Your accountant says set up a holdco. Your College says no.

The advice is not usually wrong so much as imported. A holding company above an operating company is standard planning for almost every other kind of private business in Canada, and for lawyers it works here too. It is when the same structure diagram is handed to a physician or a dentist that it collides with a rule the tax side of the file does not usually look at.

Where the disagreement comes from

Section 3.2(2) of the Business Corporations Act requires all shares of a professional corporation to be owned “directly or indirectly” by members of the same profession. The same phrase appears in the Law Society Act, in O. Reg. 665/05, and in O. Reg. 39/02.

The Law Society reads “indirectly” as contemplating exactly the structure a holdco creates: the licensee owns the holdco, the holdco owns the professional corporation, so the licensee owns the shares indirectly. Its information sheet permits it, and then fences it: the holdco’s own shares must be restricted to licensees, family members and non-licensees may not own them, and “the business of a holding company must be restricted to holding the shares of the professional corporation.” The holdco is a conduit, not a place to put investments.

CPSO and RCDSO read the same word and reach the opposite result. Neither publishes a reasoned explanation; both simply state the prohibition. That is the end of the analysis for a physician or dentist, because the College administers the certificate of authorization and a corporation that ceases to be eligible loses it.

What your accountant probably meant

In most conversations the word “holdco” is standing in for something you can actually have: a separate corporation, alongside the practice, that provides administrative or management services for a fee. It is not a shareholder of the professional corporation, so the College eligibility rules are not engaged. That is why the structure exists.

It is legitimate. It is also more constrained than it was, in four ways you want to know about before the corporation is set up rather than after.

The fee has to be reasonable

Section 67 of the Income Tax Act is short and blunt: no deduction except to the extent the expense “was reasonable in the circumstances.” The governing test is still Gabco — not whether the court would have paid that amount, but whether no reasonable business person would have agreed to pay it, having only the payer’s business considerations in mind.

CRA has published a working benchmark. In a 1996 technical interpretation it took the general view that charges not exceeding 115% of the reasonable costs incurred by a management service corporation are deductible, and said the fee should be supported by a written agreement identifying the services and the amount. Treat that as a long-standing administrative benchmark rather than binding policy — severed letters carry a standard caveat that they may not represent CRA’s current position — but a file that sits inside it, with a real agreement and real services, is a very different file from one where a round number moves between corporations each December.

If CRA does disallow part of the fee, it will generally make a compensating adjustment in the recipient corporation’s hands on written request, on the basis that it does not tax the same amount twice. That is reassuring about double taxation. It does nothing about the interest and penalties.

The small business deduction reason is gone

The classic argument for a service corporation was that it multiplied access to the small business deduction. The 2016 specified corporate income amendments to section 125 largely ended that. Income earned by the service corporation from a private corporation with which it does not deal at arm’s length is generally not eligible for the deduction unless the practice corporation assigns part of its own business limit — which is a transfer, not a multiplication. If the structure is being pitched to you on that basis, ask when the pitch was written.

HST does not net out

Management services between two corporations are taxable supplies. A medical or dental practice making exempt health care supplies generally cannot recover the input tax credits, so the HST on the management fee is a real cost rather than a wash, unless the closely related election is available. This is the single most common unpleasant surprise in these structures.

For dentists, there is a conflict of interest rule

This is the constraint that tax-side commentary almost never mentions, and it is specific and citable. Ontario Regulation 853/93 under the Dentistry Act provides that a member has a conflict of interest where the member, a related person or a related corporation enters into any arrangement respecting a lease or use of premises or equipment under which an amount payable is related to the amount of fees charged by the member. Practising while in a conflict of interest is professional misconduct.

In plain terms: a rent or equipment charge from the dentist’s professional corporation to a related service corporation calculated as a percentage of billings sits squarely inside that provision. Fixed fees, or cost-plus fees for genuine administrative services, raise a different question. There is a disclosure-based safe harbour, but it requires advance disclosure of the financial interest to the patient, which is not how most of these arrangements are run.

The physician position is different. O. Reg. 856/93 defines fee-splitting as professional misconduct, but the provision is tied to referrals — sharing fees with a person who referred a patient, or receiving fees from a person to whom the member referred a patient. A management fee paid to the physician’s own service corporation is not fee-splitting on its face.

The other route: non-voting family shares

Physicians and dentists can issue non-voting shares to a spouse, child or parent of a voting shareholder. Whether that achieves anything is now largely a tax question, and the answer has changed.

The tax on split income rules deny the “excluded shares” exception to professional corporations outright — CRA’s guidance names medicine, dentistry, law and accounting — and non-voting shares could not meet the 10%-of-votes test in any event. Three separate failures on one exception. What is left is the excluded business test, which is deemed satisfied at an average of 20 hours a week during the operating part of the year and is hard to sustain for a spouse doing occasional bookkeeping; the reasonable return test for family members aged 25 and over; and the exception that becomes available once the professional spouse turns 65.

That last one matters for planning. For a lot of couples the honest answer is that the family shares do very little for fifteen years and then do quite a lot. Which is a reason to issue them, not a reason to expect a dividend next year.

Can the professional corporation just hold the investments itself?

At the level of the Business Corporations Act, yes and expressly. Section 3.2(2) paragraph 5 permits activities related or ancillary to the practice, “including the investment of surplus funds earned by the corporation.”

There is a drafting gap worth noticing. O. Reg. 39/02 — the regulation the College actually administers — uses the narrower formula. It permits only the practice of the profession “and activities related to or ancillary to” it. The words about investing surplus funds are absent. The same clipped formula appears in the renewal declaration and in the revocation ground. In practice the OBCA governs the articles and the investment power holds, but the standard the College enforces is written more tightly than the standard the statute grants.

And the Colleges will not tell you where the line is. CPSO says outright that it does not provide legal, accounting or other advice about ancillary activities, investments, acquisitions or the use of surplus funds. There is no published policy defining the outer limit. The risk is not that you might cross a line the College has drawn. It is that no line has been drawn and the revocation ground sits there unelaborated.

One tax point to hand to your accountant alongside this: investment income inside the practice corporation grinds down the small business deduction once adjusted aggregate investment income passes $50,000, and real estate or a large investment portfolio inside an active practice corporation complicates a later capital gains exemption claim on the shares. Which is usually the real argument for keeping investments somewhere else — and for a physician or dentist, somewhere else cannot be a parent holding company.

What it can be is the corporation itself, after you stop practising. That is a different structure and a genuinely useful one, and it is covered here.