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Will Incorporating Make You (Legally) Bulletproof? Not Quite

By July 19, 2022July 30th, 2022Corporate

Most dentists have heard of a Dentistry Professional Corporations (DPC) and may have even thought about creating one to run their dental practice. If you have, you would have quickly found that one of the benefits of incorporating is the enhanced protection that a company provides compared to owning a business outside of a corporate structure. And while incorporating may generally shield youas shareholders, directors, officers and/or managers from liabilities incurred by the business, dentists should nevertheless be careful about over-relying on the use of a corporation to stay (or get) out of trouble. There are still situations where individuals will be held personally accountable and not protected, despite conducting their business through incorporated entities. Below are some notable examples of such situations.

Professional Liability

It is imperative for dentists to note that DPCs are not ‘shields’ when it comes to professional liability issues. Practising dentistry in Ontario through a DPC will not protect a College member from statutory obligations owed to their patients. As outlined in the Health Professions Procedural Code under the Regulated Health Professions Act, all of the same “professional, fiduciary and ethical” duties owed by members of the profession will apply equally to both DPCs and their directors, officers, shareholders and employees. The same would apply to situations of patient complaints and any investigations or disciplinary hearings.

So, if you ever face a fine for disciplinary reasons, your DPC would be ‘jointly and severally’ (equally) on the hook alongside you for those fines. No doubt, these provisions were put in place to protect the public from dentists who incorporate their practices in an attempt to avoid liability for malpractice. Your best option is to be a good dentist and have the proper insurance to cover errors and omissions, among other things.

Unpaid Wages and Tax Remittances

In addition to regulatory protections for patients, there are mechanisms in place to ensure that corporations pay monies owed to employees and Canadian tax authorities, even if the authorities have to go after the directors to make good on those payments.

For instance, the director(s) of a corporation can be held liable, personally, for any unpaid wages (and vacation pay ) to the company’s employee(s) for up to six months’ worth of such wages and/or vacation pay. Similarly, if a corporation fails to withhold taxes from employees’ wages or otherwise fails to remit taxes as required under Canada’s Income Tax Act, its directors can be personally on the hook for those unpaid remittances.

Although the mechanisms mentioned above have certain time limitations imposed on them, the fact that they are codifiedset out in statute, not just under ‘common’ judge-made law shows that tax and employment law related obligations of corporate entities are taken very seriously.

Fraud, or Conduct Akin to Fraud

Another commonly discussed scenario where individuals are held responsible for their corporation’s wrongdoing is where that corporation is “a mere façade concealing the true facts” or is being used as a front company for fraudulent behaviour. Much of the discussion on this exception has centred around what does or does not constitute a “mere façade”. Ontario Courts have indicated that they will be reluctant to ‘pierce’ through a corporation directly to its shareholder(s) on this basis unless:

(1) there is something fraudulent or improper going on, and a corporation…

(a) …was incorporated for the purpose of such fraudulent or wrongful conduct, OR
(b) ….is being used as a mere shield or diversion for the wrongdoers to hide behind; OR

(2) the person (individual or corporate) who completely controls and dominates the company is expressly directing something wrong to be done.

A clear-cut example of improper conduct through a corporate shell came in the case of Shoppers Drug Mart Inc. v 6470360 Canada Inc. (Shoppers). In Shoppers, an Ontario contractor used a numbered company to enter into an agreement to bookkeep, manage and pay Shoppers Drug Mart Inc.’s utility bills. However, rather than pay the bills using earmarked funds as agreed, the contractor was found to have misappropriated the funds by diverting them into a separate account in his company’s (and his own) name(s).

Family Law

When it comes to family law, there is a less strict approach to disregarding separate corporate personalities than the one applied in commercial contexts. This is because, as noted by the Superior Court of Justice in 2007, fiddling around with corporate structures “in order to evade financial responsibilities” to divorced spouses and children happens all too frequently. As a result, a spouse’s business income (as a shareholder, director, or officer of a corporation) is potentially ‘fair game’ in calculating their income and ability to pay support payments.

The Court of Appeal paved the way for this approach in 2006, finding that a company’s distinct status may be ignored depending on how that company is being used by a spouse post-separation and, more importantly, what is in the interests of the children. This less-than-deferential attitude has since been affirmed in other cases as well. So, those embroiled in tough alimony battles would do well to remember that trying to surreptitiously tuck assets away into a corporate alter ego has been frowned upon by the courts.

Bottom Line

The above represents only a snapshot of a fascinating and much-discussed topic in corporate law. Any dentist thinking about incorporating should be aware of these considerations. If you have any questions about the other benefits, potential drawbacks and optimal timing of incorporating a new DPC, or if you would like advice before deciding how to structure your corporate affairs, DMC can help. Send us an email or call us at 416-443-9280 at any time.

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