You Incorporated Your Law Practice. Now What?

The tax and structuring decisions Alberta lawyers should revisit after establishing a professional corporation.

Fahad Suleman, CPA  |  Partner  |  AccountNext LLP, Calgary  |  Canadian Tax and Compliance 

Incorporating a law practice can create meaningful planning opportunities. The professional corporation is not the strategy by itself. The value comes from the decisions made after incorporation: how compensation is drawn, how retained earnings are invested, whether risk is appropriately separated, and whether the structure still fits the lawyer's personal and professional goals. 

Every year, we meet successful Alberta lawyers who incorporated for good reasons but have not revisited the structure since the permit was issued. Their accountant files the returns, but no one steps back to assess whether the corporation is still working efficiently. 

A professional corporation should be reviewed as part of an annual planning process, not treated as a one-time incorporation exercise. The Law Society of Alberta regulates professional corporations and requires an annual permit renewal. Tax planning should be approached with the same discipline. [1]

Four planning issues that deserve an annual review

1. Salary versus dividends is not a set-it-and-forget-it decision 

Salary can create RRSP contribution room and CPP participation, while dividends may offer flexibility and avoid additional CPP contributions. The appropriate mix depends on the lawyer's cash needs, retirement planning, family circumstances, corporate income, and broader investment strategy. A compensation plan that made sense three years ago may no longer be appropriate. 

2. Family dividends require careful TOSI analysis 

The Tax on Split Income rules can apply to certain dividends and other amounts received from a related business. A spouse or adult child who is meaningfully involved in the business may qualify for an exclusion, but the analysis is fact-specific. CRA guidance describes an average of at least 20 hours per week during the portion of the year in which the business operates as a statutory safe harbour for active involvement. Other circumstances may also be relevant. [2] 

3. Passive investment income can reduce access to the small business deduction 

Retaining cash inside a corporation can create long-term investment flexibility, but it must be monitored. For a Canadian-controlled private corporation and its associated corporations, the federal business limit generally begins to decrease when the group's adjusted aggregate investment income for the relevant prior year exceeds $50,000. The reduction is calculated at $5 for every $1 above that threshold, which can fully eliminate the $500,000 federal business limit once the relevant AAII reaches $150,000. [3] 

4. A standalone professional corporation may not be the final structure 

Depending on the lawyer's circumstances, a connected holding company may support investment flexibility, succession planning, and the separation of certain retained assets from operating risks. It is not an automatic solution. The share structure, intercorporate dividend rules, section 55 considerations, Law Society requirements, and legal asset-protection advice must be reviewed before implementation. 

Three issues lawyers frequently overlook 

Work in progress: the billed-basis deferral has been phased out 

Lawyers were historically among the designated professionals permitted to elect billed-basis accounting for tax purposes. That election allowed the value of work in progress to be excluded when computing income. Budget 2017 announced the phase-out of the measure. [4] 

The practical consequence is that year-end WIP should be reviewed carefully. Billing cut-off, valuation practices, collectability, and cash-flow planning matter because taxable income can arise before the related cash is collected. 

Personal services business risk for incorporated contractors 

A lawyer who provides services through a corporation but would reasonably be regarded as an employee of the payer if the corporation did not exist may create personal services business risk. The result can be significant: a PSB is not eligible for the small business deduction or the general corporate rate reduction, is subject to full federal and provincial corporate rates plus an additional 5% tax, and may deduct only limited expenses. [5] 

The analysis is not based on a single contract clause. Working arrangements, control, financial risk, use of tools, opportunity for profit, integration, and the overall facts should be assessed before a long-term contracting arrangement is finalized. 

Individual pension plans may be worth assessing for established practitioners 

For an incorporated professional with stable income and a longer planning horizon, an Individual Pension Plan may be worth evaluating alongside an RRSP. An IPP is a registered pension arrangement and requires actuarial and administrative support. The potential benefits and costs depend on age, compensation history, retirement objectives, investment assumptions, and the corporation's ability to fund contributions. Employer contributions to a registered pension plan are deductible only when the statutory conditions are satisfied. [6] 

Key numbers to monitor 

At the same time, incorporation also comes with additional administrative and compliance responsibilities, including bookkeeping, corporate filings, and ongoing tax planning.

The key is making sure your structure supports your goals rather than creating unnecessary complexity.

Planning item	Key threshold or timing	Why it matters
$500,000 federal business limit	Subject to applicable rules and reductions	The small business deduction can materially reduce corporate tax on qualifying active business income.
Passive investment income	$50,000 AAII threshold	The federal business limit generally begins to decrease once AAII exceeds this level.
Full passive-income grind	$150,000 AAII	The federal business limit may be fully eliminated at this level.
T2 filing deadline	Generally 6 months after tax year-end	The filing deadline is separate from the balance-due date.
Tax payment timing	Often 2 or 3 months after tax year-end	The appropriate payment deadline depends on the corporation's circumstances.
LCGE planning	Confirm the current limit and eligibility before a transaction	Qualifying small business corporation share planning requires advance review and purification analysis.

What an annual review should cover 

• Update the salary and dividend plan based on the current year projections and personal cash needs. 

• Review all family-shareholder payments and document the TOSI analysis before dividends are declared. 

• Calculate passive income across the associated corporate group and assess whether retained investments are affecting the business limit. 

• Revisit whether a holding company is appropriate and confirm that any proposed structure complies with Law Society and legal requirements. 

• Review WIP, accounts receivable, billing cut-off, and expected collections before the fiscal year-end. 

• Assess retirement strategies, including RRSP contributions and whether an IPP analysis is warranted. 

• Begin succession and qualifying small business corporation share planning well before any contemplated sale. 

The planning relationship matters 

A filing relationship answers the question: what must be submitted to CRA? A planning relationship asks a different question: what should be decided before the year closes?

AccountNext LLP works with lawyers and professional-services firms that want a more proactive approach. Our goal is to identify the few decisions that have the greatest effect on tax efficiency, cash flow, and long-term flexibility, then revisit them annually as the practice evolves. 

Is your professional corporation still working as intended? 

Book a complimentary 30-minute Tax Strategy Call with our legal-professional practice team. We will review your current structure, identify the areas that deserve closer analysis, and outline the next steps for a more proactive annual planning process. 

Book Your Tax Strategy Call

Disclaimer: This article is intended for general informational purposes only. The appropriate accounting, tax, legal, and compliance approach depends on the specific facts. Consult qualified professional advisors before making decisions.