Every self-employed physician has an important decision to make as they move ahead with their career: whether to incorporate their medical practice.
Incorporation is the process of creating a separate legal entity, the corporation, that becomes the owner of your medical practice. You, in turn, become a shareholder of the corporation, owning some or all of the shares issued by the corporation.
Incorporation can offer a way to manage your income stream, increase your wealth and help you save money through tax deferral, which is why many self-employed physicians in Canada opt to incorporate. Not every physician will make this choice, however — and of those who do, not all will make it right now.
Is incorporation right for you at this point in your career? Answering these five questions will give you an idea of whether you’d benefit from doing so.
1. Are you self-employed?
Yes: Having your own practice and using the traditional fee-for-service model of compensation lets you structure your practice as a corporation and benefit from the small business tax rate, which is significantly lower than your personal tax rate. If you’re in a group practice, you can still incorporate, but some arrangements can limit access to benefits like the small business tax rate.
No: If you’re being paid a salary as an employee, such as a salaried resident physician, incorporation is not possible for you right now.
Note: You could be receiving a salary and billing. In this case, the key is to determine whether you can retain sufficient billings in the corporation to make it worthwhile.
2. Are you easily covering your living expenses, with money to spare for savings?
Yes: If you are earning significantly more than you need to meet your daily expenses, incorporation could help reduce your total tax bill by allowing you to leave funds that you don’t need right now in the corporation. When you do that, up to $500,000 per year is taxed at the small business tax rate.
No: If you’re spending almost everything you earn, incorporation may not be right for you, or at least not right now. If you need all of your income as you earn it, you won’t be able to take advantage of one of the main benefits of incorporating your practice — deferring tax on the funds left in the corporation.
3. Do you want to save a lot more than you are permitted to in your RRSP and TFSA?
Yes: In this case, incorporating could be helpful, as the corporation adds substantial tax-advantaged savings room over and above the contribution room you have in your registered retirement savings plan (RRSP) and tax-free savings account (TFSA). By incorporating and keeping some of your savings in the corporation, you pay tax at the small business tax rate — accelerating your savings for retirement or other goals.
No: Even if your answer to this question is “no” now, this may change in time. This benefit could kick in at a later date, when your savings may increase.
4. Do you have a large debt related to your practice?
Yes: When you incorporate, any income remaining in the corporation would be taxed at lower rates. This helps you pay off business debt more quickly and accumulate capital faster. Consider incorporation if you expect to borrow for a capital expenditure, such as buying a medical building or expensive equipment.
No: If “no,” this particular benefit isn’t relevant for you right now.
5. Do you think your income might vary from year to year?
Yes: During your career, you may want to volunteer in another country, or take parental leave or a sabbatical. The flexibility of a corporate structure may allow you to reduce your lifetime tax bill by smoothing out your earnings over time.
No: If “no,” this particular advantage isn’t relevant for you.
Making the right choice for you
As you can see, incorporating a medical practice can offer significant benefits, but they’re dependent on several factors. You need to first make sure you’re a good candidate, and these five questions are a start.
* 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.