How are professional corporations taxed in Canada, and which rules treat them differently from other CCPCs?
In 2026, a professional corporation pays the same federal rates as any CCPC: 9% on active business income within the $500,000 small business limit and 15% above it. Three rules hit professionals harder: specified partnership income caps a partner corporation's limit, excluded shares never shelter its dividends from TOSI, and provincial law restricts who can own shares.
What changes when the corporation is a professional corporation?
The rates don't change. A CCPC claiming the small business deduction pays 9% federally, and income above the limit pays the 15% general rate canada.ca. The business limit is $500,000 under subsection 125(2), shared among associated corporations
laws-lois.justice.gc.ca. What changes is how much of that limit a professional actually reaches, and what the corporation can do with its profits.
Incorporating defers tax; it does not erase it. Profit left in the corporation pays the low corporate rate now and personal tax later, when it comes out as salary or dividends. In Ontario, at the top personal bracket for a calendar 2026 year, $100,000 kept in the corporation defers $41,829.60 for as long as the money stays inside, and paying it out later costs slightly more than taking it as salary today.
| Rule | Ordinary CCPC | Professional corporation |
|---|---|---|
| Federal rate on active business income | 9% up to the limit, 15% above | Same |
| Small business limit when the practice is a partnership | Not usually relevant | A pro rata share of one notional $500,000 for the whole partnership |
| Income billed to a related private corporation | Specified corporate income, outside the limit unless assigned | Same, and common with clinic and management companies |
| TOSI excluded shares (owner 25 or over) | Available if the tests are met | Never available |
| Who can own shares (Ontario) | Anyone | Members of the same profession; family non voting shares only in physician and dentist corporations |
| Business it may carry on (Ontario) | Anything | The profession, plus related activities including investing surplus funds |
| Professional liability (Ontario) | n/a | Unchanged by incorporating |
Two definitions are at work, and they don't match. For the Income Tax Act, a professional corporation is one that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor laws-lois.justice.gc.ca. Ontario's Business Corporations Act lets many more professions incorporate, including every health profession named in the Regulated Health Professions Act, 1991 and social workers
ontario.ca. So an Ontario physiotherapy corporation is a professional corporation under provincial law but not under the federal TOSI definition.
How does specified partnership income shrink a partner corporation's limit?
When your client's corporation is a partner, its share of partnership income is active business income only up to its specified partnership income laws-lois.justice.gc.ca. That figure is capped by the specified partnership business limit in subsection 125(7):
| Variable | Meaning |
|---|---|
| K | The corporation's share of the partnership's active business income for the fiscal period ending in its year |
| L | The partnership's total active business income for that fiscal period |
| M | $500,000, prorated by days if the fiscal period is shorter than 365 days |
| T | Any amount the corporation assigns to a designated member under 125(8) |
| Limit | (K ÷ L) × M − T |
The CRA puts it plainly: a member's specified partnership business limit is normally its pro rata share of a notional $500,000 business limit for the partnership, and it's calculated on Schedule 7 canada.ca. One $500,000 covers the whole firm, however many partner corporations it has.
Watch the services rule too. Specified partnership income is nil where the partnership provides services or property to a private corporation that your client's corporation (or a shareholder, or someone not at arm's length) has an interest in, unless all or substantially all of the partnership's active business income comes from arm's length customers laws-lois.justice.gc.ca.
How much extra federal tax does each corporation in a 10 partner law firm pay?
Ten lawyers each hold an equal partnership interest through their own professional corporation. The partnership's calendar 2026 fiscal period produces $4,000,000 of active business income, so each corporation's share is $400,000. None of the corporations is associated with another, and none earns other income.
| Step | Arithmetic | Result |
|---|---|---|
| Specified partnership business limit | ($400,000 ÷ $4,000,000) × $500,000 | $50,000 |
| Income taxed at 9% | $50,000 | |
| Income taxed at 15% | $400,000 − $50,000 | $350,000 |
| Federal tax | $50,000 × 9% + $350,000 × 15% | $57,000 |
| Same $400,000 earned by a sole practice corporation | $400,000 × 9% | $36,000 |
| Extra federal tax from the partnership rule | $57,000 − $36,000 | $21,000 |
The corporation's own $500,000 business limit doesn't rescue it. Partnership income outside the specified partnership income is carved out of active business income before the deduction is calculated laws-lois.justice.gc.ca. For the provincial side of the same calculation, see corporate tax rates by province.
What if the partner holds the interest personally and the corporation bills the firm?
Then the corporation is a designated member: a CCPC that isn't a partner but provides services or property to the partnership while one of its shareholders holds an interest in it laws-lois.justice.gc.ca. Its income from the partnership counts toward specified partnership income, and its specified partnership business limit is nil unless a partner assigns some
canada.ca.
Subsection 125(8) lets the partner assign all or part of their own specified partnership business limit to the designated member. The partnership's fiscal period has to end in the corporation's tax year, and both the corporation and the partner file the prescribed form with their returns laws-lois.justice.gc.ca. An individual partner can't claim the small business deduction anyway, so assigning the slice costs them nothing.
Routing the same services through a third party to dodge this fails. Subsection 125(9) excludes the income if one of the reasons for providing the services to that person, instead of the partnership, was to avoid the specified partnership or specified corporate income rules laws-lois.justice.gc.ca.
The parallel rule for corporations is specified corporate income. A doctor's corporation that bills a related private corporation, such as a clinic company owned by the same doctors, is outside the limit for that income unless the clinic assigns part of its own business limit under 125(3.2), or all or substantially all of the doctor's corporation's active business income comes from arm's length customers laws-lois.justice.gc.ca. The assignor reports the amount on page 4 of its T2
canada.ca. A professional with a single client faces a different test, the personal services business rules.
Can a professional corporation pay dividends to family without TOSI?
Not through excluded shares. One of the excluded shares conditions is that the corporation isn't a professional corporation in the federal sense laws-lois.justice.gc.ca, and the CRA's guidance lists the same six professions
canada.ca. A spouse who owns 10% of the votes and value of a dental corporation still pays tax on split income on the dividends.
Three exclusions remain open. A family member who works in the practice an average of 20 hours a week during the part of the year it operates is in an excluded business for that year, and five prior years of that work keep the exclusion for life. From the year they turn 25, a reasonable return for their contribution is excluded. And if your client turned 65 in the year or earlier, any amount that would be excluded in your client's hands is excluded in the spouse's hands too laws-lois.justice.gc.ca. The full tests are on our TOSI rules page, and the pay mix question is on salary vs dividends.
This matters most in Ontario medicine and dentistry, where the regulation lets non voting shares go to a spouse, child or parent, or to a trust for minor children ontario.ca. The shares are legal to issue. The dividends are usually split income unless one of those three exclusions fits.
What does Ontario law require of the corporation itself?
Section 3.2 of the Business Corporations Act sets the core conditions, and they bind on top of the profession's own Act ontario.ca:
| Condition | Ontario rule |
|---|---|
| Shareholders | All shares legally and beneficially owned, directly or indirectly, by members of the same profession |
| Directors and officers | Must all be shareholders |
| Name | Must include "Professional Corporation" or "société professionnelle", and can't be a number name |
| Business | Articles must limit it to the practice of the profession, plus related or ancillary activities including investing surplus funds |
| Voting agreements | A proxy or agreement giving a non shareholder the vote is void |
| Status events | Death or divorce of a shareholder doesn't end the corporation's status; revoking its certificate does |
| Liability | Incorporating doesn't limit a member's liability for professional liability claims |
Physician and dentist corporations get the family exception above. In a physician corporation every voting share must belong to a member of the College of Physicians and Surgeons of Ontario, and every director and officer must be a shareholder who is a member ontario.ca. Other provinces set their own rules, often in each profession's statute, so check the province and the regulator before you plan a share structure.
Investing surplus funds is allowed, but it has a tax cost. Adjusted aggregate investment income above $50,000 grinds a full federal business limit by $5 for every $1 laws-lois.justice.gc.ca; the mechanics are on our passive income grind page.
Sources
Does a professional corporation qualify for the small business deduction?
Yes, if it was a CCPC for the whole tax year. The deduction works on the least of its active business income, taxable income and business limit, so a corporation practising through a partnership is limited by its specified partnership income canada.ca.
Can a professional corporation still leave work in progress out of income?
No. The section 34 election that let professionals exclude work in progress was repealed in 2017 (S.C. 2017, c. 33, s. 7) laws-lois.justice.gc.ca. The CRA's guide for unincorporated professionals now says professional income normally includes the value of work in progress
canada.ca.
Does incorporating protect a professional from malpractice claims?
No. In Ontario, a member's liability for a professional liability claim isn't affected by practising through a professional corporation, and the corporation's acts are deemed to be the acts of its shareholders, employees or agents for that purpose ontario.ca. Ordinary shareholder limited liability still applies to everything else.
Can a spouse own shares in an Ontario physician corporation?
Yes, non voting shares. The regulation allows non voting shares to be owned by a family member of a voting physician shareholder, meaning a spouse, child or parent ontario.ca. Dividends on those shares are still subject to TOSI unless an exclusion applies.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.