# potential situations for professional corp to use lifetime capital gains exemption?



## tdiddy (Jan 7, 2015)

I own a new medical corporation (myself, one other physician--my spouse, and a secretary) we are both just starting out (early 30s). I plan on paying myself a mix of dividends and salary with investment portfolio then split between RRSP + non-registered corporate account. I am planning on investing retained earnings within the corporation (favored towards equities in corp and fixed-income in RRSP) 

I know that once I start accumulating passive investments in the corp, I can no longer use the lifetime capital gains exemption unless it is purified. Should this be a concern? Is there any situation wherein a professional corp can actually use the capital gains exemption? I cannot envision 'selling' the practice to anyone.

I don't want to go through the process and expense of owning a holdco, family trust etc (we don't plan on children) if it is not needed. 

Obviously I will speak to my accountant about this, but it is good to get multiple opinions and be better informed before doing so. 

Thanks for the feedback!


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## nahc (Feb 22, 2011)

tdiddy said:


> I own a new medical corporation (myself, one other physician--my spouse, and a secretary) we are both just starting out (early 30s).


I would highly recommend separate professional corporations. Much cleaner and transparent.



tdiddy said:


> I know that once I start accumulating passive investments in the corp, I can no longer use the lifetime capital gains exemption unless it is purified. Should this be a concern? Is there any situation wherein a professional corp can actually use the capital gains exemption? I cannot envision 'selling' the practice to anyone.


I* manage a wide variety of investments in my medical professional corp(s) (hereafter "MPC"s). In my line, there are no assets and no goodwill so I will never be able to sell, so the capital gains exemption is useless to me. However, if you are family practice, general practice or otherwise office based and live in a place where other MDs want to live, then your practice may have goodwill and in some cases can be sold to another MD. Especially if you do botox or other comestics procedures and have built up a practice for yourself. This is like the dentistry model. Some people I know in internal medicine and select surgery discipines as well as derm have sucessfully sold their practices.

I take a mixture of income and (forced) dividends because I have a large amount of child tax credits to use up every year. Otherwise, your MPC is more tax efficient than a RRSP, and there is no deadline you have to close your MPC by. Also, you can look into pension options from your MPC (this is more tax efficient than a RRSP) and reimbursing medical expenses directly from your MPC from a PHSP (private health service plan) (most providers charge a 5% fee, which I still find ridicious but the provincial medical associations have a better deal). Then, I think in most cases it is better to take straight dividends (check this with your models or an accountant).

A final word of financial advice that an older dude in my line provided to me when I started out (well, technically I am still starting out) was that I could have anything my colleagues had but to wait 5 or better 10 years before I get it. I think it's pretty good advice to someone starting out.

(*well, mostly atrp2biz)


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## tdiddy (Jan 7, 2015)

nahc said:


> I would highly recommend separate professional corporations. Much cleaner and transparent.


My wife is a dual US/Canadian citizen so setting up her own corp was going to get complicated and expensive (LLC) and didn't seem worth it vs the setup we have now.

Yes we have the corporate medical insurance plan, going to save me a bundle on dental work this year

I saw an example here http://www.bcmj.org/premise/why-you-should-reconsider-incorporation  of turning dividends into capital gains then using the exemption but I've never seen it discussed elsewhere and wasn't sure how legit it is.

It is a outpatient clinic, so we technically could have goodwill and minimal assets but I doubt someone would ever buy it. 

Thanks for the help!


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## atrp2biz (Sep 22, 2010)

Does the secretary have ownership of the MPC? Not sure if I read that correctly, but if so, how is that? I'm also not clear on the LLC. Why would you need an LLC if a practice is in Canada? I guess I'm not sure on the structure you're thinking about.

Getting back to your original question, unless you are planning on selling the MPC at arm's length, the exemption is probably not worthwhile. But if a situation does occur where you could use the exemption, you would have to be purified, but that can be done at a later time.

Also, the only dividends that nahc takes out of the MPC are eligible dividends from the investment holdings.


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## tdiddy (Jan 7, 2015)

Ok sounds like the exemption is not a major issue at the time being at least. Good to know

Sorry should have been more clear. I'm the sole shareholder of the MPC. It is a regular INC. If my spouse was going to incorporate separately she would have needed to go with a LLC due to her US tax obligations (or at least that was my understanding). Instead she is an employee of the MPC which makes her IRS filing very simple.

Are there any good resources or guides on which investments are best kept in MPC vs RRSP? My basic understanding was it would be favorable to hold bonds and foreign equities in RRSP, rest could be kept in MPC Out here in BC the province gives us a matching RRSP contribution annually, its not much but I'll need to draw at least minimal income to take advantage of it. Eventually I suppose I could go with a IPP which they would also contribute to but I'm told that I shouldn't consider IPP until i'm in my 40s or later with much more saving.


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## atrp2biz (Sep 22, 2010)

tdiddy said:


> If my spouse was going to incorporate separately she would have needed to go with a LLC due to her US tax obligations (or at least that was my understanding).


Interesting--this is news to me. I thought an MPC would have to be incorporated (and college approved) in the jurisdiction/province of practice. I wouldn't have thought an LLC would be eligible. I would imagine there would be some weird tax implications as well since Canada does not recognize LLCs (both setup as C- or S-corps) as a corporation, thus susceptible to double taxation.


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## heyjude (May 16, 2009)

atrp2biz said:


> I thought an MPC would have to be incorporated (and college approved) in the jurisdiction/province of practice.


You are correct.


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## tdiddy (Jan 7, 2015)

heyjude said:


> You are correct.


Sorry.. It should read *ULC* not LLC


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## WiseOwl (Jan 1, 2015)

Given that you are just starting out, you and your spouse would be well served to develop a relationship with your accountant/tax advisor to discuss overall planning opportunities available to you.

On a general level, some points to consider:

You're correct in that holding a significant amount of investments would essentially taint the corporation's qualified small business status from a lifetime capital gains exemption eligibility perspective. However, as you've also noted, shares of your MPC would likely be difficult to sell anyway. Most doctors can simply set up shop for themselves, without having to buy another practitioner's shares.

When considering whether to purchase investments that you would hold in your MPC, you need to be cognizant of various other legislation that place restrictions on your MPC activities. For example, the Business Corporations Act and the Regulated Health Professions Act both state that a PC cannot carry on a business other than the practice of the profession. For a MPC, this is governed by your provincial College.

Both allow for ancillary activities. The Business Corporations Act has more "generous" language in that it includes the investment of surplus funds earned by a corporation in describing ancillary activities. The Regulated Health Professions Act, however, does not contain this language.

In essence, the governing bodies (the Colleges) generally do not like when a MPC holds significant investments because investment activity is essentially unrelated to the practice of medicine. 

You haven't stated what province you are in. You will need to investigate whether your provincial College has specific guidelines on which investments you can and cannot hold. Some have more rigid restrictions than others.

You've also said that you are planning on paying yourself a mix of dividends and salary. When you speak with your accountant, you should have him/her run some scenarios for you and your spouse to find the optimal mix. You may find that straight dividends may be optimal for you (at least from a tax minimization perspective). Of course, straight dividends would mean that you will not generate any RRSP contribution room as they do not count as earned income. In effect, the surplus earnings and return on investments from your MPC become your "retirement savings plan" in lieu of an RRSP. This dividend remuneration plan can work well if you are not reckless in spending the surplus cash. It does not however work well for practitioners that cannot control their spending.


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## uptoolate (Oct 9, 2011)

WiseOwl said:


> It does not however work well for practitioners that cannot control their spending.


Were truer words ever spoken...


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