Incorporating as a Registered Psychotherapist (RP) can be an excellent decision for individuals seeking greater control over their practice, enhanced financial benefits, and professional growth. This guide will explore the key steps, advantages, and considerations for psychotherapists who are contemplating incorporation.

Incorporation refers to the process of forming a legal entity (a corporation) to run your psychotherapy practice, separating your personal assets from those of your business. Instead of operating as a sole proprietor, an incorporated psychotherapist becomes the owner of a corporation, which can be taxed independently from the individual’s personal income.

This process involves registering a legal business entity, typically a professional corporation (PC), specifically designed for licensed professionals like Registered Psychotherapists (RPs), lawyers, doctors, accountants, and others.

Why Should a Registered Psychotherapist Incorporate?

There are several compelling reasons why a Registered Psychotherapist might choose to incorporate their practice. Some of the most significant advantages include:

Tax Benefits

• Corporate Tax Rates: Corporate tax rates for small businesses are often lower than personal tax rates. In Canada, small businesses can take advantage of the small business deduction that reduces the tax rate on the first $500,000 of active business income.
• Tax Deferral: Income retained within the corporation is not immediately taxed at personal income tax rates, providing you with the option to defer taxes. This can allow for reinvestment or saving money for future needs.
• Expense Deductions: As a corporation, you may be able to claim more tax-deductible business expenses, such as office rent, marketing, supplies, and some personal expenses that can be justified as business-related (e.g., business meals, home office costs). Furthermore, it can be beneficial to cover non-deductible expenses by the corporation with funds taxed at a much lower rate than it would be if paid with funds taxed at a personal level.

Limited Liability

One of the main advantages of incorporating is that it creates a distinct legal entity. This limits the personal liability of the owner. In the event of lawsuits or debts arising from the business, only the assets within the corporation are at risk, not your personal assets (like your home or savings). This offers added protection for your personal finances. Please note that shareholders of professional corporations are generally not liable for non-professional acts, however they are jointly and severally liable for professional acts, such as malpractice.

Professional Image and Credibility

Incorporation can also elevate your professional reputation, signaling that your practice is established and committed to long-term growth. For some clients, especially those in need of significant psychological support, working with a corporation may feel more stable and reliable.

Retirement and Succession Planning

When you incorporate, you create a business structure that is easier to sell or transfer. This is important for those looking to retire or pass their practice on to a successor. An incorporated practice may also provide access to additional retirement savings options, such as pension plans or tax-deferred retirement vehicles, which are not available to sole proprietors.

The Process of Incorporating as a Registered Psychotherapist

Determine Your Eligibility

Not all psychotherapists are eligible to incorporate. To be eligible to form a professional corporation in Canada, you must meet the following criteria:

• You must be registered with a regulatory body recognized in your province (e.g., the College of Registered Psychotherapists of Ontario (CRPO)).
• You must comply with provincial laws regarding professional corporations. For example, in Ontario, the Business Corporations Act (OBCA) governs the incorporation of professional corporations for regulated professionals.

Choose a Corporate Structure & Register

You’ll need to decide on the type of corporation that fits your needs. In the case of a psychotherapist, you will likely be incorporating a Professional Corporation (PC). This structure differs from a standard corporation because it is designed specifically for regulated professionals.

The steps to incorporate include:

1. Name Your Corporation: The name must reflect the nature of your profession and indicate that it is a professional corporation. For example, “Jane Doe, Registered Psychotherapist, Professional Corporation.” The name must also be approved by your regulatory body.
2. Prepare and Submit Articles of Incorporation: This is a formal legal document filed with the relevant provincial or federal government. It includes information about your corporation’s structure, governance, and other legal details.
3. Register with the Regulatory Body: After incorporating, you must register your corporation with the regulatory body overseeing psychotherapists in your province, ensuring it complies with their rules.
4. Obtain a Business Number (BN): Apply for a business number from the Canada Revenue Agency (CRA), which will be used for tax purposes.
5. File for GST/HST Registration: If your annual revenue from taxable supplies exceeds the GST/HST threshold, you will need to register for GST/HST (currently $30,000). Note – with the changes that went into effect this year (2024) many RPs no longer have to be registered for GST/HST.

Ongoing Compliance and Governance

Once incorporated, you will need to:

• Maintain Financial Records: Keep up with bookkeeping and preparation of financial statements for the entity.
• File Annual Tax Returns: As a corporation, you are required to file corporate tax returns every year. These returns are separate from the personal tax returns of the shareholders.
• Maintain Professional Liability Insurance: While incorporation limits personal liability, professional malpractice insurance remains critical for psychotherapists to protect themselves from lawsuits or claims related to their clinical work.