Can a Family Trust Own Shares of Your Medical or Dental Professional Corporation? (Ontario)

Much of what is written about family trusts assumes the trust can own shares of your company. The trust holds the growth shares, the trustees decide each year which family members receive dividends, and the value builds up outside your estate. That material is usually written for business owners in general. If you practise medicine or dentistry through an Ontario professional corporation, a regulation most of it never mentions answers the question first, and the answer is generally no.

This post sets out what the regulation says, why a standard family trust does not fit it, and what is still possible. It is orientation, not legal advice: your lawyer advises on your corporation's share structure, and your accountant on the tax.

The rule: Ontario Regulation 665/05

A professional corporation is an ordinary Ontario corporation with extra rules, as the professional corporation guide explains. The Business Corporations Act's general rule is that every share of a professional corporation must be legally and beneficially owned by members of the same profession. Ontario Regulation 665/05 replaces that rule for physician and dentist corporations with a slightly wider one. Section 2(1), for physician corporations, reads:

Section 3(1) applies the same words to dentist corporations, with the Royal College of Dental Surgeons of Ontario in place of the CPSO. Section 1 defines a family member as the shareholder's spouse, child or parent. A child includes a person the shareholder has demonstrated a settled intention to treat as a child of the family, other than a child placed in a paid foster arrangement, so a stepchild can qualify.

Two more rules complete the picture. All directors and officers must be shareholders who are members of the college, and an agreement or proxy that gives anyone else the right to vote a voting share is void.

Why a standard family trust does not fit

A standard family trust set up for a business owner has a wide class of beneficiaries, often a spouse, children of any age, future grandchildren and a company. Sometimes a trust company is a trustee. The regulation puts three restrictions on a trust that holds shares:

1. The beneficiaries must be minor children of a voting shareholder. A spouse, an adult child, a grandchild, a parent or a company cannot be a beneficiary of a trust that holds the shares. Most family trusts name several of them, and that alone disqualifies the trust.
2. The trustees must be individuals. The regulation says "one or more individuals, as trustees", so a trust company or other corporate trustee cannot hold the shares. That alone also disqualifies a trust.
3. Non-voting shares only. Every voting share must be legally and beneficially owned by a college member, so a trust can never hold voting shares or control of the corporation.

Beyond those three, what terms the trust may contain, including how much discretion the trustees may have among the children, is a drafting question for your lawyer.

This is why the classic estate freeze in favour of a standard family trust, one whose beneficiaries include people or companies outside the permitted class, does not work for the professional corporation itself, and why dividends cannot flow from a professional corporation through such a trust to a company beneficiary.

If shares are already held the wrong way

This is not a technicality. Under the Regulated Health Professions Act, a health profession corporation must not practise the profession when it does not meet the ownership requirements of the Business Corporations Act, as modified by this regulation. A professional corporation that cannot practise has lost the reason it exists. If a trust already holds shares of your professional corporation, perhaps because a structure designed for another kind of business was applied to yours, raise it with your lawyer promptly.

What the regulation still allows

Family members owning non-voting shares directly. Your spouse, child (of any age) or parent can own non-voting shares in their own name. It is the common arrangement, but it does less than it once did. Since 2018, dividends to family members are generally taxed at the top rate under the tax on split income rules unless an exception applies, and the excluded shares exception is not available for a professional corporation. The salary vs dividends guide sets out the exceptions that remain. One applies to a spouse from the year you turn 65, but only where the amount would also have been excluded in your own hands.

A trust for your minor children, held by individual trustees. This is the one trust the regulation permits: one or more individuals holding non-voting shares in trust for your children who are minors. It can keep shares in the family while the children are young, but it is not an income-splitting tool. For a child under 18, dividends from a private corporation, whether received directly or through a trust, are generally taxed at the top rate under the tax on split income, with narrow exceptions such as income from property inherited from a parent. The work-based exception for adult family members is available only from the year a child turns 18.

What happens at 18. The permitted trust holding depends on the beneficiaries being minor children. The regulation provides no transition procedure when a child turns 18. Have your lawyer settle a compliant ownership arrangement in advance, and your accountant review the tax consequences.

Trusts over a corporation that is not a professional corporation. The regulation governs only the professional corporation. A separate corporation that does not practise medicine or dentistry, such as one that owns the clinic building or provides non-clinical management services to a practice, is not subject to it, and a family trust can own its shares. That is where classic family trust planning, including an estate freeze in favour of a trust, can still apply. The tax on split income still reaches income that family members receive from a business related to you, and a family trust holding those shares still faces the 21-year rule. The family trusts guide covers how that planning works and where it still helps.

Why general advice misses this

Most family trust material is written for owners of private companies in general, where the Business Corporations Act places no limit on who can own shares. The rules for professional corporations sit in a separate regulation, outside the Income Tax Act, so material that focuses on tax can describe a structure in detail without ever reaching them. Physicians and dentists are a small part of that audience, and the regulation decides the question before any tax planning starts.

Questions for your lawyer and accountant

1. Who owns each class of shares in my professional corporation today, and does each holding fit one of the three permitted ways?
2. If a trust holds shares, who are its trustees and beneficiaries, and are the shares non-voting?
3. When does each child beneficiary turn 18, and what is the plan for the shares then?
4. After the tax on split income, what does any family shareholding actually save us?
5. Do I own, or plan to own, a separate corporation that is not a professional corporation, and does a trust make sense there?

For the wider plan around your professional corporation, the financial planning for physicians and financial planning for dentists pages explain how I work with each profession.

I do not draft trusts or advise on corporate law; that is your lawyer's work. This post is orientation, so the right questions reach the right person before a structure built for another kind of business is applied to yours.