Doctors, Dentists, lawyers and other professionals make great clients. They’re usually high income earners with steady and predictable cash flow. Most will fund their own retirements, so they want capital preservation. One surefire preservation method is to save on taxes. Here’s how:

  1. Incorporate

    Most can create a professional corporation (PC) and hold income within it so they don’t have to pay taxes until later—creating a quasi RRSP. This structure lets clients defer up to $120,000 in taxes (in Ontario) each year.

That’s because $500,000 of professional income is taxed at 15.5%, leaving $422,500 that can stay in the corporation (if the amount were paid as a dividend, taxes would have been about $120,000).

Clients can invest the remaining income passively to gain an even better return (no day trading allowed; stocks, bonds and real estate are generally fine). But if the investment activity rises to the income level of a separate business, it invalidates the PC structure.

When clients withdraw money, they should pay themselves with dividends, since they’re taxed at a lower personal rate.

Read: Should you incorporate?

Before setting up a PC, ensure the tax benefits exceed the cost (about $3,000 yearly) of establishing and maintaining it. If your client’s in a multi-tier partnership, she may not go this route, because the small-business deduction has to be shared among all partners—which means the tax rate paid by the corporation will be the higher general tax rate.

  • Income split

    Once the client creates a PC, she can pay lower-income family members salaries for services, or issue dividends to family-member shareholders. But some provinces restrict who can own PC shares: medical professionals in Ontario can have direct family members as non-voting shareholders, while Ontario lawyers can’t.

    Read: Income splitting for business owners

    Lower-income family members can also incorporate their own small businesses, which benefit from deductions. Canadian-controlled private corporations that claim the small-business deduction pay 11% net federal tax. Most provinces allow certain levels of income to qualify for lower small-business tax rates. As of January 1, 2012, these rates are:

    British Columbia2.5%
    Ontario and New Brunswick4.5%
    Nova Scotia and Newfoundland4%
  • Sell at the right time

    Professionals who sell their PCs can take advantage of the $750,000 capital gains exemption, but investment assets inside the PC may keep the business from qualifying. So make sure clients trigger the gain when the corporation still qualifies.

    Read: Sell a business and reduce taxes

  • Other tips

    • Clients must update their wills if they establish PCs. In Ontario, a second will can be used to save probate tax on the value of debts receivable from, and investments in, private company shares (including the PC).
    • Convert large withdrawals from PCs into capital gains income. On $500,000, this can save more than $45,000 in tax.
    • Professionals can invest in taxable investments or life insurance, both of which grow tax-exempt. When a policy is held within a PC, the proceeds on death can be paid out of the corporation on a tax-free basis.
  • Stella Gasparro is a partner in MNP’s Toronto office