In 2004, with the coming into force of the Regulation respecting the practice of the profession of advocate within a partnership or company and in a multidisciplinary firm, lawyers now had the option of choosing whether or not to incorporate their firm.
Incorporation was accompanied by undeniable benefits, including transferring to the company excess income from its holder or holders, limited personal financial liability and a lower tax rate. Thus, for the first $500,000 of income the incorporated company was taxed by the provincial government at a rate of 8% and federally at a rate of 10.5%, for a total of 18.5%. Subsequent income was taxed at 11.8% and 15% respectively, for a total of 26.8%.
New conditions in 2017 for the incorporated company
But with the 2016 provincial budget, a new rule was introduced. The government of Quebec has decreed that the incorporated company has to accumulate 5,500 hours worked to benefit from the 8% rate. Otherwise, the provincial rate rises to 11.8%. Added to the federal rate of 10.5%, this amounts to 22.3%. However, the provincial government has also agreed to a reduction of the rate applicable on income over $500,000, so that 0.1% would be cut each year to arrive at a rate of 11.5% by 2020.
The verdict
The general opinion of observers is that incorporation is still a good choice from both a tax and organizational perspective. Even though a certain number of members will now be taxed at 22.3%, it is still a much better rate than, for example, an individual earning $150,000 per year at a tax rate of 49.97%.
In addition, with respect of companies subject to the 26.8% rate, these are still able to pay dividends, that is, a share of profits taxed at a lower rate. Members can continue to split their income with members of their family, which proves beneficial tax-wise if they have lower incomes.
The Morneau reform
However, this latter point could disappear with the reform announced by the Minister of Finance, Bill Morneau, who particularly wants to counter the strategy of paying dividends to family members who do not actually work for the company. Income from passive investments treated as a personal savings account would also be in the focus of the reform, and the conversion of regular income into capital gains would also be eliminated. For now, however, nothing is yet set in stone, and time will tell if the recommended changes will change the perception about incorporation.