What are your options as a health professional in Canada?

Most will tell you that you can operate as a sole proprietor or a corporation - but as a registered health professional, you have the added option of a professional corporation!

A lot of people believe that the difference between a sole proprietorship and corporation in Canada is the legal liability and that you pay less income tax. In practice, without proper planning, you may not remove your legal liability and may end up paying more in fees than you save in income tax by incorporating too early.

You may be more used to the terms “associate,” “independent contractor,” or “practitioner.” These describe your relationship to the clinic you work at and mean that you are either a sole proprietor or have set up a professional corporation as the way you practice your profession.

Let’s dive in!

Difference between incorporation and sole proprietorship

The main difference between a corporation and a sole proprietorship is that a corporation is a separate legal entity from its owner. Once you incorporate, the corporation is the entity that collects income, pays expenses, enters into rental agreements and all other business activities.

You own a corporation by buying shares of that company. This also makes it easier to sell a business since you only have to sell the shares of the business to change ownership.

Once you incorporate, you have two tax returns to file each year - one personal and one corporate.

What is a sole proprietor business?

A sole proprietorship is a business that one person owns. It is the simplest structure and the default when starting your own business now unless you incorporate.

You can choose to register a business name or operate under your legal name.

If you operate under your legal name, just bill your patients in your name.
If you operate under a registered business name, bill your clients and customers in the business's name.
If your business has a name other than your own, you are required to have a separate bank account that is in your business name.
As a health professional, there are certain requirements with your college/association for your operating name, so make sure to check with your specific requirements.

If you are a sole proprietor, you pay personal income tax on the net income generated by your business in the year it is generated. Sole proprietors only file one annual personal income tax return, and there is an additional form in your return to tell CRA that you are a business.

The owner has sole responsibility for making decisions, receives all of the profits, claims all of the losses, and does not have separate legal status from the business. If you are a sole proprietor, you also assume all the risks of the business.

What is a corporation?

A corporation is its own legal entity. It can enter into contracts and own property in its own name, separately and distinctly from its owners.

It can have some of the following features:

It is a separate legal entity with a lasting existence.
It can generally raise large amounts of capital (money or other assets) more easily than sole proprietorships or partnerships (hint, this is why clinics are usually corporations).
The shareholders cannot claim any loss the corporation incurs.
When forming a corporation, the owners transfer money, property, or services to the corporation in exchange for shares. The owners of these shares are shareholders.

You can buy and sell shares of a corporation without affecting the corporation's existence. A corporation continues to exist unless it winds up, amalgamates, or gives up its charter for reasons such as bankruptcy.

You can incorporate a business by completing articles of incorporation and sending the documents to the appropriate provincial, territorial, or federal government.

As a health professional, you must choose between a Professional Corporation and a General Corporation. Professional Corporations are regulated by your college/association just like you are as a sole proprietorship. There are also specific naming requirements and business activity restrictions, and the articles of incorporation must be approved before using the new corporation.

A General Corporation is not regulated by your college/association but cannot perform health services. These must always be done by an underlying practitioner sole proprietorship or practitioner professional corporation that is registered with their regulatory body.

What is a professional corporation?

Under most provincial legislation, regulated health professionals have the option of incorporating their practice as a professional corporation. This is not a hard rule, as legislation varies by province, so it is important to refer to the relevant act in your province to see if your profession is included.

Further, while the framework legislation allows regulated health professionals to incorporate, it is important to consult with the governing body of your profession to ensure that it is permitted within the regulations and by-laws.

A professional corporation allows professionals to provide their services to clients through a corporate entity rather than personally. You must register your professional corporation with your college or association and keep your registration up to date on an annual basis or as required.

There are a number of steps to complete before your college or association issues a Certificate of Authorization for a Professional Corporation.

Key features of professional corporations are:

Professional liability is not limited by incorporation.
Shareholders of professional corporations are jointly and severally liable for all professional liability claims against them. That means that they cannot limit their liability for malpractice or negligence. It is important to ensure that you have adequate malpractice insurance coverage.
The voting shareholders of a professional corporation must be members of the College and must be from the same profession.
All officers and directors of the corporation must be shareholders of the corporation.
The services provided by the professional corporation are restricted to the practice of the profession.
The corporate name must include the surname of one or more shareholders of the corporation as the surname that is registered with your association.
The corporate name may also include the shareholder’s given name, one or more of the shareholder’s initials or a combination of his or her given name and initials.
The name of the professional corporation must include the words “Professional Corporation” or “Société Professionelle” and cannot be a number name.
The corporate name must indicate the health profession practiced by the shareholders.

What is an example of these structures?

You may now be wondering what each of these different business types looks like in practice:

An example of a sole proprietorship is a new-grad individual working at a clinic while paying rent. Since this practitioner has not decided to incorporate yet, their default is to be a sole proprietor.
An example of a corporation is a clinic that has decided to open its multidisciplinary space. The practice ultimately stays with the individual independent contractor practitioners who work there.
An example of a professional corporation is an individual who works at a clinic or has set up their own private practice and has decided to incorporate to save money on income tax through proper strategy tax planning.

Getting set up: corporation vs. professional corporation vs. sole proprietorship

With so many options for your business, how can you choose the right fit for you? We’ve broken down the main benefits and considerations for each type to help you make an informed decision.

If you are considering incorporating, make sure to choose the correct structure from the start. It is costly to change your business structure once you have one in place and can also impact your relationship with patients and subcontractor practitioners.

Sole proprietorship

Some of the benefits of operating as a sole proprietorship are:

⁠A Sole Proprietorship is the simplest and least expensive way to set up your business. If you are operating as your First Name Last Name there is no extra effort.
There are fewer fees and paperwork compared to the other types of businesses.
You own 100% of the business and get to make all the decisions!
You, as the business owner, receive all the profits directly, and any income from your business is reported in your personal taxes (so no extra tax returns!)⁠

The main drawbacks to being a sole proprietorship are:

⁠Your business is an extension of you. ⁠There is no legal separation between you and the business. ⁠
⁠There is unlimited liability, and you are personally responsible for any debts or liabilities of your business.
Owners must pay personal income taxes on business income in the year they earn the income.⁠

Incorporation

Some of the benefits of operating as a corporation are:

When you incorporate you can leave money in the corporation and defer personal tax until you take the money out.
Low corporate tax rates if your corporate income is less than $500,000 per year.
Tax planning opportunities with deciding how (salary, dividends, and bonuses), when, and how much to pay yourself.
There can be multiple shareholders to split the profits with.
You can choose your year-end for tax purposes within 53 weeks from the date of incorporation.
The legal separation between you and your business.
Your liability as a shareholder is limited to what you invested in the company.

As a health professional, some of the more important deterrents to incorporating are:

Shareholders are not protected against personal liability for professional negligence. It is important to ensure that you have adequate malpractice insurance to protect yourself.
⁠Additional costs include:

Cost to incorporate, including filing articles of incorporation.
Cost of articles of amendment if you ever make changes to the structure of the corporation.
Ongoing legal fees.
Annual corporate tax return.
Annual corporate legal return.

You must keep the corporate transactions separate from your personal

Additional bank accounts
We recommend investing in an accounting software
Tracking both assets and income is extra work, so you may want to invest in a bookkeeper.

Since a corporation is a separate legal entity, it needs individuals (shareholders, directors, and officers) to carry out business activities on its behalf. This creates a more complex business structure. Some considerations:

The directors will have to pass a resolution to declare and pay dividends whether you are the sole owner of the corporation or one of many.
Corporations are subject to greater regulation and compliance than a sole proprietorships and must maintain corporate records and hold annual shareholder meetings.

Making the final decision: sole proprietorship or incorporation?

This review of your business structure options might feel overwhelming. We get it - there are a lot of options and pros and cons for each.

The most important factor to think about when wanting to incorporate is your long-term goals and how much income you expect to make. If you are enjoying a mid-sized practice while working at a clinic and earning just enough money to live off of... you may never incorporate it, and that’s okay!

If you are opening a clinic with multiple practitioners as subcontractors, the incorporation can add a layer of legal separation between you as the clinic owner and the individual practitioners. It also allows you to keep your excess earnings in the corporation as a way to tax plan to pay less income tax than you would as a sole proprietor by leaving extra funds in the corporation.

We wish there were a hard and fast rule on how much income you need to make to save money with a corporation so that you can save money - but that just means that there is an opportunity for legal and tax planning to make the most of your specific situation.

FAQ

Q: Do corporations pay less taxes than sole proprietorships?

Yes! The federal corporate income tax rate starts at 12% vs. 15% in a sole proprietorship. The federal tax rate increases after you have a taxable income of $500,000, whereas sole proprietorships start to pay more at just $53,359 of income.

Although there are tax benefits, it is important to think about the overall tax picture. When you take money out of your corporation, you pay personal income tax, so without leaving any money in the corporation you will pay the same amount of income tax as staying in a sole proprietorship.

Q: At what income level should I incorporate?

The key is to incorporate when you make more money than you need to use personally. Once you hit this threshold you can leave money in the corporation and pay only the lower corporate income tax rate. Once you take the money out of a corporation you pay personal income tax.

Q: Can a sole proprietorship be incorporated?

Since corporations are separate legal entities, you cannot turn a sole proprietorship into a corporation. You will need to create your new corporation, open new bank accounts, create a new practice management software and make sure to have a cutoff date for all your income and expenses going into the corporate bank account and credit cards and not through your sole proprietor or personal banking.

Q: Do you need to register a sole proprietorship in Canada?

If you operate your business under your First Name and Last Name there is no need to register! You must register your business as a sole- proprietorship if you plan to use an operating name or register for the GST/HST or Payroll programs with CRA.

Q: How much tax does a sole proprietor pay in Canada?

The amount of income tax you pay depends on your province and income level. Tax brackets start at a minimum of 15% federally and increase after you have a taxable income, in 2023, of $53,359. You then pay 20.5% on the amount of income up to $106,717, 26% up to $165,430, 29.32% up to $235,675 and 33% on any amount higher. These thresholds change each year, indexed to inflation.

You may be thinking that incorporating your new health business from the start is the best decision–but making the wrong decision can cost you! Learn the best business structure for your business and how to set it up correctly with Business Foundations Incorporating: The blueprint to understanding the business structure options for your new health business.