Are you a physician looking to save money on taxes? Incorporating your practice could be a smart move. When you incorporate, you create a separate legal entity that owns your practice — you become both a shareholder and either a director or an employee of the corporation. The corporation earns income and pays taxes independently from your personal income and tax return.
A medical professional corporation has the advantage of being taxed at the small business rate, which is 9% – 12.2%, depending on your province or territory.
Instead of you paying tax on your income at your personal (marginal) rate, which for a physician can be 50% or more, depending on your province or territory, your corporation pays the small business rate on up to $500,000 of your practice’s income (the exact amount varies by province) after overhead expenses.
The money you save on tax can be invested through your corporation, to grow until you withdraw it. While it will become income and you will pay tax on it at your personal rate when you take the money out of your corporation, you will have had all the benefits of deferring the tax for that period. Plus, the times you want to take money out of the corporation will likely be times you’re in a lower tax bracket — on leave, working part-time, or retired.
An example of the tax advantages of incorporating
Maria is a 35-year-old general practitioner in Ontario, with an annual pre-income of $300,000 after expenses. Her personal financial needs are around $114,500 annually, and she would like to maximize both her RRSP and her TFSA contributions.
In the first scenario below Maria is unincorporated; in the second she is incorporated. See how much more she can save if she’s incorporated, based on her specific situation:
Scenario 1: Unincorporated practice
A. Maria’s cash available for investment
Net practice income (after overhead) | $300,000 |
RRSP contribution | ($30,780) |
Personal taxes payable** | ($102,435) |
After-tax personal cash | $166,785 |
Living expenses | ($114,500) |
TFSA contribution | ($6,500) |
After-tax personal cash available for investment | $45,785 |
B. Unincorporated: How much Maria can invest in total
RRSP | $30,780 |
TFSA | $6,500 |
Personal non-registered investment account | $45,785 |
Total for investing | $83,065 |
If Maria is unincorporated, she can invest a total of $83,065.
Scenario 2: Incorporated practice
If Maria incorporates her practice, there are both corporate and personal components to the tax calculation.
Inside her corporation, she would be able to save about $77,600. Here’s how:
C. Tax impact if Maria is incorporated
Net practice income (after overhead) | $300,000 |
Annual administrative costs | ($4,000) |
Physician salary | ($207,590) |
Practice taxable income | $88,410 |
Corporate tax rate*** | 12.2% |
Corporate taxes payable | ($10,786) |
After-tax corporate cash available for investment | $77,624 |
Now let’s see what happens in her personal accounts: her RRSP and TFSA. She won’t contribute to a personal non-registered investment account because she has left that money inside the corporation for investing.
D. Maria’s personal account
Physician salary | $207,590 |
RRSP contribution | ($30,780) |
Personal taxes payable** | ($55,810) |
After-tax personal cash | $121,000 |
Living expenses | ($114,500) |
TFSA contribution | $6,500 |
E. Incorporated: How much Maria can invest in total
Corporate cash available for investment | $77,624 |
RRSP | $30,780 |
TFSA | $6,500 |
Total available for investing | $114,904 |
If Maria is incorporated, she can invest a total of $114,904.
Taking advantage of tax deferral
So, when Maria is unincorporated, she has $83,065 to invest. When Maria is incorporated, she has $114,904 to invest. (Both figures include her RRSP and TFSA contributions.)
F. Tax deferral advantage
Unincorporated | $83,065 |
Incorporated | $114,904 |
Tax-deferral advantage: | $31,839 |
With an additional $31,839 or more available for investment every year available through incorporation, Maria can speed up her retirement savings. This is known as the tax deferral advantage.
Of course, the decision to incorporate your practice, and the timing of incorporating depends on multiple factors — it’s not a choice to make based solely based on investing. Talk to an MD Financial Management Advisor* to get the clarity and advice you need for your specific financial situation.
NEXT STEPS: If you’re not ready to decide, learn more about how incorporation works.
1 This example is hypothetical and is for illustrative purposes only. It does not represent the financial situation of any actual client. Any resemblance to actual people or situations is purely coincidental.
2 The maximum RRSP and TFSA contribution amounts for 2020 have been used in the two scenarios.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.