Introduction

A lawyer who has practised through a professional corporation for twenty or thirty years reaches retirement with a corporation that may hold substantial retained earnings, an established client base with files requiring transition, and a set of compliance obligations that do not end the day the office closes.

The retirement transition for an incorporated lawyer involves both professional obligations (client file management, LSO obligations) and corporate tax obligations (winding down the payroll, managing the final year's income, planning the holdco drawdown).

The Professional Transition

Before the tax planning can begin, the lawyer must address the professional obligations: transferring active files to successor counsel, notifying clients, arranging for file storage (LSO rules require retention for minimum periods), and managing trust account wind-down.

The trust account — funds held in trust for current clients — must be fully administered and closed before the law corporation can be wound up. Any interest earned on trust funds must be remitted to the Law Foundation of Ontario.

The Corporate Transition: Year of Retirement

In the year of retirement, the professional corporation stops receiving professional income. If the lawyer retired in June 2026, the corporation has six months of professional income and six months of no income except investment returns on retained earnings.

The compensation decision for the retirement year is important: the lawyer should assess whether drawing a final salary in the months before retirement — generating RRSP room for a final large contribution — is more tax-efficient than drawing dividends. The RRSP room generated from a $100,000+ salary in the pre-retirement months may support a final RRSP contribution that is deductible at the highest marginal rate the lawyer will ever pay — the peak of their career income, in the year before their marginal rate drops permanently in retirement.

The Year After Retirement

Once active practice ceases, the professional corporation becomes a passive holding entity. The same drawdown planning discussed in Articles 112 and 119 applies:

Distribute the CDA balance tax-free first.

Return any paid-up capital.

Phase taxable dividends over the retirement years.

Manage annual net income to stay below the OAS clawback threshold.

The holdco question: if a holdco exists, the professional corporation can pay inter-corporate dividends (tax-free between connected corporations) to the holdco before distributions to the lawyer personally. The holdco then manages the retirement drawdown at the lawyer's pace.

The LSO Annual Dues Question

In the year of retirement, the lawyer remains a licensed lawyer for part of the year. The LSO dues — typically paid by the professional corporation and deductible as a business expense — should be reviewed for the final year: if they cover the period after the practice has ceased, the deductibility of the portion attributable to the non-practice period is less clear.

The Final T2

Once the professional corporation has no more active income and the lawyer has decided to wind it up, the final T2 covers the period from the last fiscal year end to the dissolution date. The final T2 must be filed, a clearance certificate obtained from the CRA, and the corporation formally dissolved with the provincial registry.

As discussed in Article 78, the wind-up process distributes the remaining corporate assets to the shareholder — as a tax-free return of PUC, a capital dividend from the CDA, a deemed dividend from retained earnings, or a combination. The order and amounts require specific tax analysis to ensure the most tax-efficient distribution.

When to Speak With a CPA

For a lawyer approaching retirement within two to three years, the planning conversation should begin now — not in the year of retirement. The compensation and RRSP decisions in the final working years, the trust account wind-down timing, and the corporate distribution strategy in retirement are all interconnected and reward planning.

Rotaru CPA works with retiring lawyers through the professional and corporate wind-down process. Book a consultation to plan your retirement transition.