OK, so you have a dentistry professional corporation and you want to issue shares to your family members? Why? Because you want to income split. You see: you pay less overall taxes by taking the income earned by one person with a higher income tax bracket and dividing that income among two or more persons with lower income-tax brackets. The more you divide it up this way, the less tax that is paid overall. That’s the beauty of our progressive tax rate system. Basically, after the corporation earns and pays its taxes on income, the retained earnings can either be retained in the corporation or dividend out to shareholders.
So who can you income split with?
Under section 1(2.2) of the Certificate of Authorization Regulations made under the Regulated Health Professions Act, 1991, a dentist can only income split (i.e. issue shares of the professional corporation) to:
- another Ontario dentist, who holds it directly or indirectly;
- a family member of an Ontario dentist who is also a voting shareholder of the dentistry professional corporation, who holds it directly or indirectly; and
- an individual, as trustee, in trust for one or more children of a voting dentist shareholder who are minors, as beneficiaries.
Note: only dentists can hold voting shares; everyone else can only hold non-voting shares.
Who is a Family Member?
Now, only family members of a voting dentist shareholder are entitled to own shares. So who counts as a “family member?” Well, the Regulations define family members as a dentist shareholder’s spouse (married or living in a conjugal relationship outside of marriage), child or parent.
But who is a spouse, child or parent?
Curiously enough:if a dentist is living in a conjugal relationship with someone for 6 months, will that person be considered their spouse (under the Family Law Act, spousal support applies to persons who live in a conjugal relationship for at least 3 years). What about children who live with you but aren’t of your own blood? For example: a husband or wife brings in a child from another marriage or common law relationship? Will that child count? What about adopted children? What about parents in law? Will courts simply look at de fact (i.e. factual) or de jure (legal) relationships to determine whether a person is actually the spouse, child, or parent of a dentist shareholder?
Holding Shares Directly or Indirectly?
Now, even though the Regulations mention that a dentist and the spouse of a voting dentist can hold their shares INDIRECTLY, what exactly does that mean? Well, you would assume that it means that they can have another corporation which they own 100% of to own their shares right? I mean: why else would the regulations say “indirectly”? But, after speaking with the Royal College of Dental Surgeons of Ontario, their interpretation is simple: NOPE, the shares must be held DIRECTLY. In fact, they told me over the phone that they haven’t seen anyone try to hold the shares indirectly in the manner I described above. Interesting… I’m assuming that, if a dentist applied for a Certificate of Authorization from the College and had put down a wholly owned corporation as the holder of their shares, then the College would reject the application. So there would be difficulties getting a Certificate of Authorization from the get-go.
Holding the shares in a Trust?
The final provision of who can be a shareholder is not without its difficulties either. It says that an INDIVIDUAL can hold the shares as trustees. But who is an individual? It’s not defined in the Regulations. Nor is that word found in the Interpretation Act (Ontario). Typically, we lawyers equate the word “individual” to a person who is not a corporation. In other words, an “individual” is a human being. You can see this elsewhere. For example, section 248(1) of the Income Tax Act says that an “individual” is a person other than a corporation. The Interpretation Act (Ontario) says that a “person” includes a corporation. We lawyers interpret this to mean that a “person” includes an individual human being and a corporation, but an “individual” does not include a corporation.
The bottom line is that, although the Regulations and the Interpretation Act (Ontario) do not define an “individual”, it most likely means a human being and not a corporation. Otherwise, the Regulations would have used the word “person”.
So is the idea that ANY INDIVIDUAL can hold the shares as trustee for the minor children (as beneficiaries) of a voting dentist shareholder? Well, the College has interpreted this provision to mean that only INDIVIDUALS who are entitled to hold shares DIRECTLY may hold the shares on behalf of these minor children. In essence, this means that only dentists themselves or the spouses of voting shareholder dentists may be trustees.
Taken altogether, the College has taken some pretty narrow views of how to interpret the Regulations. No corporations are allowed to get involved and not just anyone can be a trustee for minor children of voting shareholder dentists.
In the next blog, I’ll talk about the share structure of a dentistry professional corporation.
