Tax and Estate Planning Blog : Moodys LLP and SNC Law

Further to our Blog of October 27, 2009, Bill 53 - Professional Corporations Statutes Amendment Act - has received Royal Assent today and is expected to be proclaimed (pursuant to an Order-in-Council) soon.

As previously discussed, these long awaited changes allow for common law partners / spouses and children of a professional and/or a special purpose trust (of which minor children of the professional can be the only beneficiaries) to own non-voting shares of a professional corporation.

The tax advantages can be quite significant.  As an example, a professional corporation can now pay approximately $30,000 in dividends to the common law partner / spouse shareholder with nominal personal tax and little tax risk assuming that the common-law partner / spouse has no other income.  Previously, such income splitting was often restricted to salaries paid to a spouse/common-law partner, which was always subject to a reasonability test.  Note that dividends paid to a minor child will be subject to the so-called "kiddie tax" which essentially renders this type of income splitting ineffective.

However, if the professional has children who are of the age of majority (18), the professional will now have the ability to income split with them as well.  This will allow the professional to pay for expenditures such as university or provide other such assistance in a tax efficient manner.

In addition to the planning noted above, the tax team at Moodys has developed solutions that consider the following in light of the new Acts:

1. Income splitting;
2. Valuation issues;
3. Estate planning;
4. Retention of control; and
5. Asset protection.

Moodys will be holding two complimentary lunch seminars on December 11 and 16 from 12:00 to 1:15 pm where the new Acts and our thoughts on planning will be discussed.

Please contact our office at 403-693-5100 to reserve a spot.

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Good news for Albertan professionals who are regulated by the Health Professions Act (doctors/dentists/chiropractors/optometrists), Legal Profession Act (lawyers), Medical Profession Act and Regulated Accounting Profession Act (accountants).

On October 26, 2009 Bill 53 – Professional Corporations Statutes Amendment Act, 2009 passed first reading in the Alberta Legislative Assembly. This Bill, if enacted, will have some significant repercussions on how professionals set up their business affairs in order to minimize income taxes.

Currently, under Alberta law, only members of the above noted professions are allowed to hold shares in professional corporations. The use of a professional corporation does not shield the professional from personal responsibility, but it does allow for certain interesting tax benefits, such as a deferral of some income tax until amounts are paid out by the professional corporation. The proposed amendments will allow professionals, their spouse, common-law partners, children or a trust (all of the beneficiaries of which are children of the professional) to hold non-voting shares of the professional corporation. As such, holding corporations still cannot be shareholders of professional corporations.

This amendment will provide ample opportunity for income and capital gains splitting with spouses and children. Indeed, barring the application of the attribution rules and the “kiddie tax”, spouses and children of professionals will be able to receive dividends from the professional’s corporation.

One unfortunate limitation on the holdings of non-voting shares by a trust is that such a trust, as referred to above, can only have children of the professional as beneficiaries of the trust. This restriction will likely cause existing “family trusts” that have other family members as beneficiaries to be ineligible to hold non-voting shares of professional corporations.

The second limitation is that the trust will have to transfer its shares to the professional’s children within 90 days after the child or children attain the age of 18. This may have a “cooling” effect on those professionals who want to maintain some control over their children’s ownership of the shares after they reach 18.

This begs the question as to how a discretionary trust for the benefit of the children will achieve this objective as there may be no fixed interest for the child turning 18.

In addition to the above mentioned issues, practitioners will have to pay close attention as to how family members will be inserted as non-voting shareholders of the professional corporation. Some obvious options will be:

1.  Issuing non-voting shares at fair market value; and

2.  Performing an estate freeze on the professional’s existing shareholdings and then issuing new nominally valued non-voting shares to family members.

Whatever the solution a practitioner chooses, issues involving taxable benefits under sections 15 and 246 along with the attribution rules and “kiddie” tax (which will, for example, be applicable for dividends paid to minor children shareholders) must be closely considered.

Despite these limitations, these amendments will provide for interesting future tax planning opportunities for professionals. The amendments come into force on Proclamation.

Great news! Stay tuned….

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