Introduction
A lawyer operating through a professional corporation has the same fundamental compensation decision as any incorporated professional: how much to take as salary, how much as dividends, and how to manage the resulting tax position across both the corporate and personal return.
What makes lawyers' situations distinct are the professional corporation rules under the Law Society Act, the billing and receivables structures common to legal practice, and the specific compliance considerations that come with running a regulated professional practice.
Professional Corporation Rules for Lawyers in Ontario
Under Ontario's Law Society Act, a lawyer's professional corporation may issue shares to the lawyer (voting and non-voting), to the lawyer's spouse, and to a holding company controlled by the lawyer, subject to Law Society rules. Voting shares must be held by a licensee of the Law Society. The Law Society of Ontario registers professional corporations and has ongoing compliance requirements.
Non-voting shares held by a spouse or holding company can receive dividends. However, the TOSI (tax on split income) rules introduced in 2018 significantly restrict the circumstances under which dividend income paid to a family member will be taxed at their own marginal rate rather than at the highest personal rate. For a lawyer's professional corporation where the spouse does not work in the business, TOSI is likely to apply to dividends paid to that spouse. This is a material change from the pre-2018 environment and should not be assumed away without proper analysis.
Salary vs. Dividends for Lawyers
The same principles that apply to any incorporated professional apply here — salary generates CPP contributions and RRSP room; dividends do not. The optimal blend depends on the lawyer's income level, personal financial goals, and the corporation's profitability.
One consideration specific to lawyers is the nature of practice cash flow. Law firm revenue can be lumpy — large files close, contingency fees are received, or significant estate or commercial transactions generate above-average billings in certain years. Compensation planning that accounts for this variability — rather than assuming a steady income stream — tends to produce better outcomes.
A year in which the corporation generates unusually high income may warrant a higher salary (or bonus) to generate additional RRSP room. A leaner year may call for dividends to preserve corporate cash.
Work in Progress and Accrual Income
Many lawyers bill on an hourly or matter basis and have significant work in progress (WIP) at any point in time. For tax purposes, professional practices in Canada have the option to use the "billed basis" of accounting, which means income is recognised when billed rather than when work is performed. This is a departure from standard accrual accounting.
The billed basis election, where applicable, can meaningfully affect the timing of income recognition and, by extension, the timing of corporate tax obligations. Understanding whether the corporation is correctly applying its chosen method — and whether switching methods would be advantageous — is part of good annual tax planning.
Disbursements and Expense Recovery
Law firms routinely pay disbursements on behalf of clients — court filing fees, expert fees, search costs, travel — and recover these from clients. The tax treatment depends on whether the firm is acting as agent or principal. Amounts recovered as reimbursements where the firm acted as agent for the client may not be income. Where the firm is acting as principal, recovery amounts may need to be included in revenue.
Misclassification of disbursement recoveries can affect both income and HST reporting. This is an area where legal billing software and the firm's accounting system need to be configured correctly.
The Professional Corporation as a Transition Vehicle
For lawyers approaching the end of their practice — winding down a client base, transitioning to a reduced role, or selling a practice interest — the professional corporation plays a role in the transition. Managing income in the final years of practice, distributing retained earnings efficiently, and understanding the wind-up consequences all require advance planning.
This is particularly relevant for sole practitioners or small firm lawyers who may not have a formal succession plan and who may underestimate how long the wind-down process takes.
When to Speak With a CPA
Lawyers are accustomed to precise documentation and a strong understanding of their professional obligations. The same standard applied to a client's affairs deserves to be applied to their own tax position. Annual review of the corporate compensation strategy — not filing and forgetting — is the approach that produces the best long-term results.