ONTARIO INTRODUCES LEGISLATION WHICH WILL EXPAND PROFESSIONAL CORPORATIONS

On December 12, 2006 the Ontario government introduced Bill 171, the Health Systems Improvements Act, 2006.  Schedule “B” to the legislation proposes changes to the Dental Hygiene Act, 1991 which will permit dental hygienists to perform various services for patients without the need for supervision by a dentist.  Meanwhile, Schedule “P” to this legislation introduces the new Naturopathy and Homeopathy Act, 2006.  Both of these changes will affect the way that dental hygienists, naturopathic doctors and homeopathic doctors conduct their practices.

Until recently, naturopathic and homeopathic doctors were governed by the antiquated system established under the Drugless Practitioners Act (the “DPA”) – which has now been repealed.  Unlike other health profession legislation, many practitioners governed by the DPA were not governed by the Regulated Health Professions Act.  This included naturopathic and homeopathic doctors.  As a result, they were not permitted to incorporate health profession corporations, unlike other medical and health practitioners.  This has now changed with the passage of the new legislation.  Naturopathic and homeopathic doctors are now included in Schedule I to the Regulated Health Professions Act, and they can therefore incorporate health professional corporations.

For dental hygienists, they could previously incorporate professional corporations, but since they were tied to working under the supervision of dentists, as a practical matter it made little sense for dental hygienists to proceed with incorporation.  However, now that dental hygienists could be establishing their own stand-alone practices, this is an issue that should be re-visited.

Lower Taxation Rates

The typical business model for those professions which could not establish professional
corporations was the sole proprietorship.  All assets were owned by the practitioner, all
liabilities were those of the practitioner and all revenues were taxed in the hands of the
practitioner.  In many instances, health professionals made use of a variation on this business model through the inclusion of a management company.  The assets and some of the liabilities of the practice were held by the management company which charged a fee (usually 15%) to the practitioner for the management services provided by the company.  The shareholders of the management company would then be the practitioner’s family or perhaps a family trust.  In this arrangement, the practitioner would be able to split his or her income in a small amount (being the amount of the management fee) with family members.  As a result, the amount split off to the family members would be taxed at a lower rate.  Of course, since the amount of the split was usually 15% or less, the tax savings were not overly significant – but were still better than nothing.

Under a professional corporation all income may be received by the professional corporation.  The corporation can then, in turn, either pay the revenues to the practitioner in the form of a salary or bonuses or, more importantly, in the form of dividends.  Dividends on shares can result in important tax savings to the practitioner and these savings could apply to the entire amount paid – rather than to just 15% paid under the management company arrangement.  These savings will exist for companies with revenues up to $400,000 (as of January 1, 2007) and should cover most health professional corporations.  You should consult with your accountant or financial advisor to determine if the taxation savings are a sufficient incentive to proceed with a professional corporation.

Liability Protection in Some Instances

Corporations also provide protection from liabilities that would not otherwise be available to the practitioner.  As a sole proprietor, the practitioner is liable for all claims and debts of the practice.  The use of a professional corporation can reduce some of these liabilities.  For example, significant contracts for supplies or long-term leases can now be entered into by the professional corporation.  If the practice should suffer a down-turn for any reason, the practitioner may be able to protect his or her personal assets from the claims of creditors if the arrangements were made through the professional corporation.

It is important to note, however, that malpractice or other similar negligence claims will not be protected.  Practitioners will not be able to avoid this form of liability through the use of a professional corporation.

Requirements for Establishing a Professional Corporation

Unlike other corporations, professional corporations are restricted to carrying on the business of the profession and to related activities (including the investment of funds generated by the corporation).  Therefore, the corporation will only be able to carry on the practice of a dental hygienists or a naturopathic or homeopathic medicinal practice.  Operating a travel agency, for example, as a division of the professional corporation (which would be permissible for other forms of corporations) will not be permitted.

Only dental hygienists, naturopathic doctors or homeopathic doctors who are licensed members of their respective College can be shareholders, officer and directors of the professional corporations.  At the present time, only doctors and dentists are permitted to create professional corporations with non-member shareholders (ie. immediate family members).  It remains hopeful that the other professions will be provided with this advantage within the next few years.  This ability to provide for a very significant “income split” will provide for a large taxation advantage once it is provided to professionals other than doctors and dentists.

Should You Convert Your Practice to a Professional Corporation?

There are definite advantages to converting your practice.  Dental hygienists, naturopathic and homeopathic doctors are encouraged to consult their accounting and legal advisors to determine if this would be a benefit for their practices.

The Law Office of Christopher A.L. Caruana would be pleased to assist you in this process.  For inquiries, we may be contacted at (416) 204-0155 or via electronic mail at info@ontariolegal.com