In Canada, many physicians incorporate their medical practice. If you’re a family member of a physician (for example, a parent, spouse or common-law partner, sibling or child), you might be a shareholder in their medical professional corporation.
If so, you may have questions about the benefits and responsibilities being a shareholder.
When a physician incorporates their medical practice, they create a separate legal entity. The corporation owns the medical practice, while the physician and other shareholders own shares of the corporation. The physician is a director, company officer or employee of the corporation.
What is your role as a shareholder? Here are the answers to some frequently asked questions to help shed some light on this complex topic.
What is a shareholder?
A shareholder, as the name suggests, is a person who owns a share or shares of a corporation and may also receive some of the corporation’s profits, in the form of dividend payments.
A medical professional corporation is owned by its shareholders. The corporation may issue several different types of shares, including:
- preferred or special shares, usually issued to family members; and
- common shares, usually issued to the physician shareholder — these are the only voting shares.
What are dividends and how are they taxed?
A dividend is a payment made to shareholders out of the company’s profits. Dividends receive special tax treatment because the corporation has already paid tax on the earnings that are used to pay the dividend.
Recipients with no other income can receive $30,000+ in dividends with no personal income tax, depending on the province or territory.
What are the benefits of being a shareholder?
There are several tax advantages to having a corporation, and prior to the federal tax rule changes that were made in 2018, having multiple shareholders in the corporation could provide a way to reduce the overall taxes paid by a family.
What were the pre-2018 income-splitting rules and how did they change?
Let’s look at a fictitious example. Dr. Breton is married with two children, ages 22 and 18. Dr. Breton, his spouse and his children are shareholders in his corporation. Prior to 2018, the corporation could pay dividends to each of them, whether or not they made a reasonable contribution to the business. Each person had to report their own dividends on their tax return.
Splitting the corporation’s distributions among several family members reduced the total tax the family had to pay if those receiving the dividends had a lower annual income than the physician did. This income-splitting tax strategy was commonly called “income sprinkling.”
Starting in 2018, dividends paid to family members are taxed at the highest marginal tax rate for dividends, which is typically around 45% depending on the province or territory. As a result, there is no longer a tax benefit to income sprinkling.
There are exceptions, but they can be difficult to achieve for physicians; for instance, if the shareholder actually works in the business, or if you’re the spouse or common-law partner of a physician who’s 65 or older, you can receive dividends from the corporation at the regular dividend rate rather than the highest marginal tax rate.
What are your responsibilities as a shareholder?
Although shareholders have an ownership stake in the company, your obligations as a shareholder of a medical professional corporation will often be minimal, if any — especially if the shares you might benefit from are held in a trust.
If you have voting shares, however, you will participate in certain corporate decisions. This could include situations where you have a power of attorney for a voting shareholder.
One of the decisions made by voting shareholders is the appointment of directors of the corporation (directors make the day-to-day business decisions on behalf of the corporation). When appointing directors, shareholders must keep in mind that medical decision-making on behalf of the corporation should be done by those with appropriate expertise and licensing.
What is the financial impact of owning shares for you?
The bottom line is that the impact is not the same for everyone. As a shareholder of your family member’s medical professional corporation, you may have questions about how share ownership fits into your personal tax situation and your overall financial plan. An MD Advisor* can help you get more clarity about what share ownership means for you.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.