Since June 21, 2012, architects in Quebec have been permitted by legislation to practice their profession within a joint stock company or a limited liability partnership (LLP), just as lawyers, notaries, accountants, physicians, dentists, pharmacists and other professionals can. Professionals have been able to incorporate themselves or carry out their professional activities within limited liability partnerships since the Professional Code was amended in 2001 to enable various professional orders in Quebec to adopt regulations for that purpose, which vary from order to order. This legal update explains the legal and tax advantages that are now available to architects and, more generally, certain other professionals.
Regulatory framework
Architects used to only be able to practice their profession within a nominal partnership or a general partnership. Then, on June 21, 2012, the Regulation respecting the practice of the profession of architect within a partnership or a joint stock company (Regulation) made by the Ordre des architectes du Québec came into force. This Regulation allows architects to form joint stock companies or limited liability partnerships with other persons, except manufacturers or wholesalers of materials.
Legal form
Joint-stock company
Under the Regulation, architects may practice their profession within a joint-stock company if the company remains under the control of architects – i.e. more than 50% of the voting shares must be held by architects or legal persons, trusts or any other enterprise held exclusively by architects and the chair and the majority of the directors of the board of directors must be members of the Ordre des architectes du Québec.
For architects, the main advantage of incorporation is that it provides protection against creditors. As the patrimony of a joint-stock company is separate from that of its shareholders, creditors only have recourse to the patrimony of the company, and the personal patrimony of an architect practicing within the company benefits from a certain degree of protection. The architects continue to be liable for their professional acts, however, but not for the acts of the company’s employees or other professionals.
Limited liability partnership
The rules with respect to control by architects for a limited liability partnership involving architects are similar to those for a joint-stock company. More than 50% of the voting rights attached to the partnership units must be held by architects or legal persons, trusts or any other enterprise held exclusively by architects. Also, the majority of the directors of the limited liability partnership must be architects. Finally, only an architect who is a partner of the limited liability partnership may perform executive functions within the partnership.
Compared with a joint-stock company, architects carrying on their professional activities within a limited liability partnership continue to be liable for any commercial liabilities of the partnership. However, the architects are not liable for faults committed by other professionals or employees of the limited liability partnership. That being said, they do remain personally liable for their own faults.
Code of ethics and professional practice
As the joint-stock company and the limited liability partnership are merely legal vehicles, which do not become members of the Ordre des architectes du Québec, the rules of professional conduct remain unchanged for architects practicing within such entities.
The tax advantages of incorporation
The potential tax advantages for architects who elect to practice their profession within a joint-stock company are manifold.
Small business deduction
A joint-stock company can generally benefit from the small business deduction, allowing it to reduce the combined corporate tax rate to 19% on the first $500,000 of annual income.
Tax deferral
An incorporated architect can usually defer income tax that would otherwise be payable. Because the income generated by the joint-stock company is subject to a lower tax rate than the rate that would otherwise apply to the architect, the result is more cash for investment and other purposes. Incorporation is therefore a particularly attractive option for architects, who can save a portion of their income each year.
Income splitting
Incorporated architects can split their income with other people, particularly their spouse and majority-age children, using the progressive tax rates to lower their overall tax burden.
Sharing the increase in value
The increase in value of a joint-stock company may be shared with other individuals – especially the architect’s spouse and majority-age children.
Capital gains deduction
Each shareholder of the joint-stock company, including the architect and the architect’s spouse and majority-age children, may, under certain conditions, benefit from the $750,000 capital gains deduction upon the sale of his or
her shares.
Fiscal year
An architect, when setting up a joint-stock company, can choose the start and end dates of the company’s fiscal year, providing greater tax flexibility.
The appropriate legal form for an architect depends on the architect’s personal situation and must be determined on a case-by-case basis. Norton Rose Canada’s tax team has already implemented such structures for professionals and can plan and incorporate an architect’s professional practice (or the practices of other professionals who are permitted to incorporate) and provide the architect with tax advice for the purposes of personal, family and estate planning. Architects wishing to practice their profession within a joint-stock company or limited liability partnership are invited to contact a member of the Norton Rose Canada tax team.
The author wishes to thank Mr Rémi Weiss, articling student, for his help in preparing this bulletin.
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