Professional practices are not automatically excluded from the Small Business Corporation tax rates.
However, a company that relies mainly on the skills or services of its shareholders may need to satisfy additional requirements before it qualifies.
This commonly affects:
- doctors and other healthcare practitioners;
- accountants and auditors;
- attorneys;
- engineers;
- other owner-managed professional practices.
The Personal-Service Income Restriction
A company may fail the Small Business Corporation test where more than 20% of the relevant receipts and capital gains consists collectively of:
- investment income; and
- income from rendering a personal service.
A personal service generally involves services performed personally by a shareholder, member or someone connected to that person.
For many professional practices, the shareholder’s qualifications, expertise and personal involvement are the main sources of the company’s income.
This means that a genuine professional practice may still fall within the personal-service restriction.
The Three-Employee Exception
A professional practice may still qualify where it employs at least three qualifying full-time employees.
The employees must generally:
- work for the company on a full-time basis;
- not be shareholders or members; and
- not be connected persons in relation to the shareholders or members.
The requirements are more detailed than simply having three employees on the payroll. The employees’ roles, relationships and periods of employment must also be considered.
Meeting the three-employee requirement may also prevent the company from being classified as a personal service provider.
Professional practices should obtain advice before relying on this exception.
Personal Service Provider Rules Must Also Be Considered
The company must also ensure that it is not classified as a personal service provider under the Fourth Schedule to the Income Tax Act.
The personal service provider rules are separate from the personal-service income restriction under section 12E.
This risk may arise where the company effectively provides the shareholder’s services to a client under circumstances similar to an employment relationship.
The contract, working arrangements, number of clients and level of control exercised by the client may all be relevant.
Professional Practices Are Not Automatically Disqualified
Professional practices are not automatically excluded from the Small Business Corporation tax rates.
This article has addressed two of the most common issues affecting professional businesses:
- the personal-service income restriction; and
- the personal service provider rules.
Employing at least three qualifying full-time employees may assist a professional practice in overcoming these restrictions.
However, these are only part of the SBC qualification test. The company must still satisfy all the other requirements, including those relating to its gross income, shareholders, other business interests and investment income.
A doctor, consultant, accountant or other professional operating through a company may therefore qualify as an SBC, but the company’s full circumstances must be considered.
Review the Position Every Year
A company’s SBC status is not permanent.
Changes in employee numbers, working arrangements, income sources or client relationships may affect whether the company qualifies.
The position should therefore be reviewed before each company income tax return is submitted.
Does Your Professional Practice Qualify?
The personal-service rules are technical and depend on how the practice operates in reality.
Book a strategy consultation with PB Consultants to assess whether your professional practice qualifies as a Small Business Corporation and whether the correct tax treatment is being applied.
Disclaimer
This article provides general information only and does not constitute tax, legal or financial advice. Small Business Corporation and personal service provider classifications depend on the specific facts and circumstances of each company. Professional advice should be obtained before submitting a tax return or implementing a business structure.
