Should you dissolve your medical practice corporation when you retire?
Closing a medical practice can be a long process, and most physicians prefer to retire gradually and reduce clinical workload over time.1
With advance planning, you’ll be better prepared for the onerous professional and legal obligations that will lead up to closing your practice, such as giving staff notice, informing patients, ending ties with suppliers, securing medical records, and the many other regulatory steps.
From a personal finance perspective, incorporated physicians have one further critical decision to plan for: whether it will make sense to maintain their corporation in retirement.
A medical professional corporation is no ordinary company
Generally speaking, once you no longer have a licence to practise, your medical professional corporation can’t be maintained as such. In Ontario, for example, when you give up your licence, you must resign from membership with the College of Physicians and Surgeons of Ontario — and in order to maintain a medical professional corporation, you need one voting shareholder who is a member of the college and has a valid certificate of authorization.
At this point, a physician would normally decide whether to dissolve the medical professional corporation or convert it to a standard business corporation, reflected by a change in name and amended scope of activities.
In this latter case, the corporation would typically be converted to a holding company — one that has no active business but is used primarily to hold the assets or investments that the physician has accumulated in the corporation over their working years.
Dissolve your corporation if costs outweigh the tax advantages
The amount of money held in your corporation will likely be the single biggest factor in determining whether to dissolve or convert it.
If the cost and burden of accounting and legal requirements outweigh the tax- or estate-planning benefits, then it’s probably not worth keeping the corporation.
Generally, if your corporation holds less than the amount you would need for your lifestyle in the coming year, it is a strong candidate for wind-up.
Formally dissolving will involve (among other things) selling the corporation’s assets; paying off creditors and paying corporate income tax; distributing net proceeds of the corporation to its shareholders; and, finally, dissolving the corporation.
Convert as a way to plan cash flow and save taxes
If you have substantial investments from your practice inside a corporate account, the cost of taking that money out all at once could be high, from a personal income tax perspective. So you might be better to convert your corporation to a holding company.
Maintaining a holding company allows you more flexibility to do some of the following:
- Draw income gradually. By keeping assets inside a holding company, you can draw on the savings gradually over many years, and more tax-efficiently. This is most relevant if you expect to be in a lower tax bracket at some stage of your retirement than you were in during your working years. Using the holding company, you can also plan for tax-effective legacy distributions (to your heirs or charitable organizations).
- Retain control over how and when you draw on corporate assets for personal income. You can hold off until a later year when you expect to need the money, or know you will be subject to a lower income tax rate.
- Continue to generate income from the investments inside the holding company. The idea here is to continue to take advantage of a bigger pool of capital by retaining it in the corporation. It will generate passive sources of income, such as interest, dividends or capital gains. There can be opportunities to draw retirement income from the corporation tax-effectively, using aspects of corporate investment income like refundable tax and tax-free capital dividends.
Since there is no active business to consider, the administration and tax filing may become more streamlined. Plus, the corporation no longer needs to report to your college of medicine, pay college fees, or abide by any college restrictions on corporate activities or who qualifies as a shareholder.
Plan your corporation’s future to boost retirement plans
We know that physicians who have concrete plans for retirement far outpace their peers on savings. A corporate account can be a useful part of your financial strategy, alongside RRSPs, spousal RRSPs, tax-free savings accounts, government pensions and other assets. Keep in mind that an inactive corporation will typically no longer pay salary, so you may be figuring out a new compensation plan.
Keeping a holding company throughout your retirement can help you to:
- Draw tax-efficient retirement income. As you begin drawing retirement income from your assets, there will be different tax consequences for each source of cash flow. You can draw on corporate assets strategically to defer taxes and achieve specific retirement objectives, such as to manage risk or preserve an estate.
- Split income with a spouse. A physician who has fully retired from practice or has reached age 65 can pay dividends to a spouse who is a shareholder in the corporation. Income splitting works best if the spouse is in a lower tax bracket.
- Protect the value of your estate. Incorporation can increase your options for benefitting your loved ones and/or leaving a legacy, which could include charitable gifts through your estate. Corporate-owned permanent life insurance can be a powerful tool for estate planning. One caution: since health and age are factors in the eligibility and price of insurance, don’t wait too long to consider your estate options if your estate is likely to contain significant corporate assets.
Keep in mind that the purpose of your corporation may evolve. While growth of retirement assets is often its key purpose when you’re practising, retirement may well be the time when you discover your wealth has grown beyond what you will need. Perhaps you have a family following in your footsteps, or another business that the corporation will take over. These can often be material factors in determining the best way forward for your corporation.
Closing a practice and starting life after medicine
The task of either dissolving or converting a medical professional corporation marks a milestone in a physician’s transition to retirement.
As you move closer to this event, your MD Advisor* can help you weigh your options. Careful financial planning can have you ready to swing open the door to retirement with confidence when you decide to turn the key on your practice.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 Patterns of physician retirement and pre-retirement activity: a population-based cohort study, Dec. 11, 2017; CMAJ: Canadian Medical Association Journal (Vol. 189, Issue 49).
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.