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.
To better understand how to make the incorporation decision, take a look at the advantages and disadvantages of incorporating outlined below.
Advantages of incorporating
The advantages have to do with taxation—deferring tax and saving tax.
1. Tax deferral
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 30% or top marginal rates of around 50% if the earnings are taxed personally.2
If your medical practice is incorporated, your business would deduct all eligible expenses and any income remaining in the corporation would be taxed at around 13%.
Remember it’s your corporation—not you as the individual physician—that benefits from the reduced rate. The biggest benefit occurs if you can keep as much of the corporate earnings within the corporation as possible. This money in your corporate account—which would have otherwise been paid in taxes—gets to grow tax-deferred.
2. Tax savings
Here’s what is important to keep in mind: the more money you can keep in your corporate account, the bigger the tax benefit will be over the long term. But there may be times when you need to withdraw money from your corporation. Perhaps you want to take a sabbatical, or take time off work to raise your family. Or maybe you are retiring.
Here’s how the tax savings work. When you’re working, you should retain as much money in your corporation as possible (once you’ve covered your lifestyle needs) because it would otherwise be taxed at a high personal rate.
When you’re not working, you can withdraw money from the corporation—you will be in a lower personal tax bracket at that time. That’s how being incorporated can help you save on taxes.
Disadvantages of incorporating
While there are important tax advantages to incorporating your practice, you should be aware of a couple of key drawbacks.
1. Increased 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 you would incur a business loss in your 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 within 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.
Many physicians just like you have been faced with the question of whether incorporating their practice makes sense. Now that you have looked at the key advantages and disadvantages of incorporation, you and your MD Advisor can make the best decision for your financial situation.
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.