You probably know many doctors who've chosen to incorporate their practices. Perhaps you've even wondered if doing so makes financial sense for you.
The answer? Maybe. But first, let's explore what incorporating means.
What is incorporation?
When you incorporate, you create an entity that legally “owns” your medical practice. You become a shareholder, director or employee of that corporation, which then pays you dividends, bonuses or a salary.
The primary reason that physicians choose to incorporate is to realize significant tax advantages.
So should you go ahead and incorporate? Ask yourself these two questions.
1. Can I save enough in my corporation?
In a medical professional corporation, net earnings (after eligible expenses) are taxed at around 13%, depending on your province or territory. If you earn more than $500,000,1 the amount above that is taxed at the general corporate rate, which is around 30%.
Now let’s compare this with being unincorporated. Your earnings (less eligible expenses) would be taxed at your marginal personal tax rate, which is around 50%.2
That’s a huge difference in taxes.
The tax advantage of incorporating comes from withdrawing only the amount you need to cover your personal needs and leaving as much as possible in the corporation. This is called the tax deferral advantage.
The more you retain in your corporation every year, the faster you can accumulate and grow your wealth. Your MD Advisor can help you figure out whether the math makes sense for you.
2. Will the tax benefits of incorporating more than offset the costs?
Incorporating involves legal and set-up fees, along with ongoing accounting, administration and compliance costs.
Initial legal and accounting fees can be from a few thousand dollars to much more if the set-up is complex. You’ll also have to plan for disbursements, including fees to the professional licensing body, a corporate minutes book and corporate registration. In later years, you’ll have to factor in the annual legal and accounting fees, with the amounts depending on the professionals you work with.
Finally, if the law designates you a “U.S. person” for income tax purposes, you may potentially face additional taxes in Canada.
It’s important to make sure that the benefits of incorporating offset any or all these costs.
How should you integrate your personal and corporate planning?
If you do incorporate your practice, to make the most of tax-deferred investing within your corporation, you will need to take a holistic view of your personal, family and corporate investment assets.
Your corporation may have a different time horizon, risk tolerance and tax profile than you have personally when it comes to your registered retirement savings plan, for example. Non-registered investments that you own jointly with your spouse may also have a different profile.
The bottom line: incorporating their practice is the right move for many physicians, but it isn’t for everyone. Talk to your financial advisor first. Then get input from professional, legal, accounting and tax advisors before making a decision.
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 for all provinces and territories. Actual amounts will vary from one taxpayer to another.