Yesterday, Ontario published the regulation that prescribes who can own shares of professional corporations (PCs) controlled by doctors and dentists — see Ontario Regulation 665/05 under the Business Corporations Act (Ontario).
The regulation specifies that only a member of the relevant College — the College of Physicians and Surgeons of Ontario for a doctor and the Royal College of Dental Surgeons of Ontario for a dentist — can own voting shares.
The regulation provides that a non-voting share must be owned in one of three ways:
- The share shall be legally and beneficially owned, directly or indirectly, by a member of the relevant College;
- The share shall be legally and beneficially owned, directly or indirectly, by a family member of a voting shareholder.
- The share shall be owned legally by one or more individuals, as trustees, in trust for one or more children of a voting shareholder who are minors, as beneficiaries.
A “family member” is defined as a voting shareholder’s spouse, child or parent.
The regulation is problematic on a number of levels. First, its drafting would appear to restrict the manner in which shares can be held. It appears, for example, that a husband and wife cannot own non-voting shares jointly, which precludes a common form of probate fee planning.
The regulation is also problematic from an income tax perspective. Some of these problems are outlined in the paper that I presented at an OBA conference in November (see “OBA Presentation on Professional Corporations”). Briefly, the use of a trust that permits income to be distributed to minors, or the ownership of shares by a spouse, could attract the application of the corporate attribution rules (see footnote 12 of my OBA paper). In addition, “kiddie tax” will apply to income distributed from a PC to a trust and then to a minor child (see section D.3 of my OBA paper).
As a result, a doctor or dentist who wishes to take maximum advantage of the tax savings associated with a PC could be required to allot non-voting shares directly to adult family members. Not every professional will be comfortable with the prospect of an 18 year-old son or daughter owning shares of the professional’s PC because, legally at least, the son or daughter will then be entitled to bring an action for oppression if, for example, sufficient dividends are not paid on the shares.
