within the professional corporation is often taxed at the low small business corporate rate (on the first $500,000 of active income), which is substantially lower than the high marginal personal tax rates applicable to the same income if received directly. By leaving surplus earnings inside the corporation rather than immediately paying them out as salary or dividends, the professional defers the high personal income tax until the funds are withdrawn during retirement. This allows a larger pool of after-tax capital to be invested and compound over time, making the professsional corporation a powerful, albeit complex, alternative savings vehicle compared to traditional Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).

While the tax deferral benefit is significant, the strategy must contend with the "passive income rules" introduced in 2018. The Canadian government implemented these measures to prevent professional corporations from acting as "unlimited RRSPs." Specifically, if a professional corporation (or its associated corporations) earns over $50,000 in passive investment income (such as interest, rent, or certain dividends) in a year, the maximum amount of active business income eligible for the low small business tax rate begins to be clawed back. If passive income reaches $150,000, the low tax rate is fully eliminated, forcing the professional corporation to pay tax on all its active income at the higher general corporate rate. This limitation necessitates careful investment selection, often favouring assets that generate tax-preferred capital gains or Canadian eligible dividends, and strategic planning to manage the retained earnings pool to maximize the small business deduction.

Beyond general corporate investing, the professional corporation structure unlocks advanced retirement tools that allow for greater contributions than traditional registered accounts. One of the most powerful options is the Individual Pension Plan (IPP). An IPP is a defined benefit plan sponsored by the professional corporation, allowing the owner-manager (who is an employee) to accumulate retirement savings on a tax-deferred basis. The key advantage of an IPP is that the contribution limits are often significantly higher than those permitted by RRSPs, particularly for older, high-earning professionals. Contributions made by the professional corporation into the IPP are tax-deductible to the corporation, offering an immediate reduction in corporate tax liability, and the assets grow tax-sheltered until retirement.

Finally, effective retirement planning through a professional corporation requires a carefully planned withdrawal strategy to ensure tax efficiency during retirement. The accumulated wealth inside the corporation must be drawn out strategically, often as a blend of dividends, salary, and capital dividends (a tax-free component resulting from corporate capital gains), to minimize the personal tax burden and preserve government benefits like Old Age Security (OAS). Furthermore, as the professional winds down their practice, they must decide whether to formally dissolve the professional corporation or convert it into a Holding Company (HoldCo). Converting to a HoldCo allows the professional to maintain the investment pool and continue drawing income gradually, preventing a massive tax hit that would occur if all corporate assets were liquidated and distributed personally at once.

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.