As of the passing of the Province of Manitoba budget 2018, Bill 34 now allows licensed chiropractors in Manitoba to incorporate their professional services and to benefit from the potential tax savings that comes with it. What does that mean for you, the professional Manitoba chiropractor?
To begin with, a professional corporation is one that provides professional services and is regulated by a governing professional body such as the Manitoba Chiropractors Association. Generally, only those professions that are governed by a legislative professional body or association and have been legislated by government will be allowed to incorporate.
There are many reasons why this is appealing to a professional’s practice but the ability to use tax deferrals on professional income is a reason for many to incorporate. Prior to 2018, all licensed chiropractors who chose to practice in Manitoba were required to recognize their professional income at higher tax rates. In Manitoba, these higher tax rates could be as much as 50.4% on net professional income over $205,800.
With incorporation, the possibility of deferring this tax until a later date is possible. Income recognized through a corporation, where taxable income is below $500,000, would benefit from a 10% (9% in 2019) tax rate in Manitoba, which is a 40.4% (41.4%) tax drop from the personal tax rates. Shareholders could then pay themselves from the corporation as either employees or shareholders through salary or dividends respectively. All other money that is left in the corporation could be held within the company and reinvested or paid out in the future when the shareholders are in a lower tax bracket.
If a corporation qualifies as a qualified small business, the future sale of shares of the corporation may be done on a tax-free basis. When planning on retiring, chiropractors can sell their shares to another party and use their capital gains exemption on the sale to recognize either no taxes on the sale or a drastically reduced amount.
As with most professional corporations, only a licensed member of the Manitoba Chiropractors Association will be able to hold voting shares and act as a director and president in a chiropractic corporation. Non-voting shares can be held by family members or a spouse. Careful consideration must be used when splitting income with family members in order to avoid any additional tax on that split income.
Incorporation also provides some Protection and liability limitation compared to a sole-proprietorship or partnership. The corporation would not protect you if you were sued for malpractice, your professional insurance would cover you in those cases. A corporation would offer some protection of your personal assets from third party creditors in case your corporation was unable to pay any outstanding debts.
Many chiropractors today have also been working for many years and have purchased many assets over their professional careers. Incorporation allows for a transfer of these assets to the corporation from an individual on a tax deferral basis, so chiropractors can continue using their current equipment and assets without having to pay tax on the transfer of these assets to your new corporation.
A transfer of equipment and other assets to a corporation also allows for a possible release of money built up in the assets. Depreciation is usually calculated at a rate deemed reasonable by CRA but unfortunately, this is not always the case. Equipment and assets can be transferred to the corporation at the fair market value of the item, which in turn allows for more money to be withdrawn from the corporation at a reduced rate of tax. If the fair market value is greater then the tax value, taxes may apply as well.
If you are a licensed Manitoba chiropractor and are interested in incorporation but have more questions or would like to discuss your options further, one of our staff would be happy to sit down with you to discuss this subject with you.
Before taking any steps, it is recommended to sit down with your accountant and lawyer before proceeding with incorporation as there can be a lot of difficult questions that can be helped by having a professional assist you in this process.
Please see the following link for the full Bill 34, which goes into further detail about incorporation and chiropractors of Manitoba.