Professionals operating their business through a professional corporation are subject to the restrictions of the Ontario Business Corporations Act (OBCA). This includes doctors and dentists.
What are the rules?
Paragraph 3.2(2)5 of the OBCA states that professional corporations, in general (i.e., accountants, lawyers, physicians, veterinarians), ‘may not carry on a business other than the practice of the profession but this paragraph shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of the profession, including the investment of surplus funds earned by the corporation’.
However, different professionals are governed by different bodies (i.e., the College of Physicians and Surgeons of Ontario, and the Royal College of Dental Surgeons of Ontario). These governing bodies have different sets of rules that each professional corporation bust abide by in order to obtain and maintain certificates of authorization. More specifically, Ontario Regulation 39/2 of the Regulated Health Professions Act, 1991, states that medicine and dental professional corporations are further restricted as they ‘cannot carry on a business other than the practice of the profession governed by the College and activities related to or ancillary to the practice of that profession’.
The obvious difference? Medicine and dental professional corporations are not permitted to invest their surplus funds. But that does not seem fair, and you’ve probably heard of a colleague who already does invest funds inside their medicine or dental professional corporation.
So what can you invest in?
Unfortunately, the College of Physicians of Ontario is very clear in saying that it does not provide any legal, accounting, or other advice for corporations about ancillary activities or investments and the use of surplus funds. So, it is up to the professionals themselves, and their advisors, to determine what to do.
A common debate surrounds what is considered to be ‘related to or ancillary’. For example, a building unit that a doctor or dentist operates out of is clearly ‘related to or ancillary’. But, what about a building with several units and the doctor or dentist only requires one unit to run their practice and the remaining units are available to rent out to others – is that permitted? If that is in fact permitted, does that mean that medicine and dental professional corporations can invest in real estate? If so, can they invest in residential rental property? If real estate investments are permitted, what about diversifying the investments in the public stock market or even private investments?
Who determines compliance?
Not only is it not clear as to what is considered acceptable with respect to ancillary activities, it also does not seem that there is anybody who is responsible for enforcing the restrictions.
Every year, professionals are required to sign-off that they are in compliance with the applicable rules and guidelines. It seems that the only people responsible for determining whether this is the case are the professionals themselves (i.e., the doctor, dentist), and their advisors (i.e., accountants, lawyers). The governing bodies for accountants and lawyers do not require that they make a decision as to whether their clients are in breach of the relevant rules, and there does not seem to be any reason as to why any potential non-compliance would raise red flags with Canada Revenue Agency (CRA).
Implications of non-compliance?
Perhaps you are now wondering about the implications of non-compliance. An obvious ramification is that the governing body could cancel the corporation’s authorization to practice. However, this does seem rather severe considering the governing body was reluctant to provide more detailed guidelines. With the information we know, it is reasonable to say that no action would be expected to be taken by the governing bodies unless there was negative public implications as a result of the corporation’s activities.
Other ways to invest?
A conservative approach is for doctors and dentists to set-up another company where they do their investing (i.e., a ‘Sister Company’). A Sister Company would not be a professional corporation and, therefore, would not be subject to the restrictions discussed above.
If a separate company is used for investing funds, there would actually need to be funds available to invest. These funds would naturally be and come from the surplus earnings of the professional corporation.
The methods available for essentially transferring the funds from the professional corporation to the Sister Company are beyond the scope of this writing, but typically include two options. One, the professional corporation loans the funds and takes back a note receivable. Two, issuing stock dividends followed by share redemptions. Option two is more complex, but it does allow there to be no amounts owing to/from the professional corporation/Sister Company.
What to do?
At the end of the day, there are two things you need to ensure:
1. Be on-side with your governing body
2. Have an optimal corporate structure and tax plan in place to defer and save corporate and personal income taxes
Caveat: The information in this publication is current as of the time it was written. This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Deuzeman & Associates to discuss these matters in the context of your particular circumstances. Deuzeman & Associates does not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.