OMA contract to let family become corporate shareholders

Opens door to income-splitting, an option denied others

ELLEN ROSEMAN
BUSINESS COLUMNIST
Toronto Star
March 30, 2005

The government's new tentative contract with the Ontario Medical Association gives doctors a tax break that other professionals don't have by allowing spouses and other family members to become shareholders of a professional corporation.

Ontario professionals, such as doctors, dentists, lawyers and chartered accountants, have been allowed to incorporate for tax purposes since 2002. But other professionals who incorporate can't have family as shareholders under the Ontario Business Corporations Act. The OMA deal makes doctors an exception to the rules that govern other Ontario professionals.

Doctors' spouses and family members, such as adult children or elderly parents, can become shareholders of the professional corporation. This opens the door to income-splitting options, such as paying out company income as dividends to family members.

Taxpayers can earn up to about $30,000 in dividends from a Canadian corporation in a year and pay little or no tax, as long as they have little other income.

The new income-splitting rules for doctors are slated to take effect on Jan. 1, 2006, if approved by the OMA's membership and governing council.

"Doctors in most other provinces can incorporate and split income with family members," says Patrick Nelson, an OMA spokesman. But Christine Van Cauwenberghe, director of tax and estate planning for Investors Group Inc., said some provinces don't allow doctors to incorporate. "There's a hodgepodge of rules" across the country for incorporation and income-splitting, she said.

The OMA has been tight-lipped about the details of professional incorporation. Yesterday, Nelson sent the Star a copy of the letter of understanding with the provincial health ministry. It hadn't been released to the public before.

"The parties, through the course of these negotiations, have allocated a sum of money to deal with the estimated cost to the Ontario government of changes to the incorporation rules for physicians," it reads. "The revised rules shall provide for non-voting shareholders who are family members of the physician voting shareholders."

In other words, physicians can have family members as shareholders as long as they do not have any voting rights. This is a major change from the current law in Ontario, in which only professionals can own shares of professional corporations-and they must be in the same profession.

"Unless spouses are also doctors, they can't be shareholders in a doctor's professional company," says Van Cauwenberghe. But couples who both work as physicians wouldn't save taxes through incorporation, in most cases.

The major benefit is to non-working spouses or those in lower income brackets. Ontario is expected to lose about $15 million in tax revenues with the new income-splitting rules for doctors, health ministry officials have said. "It's got to be in the hundreds of millions," replied Conservative health critic John Baird. His party considered letting doctors split income when it was in power, but rejected the idea as too costly, Baird added.

Tax professionals point out that doctors already take advantage of income splitting. Many put their spouses on the payroll and pay them a salary for bookkeeping or other services provided to the medical office. Some doctors set up separate management companies, employing spouses to hold the lease or employ staff. But putting spouses on the payroll can mean more scrutiny by the Canada Revenue Agency, said Van Cauwenberghe.

"When a salary is paid to a spouse, the CRA wants to see that it's reasonable," she said. "When spouses are 50 per cent shareholders of a corporation, they can receive 50 per cent of the dividends without worrying about reasonableness or type of services provided."

Incorporating as a professional also provides some tax deferral. That's because any money left in the company is taxed at low corporate income tax rates.

In Ontario, small-business income of under $300,000 a year is taxed at a corporate rate of about 20 per cent. This compares with an average personal tax rate of about 40 per cent for high-income taxpayers. Money left in a company is paid out eventually as dividends or salaries to shareholders-and taxed at the personal rate in shareholders' hands. But excess funds can stay in a company for years before being paid out. This kind of tax deferral, however, only helps those who don't use all their income for living expenses.

"Most professionals spend every cent they make and then some," says David Louis, a tax lawyer with Minden Gross Grafstein & Greenstein in Toronto. "Not many people have taken advantage of professional incorporation since it's been allowed. That's been the experience of most tax practitioners."Many doctors now have spouses on the payroll or in management companies. So, income-splitting through incorporation offers few new benefits.

"I'm not sure this is such a big deal when you think it through," Louis says.

Still, the OMA fought hard to get income-splitting in its contract. It was a strategy to stop doctors from moving to provinces with more liberal tax rules.

How will the public react? And will other professionals push for something similar, arguing that it's unfair for physicians alone to get an exemption? That's a key question for the Ontario government, if the new deal for doctors is approved.