How hard is it to incorporate? Why do some doctors incorporate and others don’t?
For one thing, not every physician can incorporate. It is most suitable for those who are self-employed; it’s less attractive for those in a partnership, and not possible for salaried physicians (unless they are billing as well).
To better understand how to make the incorporation decision, take a look at the advantages and disadvantages of incorporating outlined below.
Advantages of incorporation
The following are the key advantages of incorporation, and both have to do with taxation.
1. Significant tax advantages
Small businesses are a critical part of Canada’s economy. To encourage their growth, there is a small business tax rate in effect for Canadian-controlled private corporations. That rate is approximately 12% on the first $500,000 of active business income.1 Compare that with the general corporate tax rate of about 28%; or with top marginal rates of around 50% if the earnings are taxed personally.2
When your medical practice is incorporated, your practice income (up to $500,000, depending on the province) is taxed at around 12%, as long as the money stays inside the corporation. This is known as tax deferral, because when you withdraw the money, it will be taxed at your personal rate (more on this below).
2. Accelerated savings
The money you save on tax through the small business tax rate can be invested inside your corporation, where it will grow. This helps you build savings faster. Think of it this way: money that you would have otherwise paid in taxes gets to grow tax-deferred.
Tax deferral using a professional corporation can be a good saving strategy if you want to save more than your RRSP and tax-free savings accounts allow.
When you’re working, you should retain money that can’t be sheltered from tax in an RRSP or TFSA in your corporation. This helps to reduce the impact of high personal tax rates. The time to withdraw money from the corporation is when you’re not working — when you’re retired, or if you take sabbatical or time off work to raise your family. You will be in a lower personal tax bracket at that time.
Disadvantages of incorporation
While there are important tax advantages to incorporating your practice, you should be aware of a couple of key drawbacks.
1. Costs and complexities
When you set up a corporation, there are various costs involved, including legal and accounting fees and disbursements. Depending on the professionals you work with and the province/territory you’re in, the initial costs can be several thousand dollars or more.
There are also ongoing annual legal and accounting fees, and the potential for payroll taxes.
Finally, there is an additional administrative burden associated with the corporation’s record-keeping and bookkeeping activities: regular corporate tax instalments, annual corporate tax returns, separate bank accounts, directors’ resolutions, etc.
2. Corporation versus individual business losses
In a corporate structure, any gains or losses belong to the corporation.
While it’s unlikely that physicians would incur a business loss in their corporation, if you did have losses, you wouldn’t be able to write them off against your personal income. In essence, the losses are trapped in the corporation. These non-capital losses, however, can be carried back three years or carried forward 20 years, to be applied against corporate income earned in those years.
Does incorporation make sense for you?
Many physicians just like you have been faced with the question of whether incorporating their practice makes sense.
Next steps: If you’re not ready to decide, learn more about how incorporation works.
If you are ready to incorporate your medical practice, your MD Advisor* can help you integrate the corporation into your financial plan. They can also refer you to tax and legal experts to assist with the incorporation process.
1 Provincial/territorial small business limits may vary from the $500,000 federal limit.
2 The tax rates used are for illustrative purposes only and reflect the average personal top marginal rate or, for corporations, the average small business rate, for all provinces and territories. Actual amounts will vary from one taxpayer to another.
* 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.