Professional corporation planning in Alberta

Canadian tax is designed so income earned through a corporation and paid out as a dividend faces roughly the same total tax as salary. In Alberta, where active income eligible for the small business deduction is taxed at 11%, integration works unusually well, so the rate comparison is the least important input in the decision.

Salary is earned income. It creates RRSP room (18% of the prior year's earned income, up to the annual limit), makes an Individual Pension Plan possible, and qualifies for deductions such as child care. The cost is CPP: as the owner you pay both halves, in exchange for an indexed pension with disability and survivor benefits.

Dividends can be declared when you choose, need no payroll, and leave more inside the corporation to compound at the small business rate. Late in a career, with a full CPP record and no plan for an IPP, dividends often win.

Dividends to a spouse or adult child who is not actively engaged in the business are generally caught by the tax on split income (TOSI) and taxed at the top rate. Most professional corporations cannot use the excluded shares exception, so a reasonable salary for work actually performed is the cleaner path.

Once adjusted aggregate investment income passes $50,000 in a year, the next year's $500,000 small business limit shrinks by $5 for every $1 over, and it is gone at $150,000. Active income then moves from the 11% small business rate to Alberta's 23% general rate.

Asset location inside the corporation, corporate class funds, return-of-capital withdrawals (T-SWP), permanent insurance and an IPP all reduce the income that counts. Each is easier to put in place early, and the compensation decision is where it starts.

A holding company owns shares of your operating company and holds the surplus it does not need. Moving retained earnings up through inter-corporate dividends, which are generally received tax-free, can provide creditor protection and estate planning flexibility.

For the lifetime capital gains exemption, at least 90% of the operating company's assets must be used in an active business at the time of sale, and more than 50% throughout the 24 months before it. Moving surplus investments to a holding company well ahead keeps the shares qualified, so start two to three years before a sale.

Regulators set rules on who may own shares of a professional corporation, which affects whether and how a holding company can be used. In Alberta, a physician's or dentist's spouse must hold non-voting shares. The structure is set with your lawyer and accountant, and we plan it alongside them.

Usually both, in a ratio driven by your age, family situation, retirement timeline and how much is already inside the corporation. In Alberta the two routes land within about a percentage point of each other on tax, so RRSP room, IPP eligibility, CPP and the passive income rules decide it. Review the mix every year.

A holding company is a corporation that owns shares of your operating company and holds investments. It can make sense once retained earnings are significant: for creditor protection, estate planning flexibility, or to keep the operating company qualified for the lifetime capital gains exemption before a sale. It also adds its own tax return and accounting cost.

When adjusted aggregate investment income in a year passes $50,000, the next year's $500,000 small business limit is reduced by $5 for every $1 over, and it is eliminated at $150,000. In Alberta that can move active income from the 11% rate to 23%.

An IPP is a defined benefit pension registered for the owner of a corporation. From the late forties on, it typically allows larger deductible contributions than an RRSP, and past service can be funded. It requires T4 employment income, so a dividends-only history rules it out.

Dividends to family members who are not actively engaged in the business are generally taxed at the top rate under the tax on split income (TOSI) rules, and most professional corporations cannot use the excluded shares exception. A reasonable salary for real work is the cleaner path.

This is one of our specialties. We help physicians optimize their salary-dividend mix, manage corporate investment portfolios, evaluate IPPs, and structure holding companies. Visit our Physicians page for more details.