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Holding companies can be useful for some incorporated professionals, but Ontario physicians and dentists face specific professional corporation ownership restrictions. Learn how these rules affect Holdco planning, corporate investments, passive income and long-term tax strategy.
For incorporated medical professionals, the idea of setting up a holding company often comes up once the professional corporation begins accumulating significant cash or investments.
The usual thinking is straightforward: move excess funds from the operating corporation into a separate holding company, invest the money there, and create greater separation between the active practice and accumulated investments.
For Ontario physicians and dentists, however, an important regulatory issue comes before the tax planning. Their professional corporations are subject to specific ownership restrictions that prevent the conventional Holdco-over-Opco structure commonly used by other owner-managed businesses.
What Is a Holding Company?
A holding company, commonly referred to as a Holdco, is a corporation that primarily holds assets or investments rather than carrying on the active professional practice.
In a typical owner-managed business, the structure may place a holding company above an operating company. After the operating company earns business income and pays corporate tax, surplus cash may sometimes be transferred to the holding company through intercorporate dividends and invested there.
Taxable dividends between Canadian corporations are often deductible to the receiving corporation, although Part IV tax and other rules can apply. CRA guidance on intercorporate dividends
That structure can work well for ordinary corporations. Professional corporations must also comply with the ownership rules imposed by Ontario law and their professional regulator.
Ontario Physicians and Dentists Have Specific Ownership Restrictions
Ontario physicians and dentists are subject to specific professional corporation ownership rules under O. Reg. 665/05, Health Profession Corporations, made under the Business Corporations Act.
The regulation contains separate provisions for physician corporations and dentist corporations. In each case, the voting shares must be legally and beneficially owned, directly or indirectly, by members of the applicable professional College. Non-voting shares are also limited to specified permitted holders.
As a practical result, a conventional holding company cannot simply own the shares of a physician or dentistry professional corporation in the same way that it might own shares of an ordinary operating company. The Royal College of Dental Surgeons of Ontario specifically confirms that holding companies may not own shares in a dentistry professional corporation. RCDSO guidance. The underlying physician and dentist ownership requirements are found in O. Reg. 665/05.
Other regulated health professions may be subject to different professional corporation ownership rules. Their ability to use a holding-company structure should therefore be reviewed under the legislation and regulatory requirements applicable to their particular profession.
Does That Mean a Physician or Dentist Cannot Invest Corporate Savings?
No. The inability to place a conventional Holdco above the professional corporation does not mean that corporate savings cannot be invested.
Ontario's Business Corporations Act permits a professional corporation to invest surplus funds earned by the corporation, even though the corporation's principal business must remain the practice of the profession and activities related or ancillary to that practice. Ontario Business Corporations Act
As a result, many incorporated physicians and dentists build investment portfolios directly inside their professional corporations. If the professional does not need all of the after-tax corporate earnings personally, leaving some funds inside the corporation can defer personal tax until amounts are eventually withdrawn as salary, dividends or otherwise.
As the investment portfolio grows, however, passive-income rules, investment tax efficiency, creditor considerations and longer-term planning become increasingly important.
How Corporate Investment Income Is Taxed
Investment income earned inside an Ontario CCPC is taxed differently from active business income. Depending on the type of income, the initial corporate tax rate can be quite high. For example, certain forms of passive investment income are subject to a combined federal and Ontario corporate tax rate of approximately 50.17%.
A portion of this tax may later be refundable when the corporation pays taxable dividends to its shareholders. Interest, dividends, rental income and capital gains can all arise from corporate investments, but they are not taxed in exactly the same way.
The refundable-tax system, including RDTOH, and the different treatment of various types of investment income can become quite technical and are discussed in more detail in our other articles. For this discussion, the key point is that investment income has its own tax consequences before considering the additional impact of the $50,000 passive-income rule.
The $50,000 Passive Investment Income Rule Still Matters
One of the most important tax considerations is adjusted aggregate investment income, or AAII.
For federal tax purposes, the small business limit of a Canadian-controlled private corporation begins to be reduced when the corporation and its associated corporations earn combined AAII above $50,000. The federal business limit is progressively reduced and can be eliminated once combined AAII reaches $150,000. CRA T2 Corporation Income Tax Guide
Passive income can include interest, portfolio investment income, certain rental income and certain taxable capital gains, subject to the detailed tax rules.
This can become particularly relevant for established medical professionals who have accumulated substantial investment portfolios inside their corporations.
It is also important to understand that moving investments to an associated holding company, where a Holdco structure is otherwise permitted, does not automatically solve the $50,000 passive-income issue. The federal passive-income business-limit reduction looks at the AAII of the CCPC together with its associated corporations.
When Can a Holding Company Still Make Sense?
For professionals whose governing rules permit a holding-company structure, there can be several legitimate reasons to consider one.
1. Significant Surplus Cash Has Accumulated
A professional who withdraws virtually all corporate earnings each year for personal expenses may receive little benefit from adding another corporation. The discussion becomes more relevant when substantial amounts are being retained and invested for the long term.
2. Separating Investments From Operating Risk
One reason business owners use holding companies is to separate accumulated investments from the corporation carrying on the active business.
A professional corporation generally provides the usual corporate separation for ordinary business liabilities. However, this protection does not extend to professional liability. For example, a physician practising through a professional corporation remains personally exposed to professional liability arising from the provision of medical services.
Where a holding-company structure is permitted and properly implemented, moving surplus investments outside the operating corporation may provide additional separation between investment assets and liabilities arising from the business operations.
However, personal guarantees, director liabilities, fraudulent or wrongful conduct, and other legal exceptions can still create personal exposure. The effectiveness of any creditor-protection strategy should therefore be reviewed with a lawyer.
3. Long-Term Investment Planning
Once a professional corporation begins accumulating substantial savings, investment tax planning becomes increasingly important.
- the mix of interest, dividends and capital gains;
- corporate versus personal investing;
- registered investments such as RRSPs and TFSAs;
- corporate-owned insurance where appropriate;
- passive-income implications; and
- how much capital should remain available for the professional practice.
The objective should not simply be to accumulate as much money as possible inside corporations. The corporate and personal investment strategies should work together with the professional's retirement, estate and cash-flow objectives.
4. Preparing for a Future Sale
Future sale planning can be important, but the ownership structure must be considered carefully where access to the Lifetime Capital Gains Exemption (LCGE) is an objective.
The LCGE is generally available to individuals on the disposition of qualifying small business corporation shares. If a holding company owns the operating-company shares and the holding company later sells those shares, the capital gain is realized by the holding company, not by the individual shareholder. The individual would therefore not normally be able to claim the personal LCGE on that sale.
Excess passive assets inside an operating company can still make it more difficult for personally owned shares to satisfy the qualified small business corporation share tests. Moving non-business assets out of an operating company, sometimes referred to as purification, can therefore be relevant in appropriate circumstances. However, the ownership structure and any reorganization should be planned carefully well before an anticipated sale. CRA guidance on the capital gains deduction
When Is a Holding Company Probably Not Worth It?
Creating another corporation also means additional costs and administration, including incorporation and legal costs, bookkeeping, a separate corporate tax return, banking arrangements and ongoing compliance.
For a professional who has limited retained earnings, expects to withdraw most corporate income personally, or does not have a specific planning objective, adding another corporation may provide little practical benefit.
A Holdco should solve a planning problem. It should not be created simply because the professional corporation has become profitable.
The Better Planning Question
Rather than starting with, "Should I open a holding company?" an incorporated medical professional should first ask: "What am I trying to accomplish with the money accumulating inside my corporation?"
For Ontario physicians and dentists, the professional corporation ownership rules mean that the conventional Holdco-over-professional-corporation structure is not available. That does not eliminate the need for planning. It simply means that investment, tax, retirement and asset-protection strategies need to be designed within the regulatory framework that applies to the profession.
For medical professionals in Mississauga and across the GTA who are accumulating significant corporate savings, reviewing the structure before the investment portfolio becomes very large can make future tax and financial planning considerably easier.
How Source Accounting Can Help
Source Accounting Professional Corporation works with physicians, dentists and other incorporated professionals on professional corporation taxation, salary and dividend planning, corporate investments, passive-income planning, corporate reorganizations and longer-term tax planning. We serve clients throughout Mississauga, Toronto, Brampton, Oakville, Milton and surrounding areas and can work alongside your lawyer or financial advisor where a restructuring requires coordinated legal and investment planning.
This article provides general information only and is not intended to constitute tax, accounting, legal, investment or financial advice. Professional corporation ownership requirements and tax consequences vary depending on the profession and individual circumstances. Medical professionals should obtain advice from their accountant and lawyer before implementing a holding-company, corporate reorganization or investment structure.
