In previous Kutner Law Blog posts we have addressed the most frequently asked questions of healthcare professionals regarding the benefits of incorporating a professional corporation. Our response is virtually always that that they should, and soon. If not, they may be missing out on some significant tax advantages.
When it comes to veterinary hospitals, practices or clinics, it is not uncommon to encounter veterinarians who have set up practice in the simple business form, referred to as a sole proprietorship. Although establishing a sole proprietorship is significantly less complex than incorporating a veterinary professional corporation, unincorporated professionals may not be maximizing their practice/clinic’s financial potential.
Once you and your accountant have decided to incorporate your own veterinary professional corporation (“VPC”) you should meet with both your lawyer to discuss incorporation and the other steps that need to be taken. It generally takes one day to complete the incorporation once we have the requisite information from you and about three business weeks to obtain a Certificate of Authorization from the College of Veterinarians of Ontario (CVO).
Name of VPC
One of the first items we will ask you is what would you like the name of your VPC to be. The only restriction on your choice of name is that it must end with the words “Professional Corporation”. Otherwise, VPC names will often include one of the following:
- The name or surname of every shareholder;
- Name or surname of a single shareholder and one of the words “Animal”, “Pet” or “Veterinary”;
- A geographical reference appropriate to the location of the Practice/Clinic and one of the words “Animal”, “Pet”, or “Veterinary”; or
- Name of the accredited facility owned by a shareholder of the VPC at which the practice is carried on exclusively through the VPC.
For example, if your name is Dr. Joe Smith, a couple of options for the name of your VPC are: “Dr. J. Smith Veterinary Professional Corporation” and/or “Dr. Joe Smith Animal Hospital Professional Corporation”. Prior to incorporation we will conduct a required name search for the name to ensure that there is not another veterinarian utilizing the same corporate name.
Who can own shares of a VPC and What Type of Shares are Issued?
Unlike dentistry and medical professional corporations, all shares of a VPC must be either owned by a licensed veterinarian or owned through a holding company of which the shareholders are licensed veterinarians. Family members who are not licensed veterinarians may not be shareholders of the VPC. There are often three (3) classes of shares that we issue – common, preference and special shares which most often are issued for the following purposes:
- Preference Shares – See below under the heading “Rollover Agreement to Transfer Clinic/Practice to the VPC”. As noted you will be transferring your practice to the VPC at its tax values in order to avoid the payment of income tax. In consideration of you transferring your practice to the VPC the VPC will issue you Preference Shares which are frozen in value and equal to the valuation of your Clinic/Practice at the time of transfer to the VPC. This value is most often determined by your accountant.
- Special Shares – Special shares are normally frozen in value when issued (and do not share in the growth of the VPC) – for example at $1.00.
- Common Shares – Common Shares are also known as growth shares. The advantage of common shares is that as the value of the VPC increases the value of each common share will also increase.
The decision as to what type of shares are to be issued is made with the assistance of your accountant and lawyer.
Tax Benefits of Incorporating
There are two (2) main tax benefits for practicing through a VPC:
- Capital Gains Exemption : On a sale of the shares of the VPC each holder of Common Shares will enjoy the benefit of the capital gains exemption of approximately $848,000.00 for 2018 – in summary, if you sell the shares of your VPC the 1st $848,000.00 capital gains will be tax free if set up properly.
- Small Business Deduction : The tax rate paid by the VPC on the 1st $500,000.00 of taxable income is approximately 15% as compared to up to 53% if the same income is earned by the veterinarian personally;
- Paying money out of the VPC : There are a number of methods of paying monies out of the VPC to you personally that may be more tax efficient then simply earning the monies personally.
VPC Structure
There are several nuances between a regular corporation and a VPC. For example, the articles of your VPC must provide that “the corporation cannot carry on a business other than the practice of veterinary medicine as governed by the College of Veterinarians of Ontario and activities related to or ancillary to the practice of veterinary medicine”. It is also important to note that only the veterinarian can be an officer or director of the VPC. You should ensure that you retain a lawyer familiar with corporate law to ensure compliance with the requirements and the proper structure of your VPC.
Post Incorporation
- Application to the VCO
Once your VPC has been incorporated we will send you a copy of the articles of incorporation which you can take to your bank to set up a new bank account for the VPC or simply to change the name on your existing clinic/practice account.We will complete the application to the College of Veterinarians of Ontario and meet with you to sign and then submit the application along with the initial application fee of $452.00 in order to receive a Certificate of Authorization for the VPC from the College. - Rollover Agreement to Transfer Clinic/Practice to the VPC
In order to transfer your existing Practice to the VPC, you and the VPC may need to enter into a S. 85(1) Income Tax Act, Canada (“ITA”) Rollover Agreement which is an agreement to affect the transfer of your Practice to the VPC. Both you and the VPC will elect in the rollover Agreement to rollover the clinic/practice at its tax values in order that there are no taxes to pay under the ITA. In consideration of you transferring your Practice to the VPC the VPC will issue shares (most likely Common Shares and/or Preference Shares) to you which shares would have a value equal to the value of your Practice/Clinic. - Assign Lease
If you are a tenant under a Lease it may be a requirement under the lease that you assign your Practice to a new name (the VPC in this case) to obtain the Landlord’s consent. We would normally review your lease on your behalf and discuss it with you. This will entail a review of your lease. - Retainer/Employment Agreement
We will also provide you with a Retainer/Employment Agreement whereby you personally agree that all services being provided to patients by you are being made on behalf of the VPC and all payments received by you personally are being paid to you personally and are held by you as trustee for the VPC. Canada Revenue Agency has taken the position that if you receive payments personally and do not have this agreement you may be taxed personally for these payments rather than in the VPC. - Renewal of Certificate of Authorization for College
It should be noted that each VPC must apply for a renewal of the Certificate of Authorization before the expiry of the current Certificate’s thee (3) year term each year for which the college charges $169.50 for applications received on or prior to the end of the current term. If the VPC fails to properly apply for renewal, their Certificate may be suspended and they may be subject to an administrative late fee of $56.50. If the Certificate of Authorization is not properly renewed within one year, the CVO will revoke the Certificate, the VPC will lose its authorization to practice veterinary medicine, and the CVO may be permitted to cancel the veterinarian’s member license.
FEES AND DISBURSEMENTS
We do not charge to meet and/or consult with you on the incorporation of your VPC. Once you decide to go forward with the incorporation of your VPC, you can inquire about our fees for this service, which includes the incorporation and organization (by-laws, resolutions, share certificates, ledgers, etc.) of your VPC as well as preparing and filing your application to the College and obtaining your Certificate of Authorization and all post-incorporation matters noted above including (i) the Rollover Agreement, (ii) the Retainer/Employment Agreement and (iii) reviewing and discussing your lease. In addition, there will be disbursements.
Summary
It is important to follow the strict guidelines for VPCs to ensure you are in compliance with applicable laws and the requirements of the College of Veterinarians of Ontario. If you want to discuss any of these matters, or have specific questions related to this article please do not hesitate to contact us by e-mail or phone.