Professional Corporation

Historically, regulated professionals in Ontario could not carry on their practices through corporations — personal liability for professional services was considered essential to maintaining public accountability. Over time, each regulated profession lobbied successfully to allow incorporation, but on terms that preserve professional accountability.

A professional corporation (PC) is an Ontario corporation that has been granted a certificate of authorization (or equivalent approval) by its professional regulator and that complies with restrictions unique to that profession. The PC is incorporated under the Ontario Business Corporations Act, RSO 1990, c B.16 (OBCA), but its existence and operation are also subject to the specific legislation governing the profession.

Professions that currently permit professional corporations in Ontario include:

• Law: Law Society Act, RSO 1990, c L.8; Law Society of Ontario rules
• Medicine: Medicine Act, 1991, SO 1991, c 30; Regulated Health Professions Act, 1991, SO 1991, c 18 (RHPA); CPSO
• Dentistry: Dentistry Act, 1991; RCDSO
• Pharmacy: Pharmacy Act, 1991; OCP
• Nursing: Nursing Act, 1991; CNO
• Optometry, Chiropractic, Physiotherapy and other health professions under the RHPA
• Accounting (CPA): Chartered Professional Accountants of Ontario Act, 2017; CPA Ontario
• Engineering and Geoscience: Professional Engineers Act, RSO 1990, c P.28; PEO
• Architecture: Architects Act, RSO 1990, c A.26; OAA

The defining feature of a professional corporation — and what distinguishes it from a regular business corporation — is the strict restriction on who may hold shares.

General principle: Only members of the regulated profession (or, in some professions, members of a listed set of allied professions) may hold shares, directly or indirectly, in a professional corporation.

Law Society of Ontario (LSO) rules: Under the Law Society's By-Law 7, all shareholders of a law professional corporation must be licensees in good standing. No non-lawyer may hold shares, directly or indirectly (including through a holding company that a non-lawyer owns or controls). All directors and officers must also be licensees.

CPSO (Physicians) rules: Under the RHPA and CPSO policies, only legally qualified medical practitioners may hold shares in a medicine professional corporation. The PC must obtain a certificate of authorization from the CPSO and renew it annually.

CPA Ontario rules: Under CPA Ontario's professional corporation requirements, a majority of shareholders must be CPAs in good standing. Non-CPA shareholders are permitted in some circumstances (e.g., a spouse or family member holding non-voting shares), depending on CPA Ontario's current rules.

Indirect ownership (holding companies): Many professions permit a member to hold their PC shares through a personal holding company — a key planning tool discussed below. However, whether this is permitted, and under what conditions, varies by profession. Lawyers subject to LSO rules, for example, may not use a holding company to hold PC shares if any non-lawyer has any interest in the holding company.

Practical impact: These ownership restrictions mean that a professional cannot bring in a non-professional business partner as a co-owner of the PC. Equity financing from investors is prohibited. Succession planning options are significantly narrower than for a regular business corporation.

A fundamental point that professionals must understand: incorporating does not eliminate personal liability for professional negligence.

Under Section 3.2 of the OBCA and the equivalent provisions in each profession's governing legislation, a professional corporation does not protect the individual professional from personal liability arising from their own professional acts, errors, or omissions. The corporate veil does not extend to professional malpractice.

What this means in practice:

• A physician incorporated through a medicine professional corporation is personally liable to patients for their own negligent diagnosis or treatment
• A lawyer practising through a law professional corporation remains personally liable to clients for negligent legal advice
• The PC itself may also be liable, giving claimants two defendants — but the professional's personal exposure is not eliminated

The OBCA (s. 3.2(1)) explicitly provides: "Nothing in this Act limits the liability of a shareholder of a professional corporation for a breach of a professional duty."

This is the critical distinction from a regular business corporation: a director or officer of a regular corporation is not personally liable for the corporation's contract defaults or negligence (absent fraud or specific statutory exceptions). A professional practising through a PC remains personally liable for their own professional conduct.

The primary financial reason professionals incorporate is tax deferral and income splitting. However, the Tax on Split Income (TOSI) rules introduced in 2018 (ITA, s. 120.4) have substantially curtailed the income-splitting benefits available through professional corporations.

Pre-2018 income splitting: Before 2018, a professional could pay dividends from the PC to adult family members (spouse, adult children) who were shareholders, taxing that income at their lower marginal rates. This reduced the household's combined tax burden significantly.

TOSI (effective 2018): TOSI taxes "split income" — broadly, dividends paid to a related family member from a private corporation where the family member is not actively engaged in the business — at the top marginal rate (approximately 53.53% in Ontario), eliminating the tax advantage. TOSI applies to both adult and minor family members.

Excluded amounts: TOSI does not apply (i.e., income splitting is still available) in limited circumstances:

• A spouse aged 65 or older can generally receive dividends free of TOSI
• A family member who works at least 20 hours per week in the business is excluded
• A family member who has made a "reasonable" capital contribution proportionate to dividends received may be excluded
• Certain arm's length employeee arrangements are excluded

Practical result for professionals: Most young professionals cannot effectively split income with a stay-at-home spouse or student children. The tax deferral benefit of retaining income in the PC at the SBD rate (12.2%) and investing within the PC remains intact, but the dividend-sprinkling benefit has been significantly curtailed.

Ongoing planning opportunities: - Paying a reasonable salary to a spouse who genuinely works in the practice administration - Retaining surplus income in the PC for investment (deferred at 12.2% vs. 53.53% personal rate) - Using a holding company for investment once PC shares are transferred - Capital gains planning on eventual sale of PC shares (LCGE is generally not available for PC shares, as discussed below)

Incorporating a professional corporation involves satisfying two parallel requirements: corporate law under the OBCA, and professional regulatory requirements.

Step 1 — Incorporate under the OBCA: The articles of incorporation must include the required professional corporation provisions. Under OBCA s. 3.2, the articles must state that the corporation is a professional corporation practicing a specific named profession, and must include the required restrictions on share transfers (only members of the profession may hold shares).

Step 2 — Apply to the professional regulator: After incorporation, the professional must apply to their regulator for a certificate of authorization (or equivalent). Requirements vary by profession:

• LSO (lawyers): Apply for a Certificate of Authorization under LSO By-Law 4. The PC name must comply with LSO naming rules and must include "Professional Corporation" or "Law Corporation" or an approved abbreviation (e.g., "Law Corp." or "P.C.").
• CPSO (physicians): Apply for a Certificate of Authorization under the RHPA. Annual renewal required. The PC must maintain CMPA coverage.
• CPA Ontario (accountants): Apply for a Certificate of Authorization under CPA Ontario's rules. The name must include "Professional Corporation" in full.

Name requirements: Professional corporation names must comply with both OBCA naming rules and the applicable profession's naming conventions. For law professional corporations, the name must not be misleading and typically includes the lawyer's name plus "Law Professional Corporation" or "Law Corp."

Annual renewal: Most professional regulators require annual renewal of the certificate of authorization, with confirmation that the PC continues to comply with ownership, directorship, and insurance requirements.

Despite TOSI, professional corporations continue to provide meaningful tax benefits:

Tax deferral: Income retained in the PC is taxed at 12.2% (SBD rate on the first $500,000). The difference between this rate and the top personal rate of 53.53% represents significant deferred tax that can be invested within the corporation.

Investment income inside the PC: Retained after-tax earnings can be invested in a corporate investment portfolio. Note: investment income earned inside a private corporation is taxed at approximately 50.17% (combined federal-Ontario), but refundable dividend tax on hand (RDTOH) and the refundable portion of Part IV tax provide refunds when dividends are paid. This is more complex than deferral on active business income and requires ongoing tax planning.

Capital dividend account (CDA): The non-taxable portion of capital gains realized inside the PC (currently 50% of capital gains) accumulates in the CDA and can be paid to shareholders as tax-free capital dividends (ITA, s. 83(2)).

Retirement planning: Surplus retained in the PC can be invested and eventually paid out as dividends during retirement when the professional is in a lower tax bracket.

Health and dental benefits: The PC can provide health and dental benefits to the professional as a shareholder-employee, which may be deductible to the corporation.

Lifetime capital gains exemption: LCGE is generally not available for shares of professional corporations, because the business assets (primarily accounts receivable and work in progress of a personal services business) are typically not "active business" assets meeting the QSBC test. Professionals should obtain specific tax advice on this point.

Dr. Amara is a dentist in Mississauga earning $600,000 per year in gross billings. After practice expenses, her net income is $400,000.

After incorporating Amara Dentistry Professional Corporation under the OBCA and obtaining a Certificate of Authorization from the RCDSO, Dr. Amara pays herself a salary of $120,000 (generating RRSP room and covering personal living expenses).

The remaining $280,000 stays in the PC and is taxed at approximately 12.2% = ~$34,160 in corporate tax, leaving $245,840 available for investment inside the PC.

If Dr. Amara had taken all $280,000 personally, she would have paid approximately $149,920 in income tax (at ~53.53% marginal rate) — retaining only $130,080.

The difference — approximately $115,760 per year — remains inside the PC, invested and compounding. Over a 20-year career, this deferral represents a substantial wealth accumulation advantage, even after the eventual tax on distributions.