Important Notice: Professional medical corporation information on MD’s web site is based on existing incorporation rules which may be impacted by proposals announced in the Department of Finance’s policy paper entitled “Tax Planning Using Private Corporations.” MD is monitoring these proposals and we will update our tax planning strategies accordingly should rules change. For more details, please read MD’s blog Tax Planning Using Private Corporations, What’s Next: A Summary of Finance Announcements.
Incorporating your medical practice made good financial sense, but there are many tax considerations to be aware of.
In particular, effective tax planning does not end when you incorporate your practice. While incorporation means lower tax rates on your active business income, your corporate investment income does not enjoy the same tax benefits. It is important to be smart about the way you manage your corporation.
Here are four key investment strategies for you to consider, as an incorporated physician, that can help maximize your wealth and/or minimize tax.
- Make tax-efficient investments
With high tax rates on corporate investment income, it makes sense for your corporation to hold investments that produce the least possible amount of taxable income. Equities or equity mutual funds typically generate capital gains and eligible dividends, the most favourably taxed forms of income. Interest income, on the other hand, attracts the highest rate of tax. As a result, you may want to hold interest-earning assets—like bonds, money market funds or guaranteed investment certificates (GICs)—in your tax-sheltered registered accounts (e.g., registered retirement savings plan (RRSP)).
Sometimes there will be tax trade-offs. Funding a tax-free savings account (TFSA) by drawing from the corporation may result in more current tax. However, a TFSA will often turn out to be a better long-term strategy due to corporate taxation on investment income.
There are also times when the cost structure of your investments can provide tax opportunities. Corporate investment management fees (e.g., MD Private Investment Counsel) can help offset higher taxed corporate investment income, which is not an option with embedded costs (e.g., the fees associated with an exchange traded fund (ETF)).
- Pay health expenses through your corporation
Incorporated physicians can use their corporations to pay for health expenses through a private health services plan (which some provincial medical associations offer), health insurance or a combination of the two.
Paying for health expenses through your corporation is more tax efficient, leaving you with more money to invest and, potentially, more long-term growth.
- Consider corporate-owned permanent life insurance
If you are looking for a secure way to increase the value of your estate, using your corporate assets to fund a corporate-owned permanent life insurance policy offers multiple benefits.
- Money invested within the policy grows on a tax-deferred basis, rather than being subject to the high tax rates on corporate investment income.
- You can pay the policy premiums using the corporation’s after-tax dollars, which is generally more cost-effective than using your personal after-tax dollars.
- Death benefits from the policy may eventually be distributed by your executor with little or no tax
- Consider an individual pension plan
If you’re looking to make greater tax-deferred contributions than an RRSP allows, consider an individual pension plan (IPP). An IPP is a private pension plan set up for you by your corporation. Your corporation becomes the “plan sponsor” that will pay a pension to you, the “plan member,” upon retirement. An IPP can accelerate tax-sheltered personal savings and reduce current-year corporate tax.1
The maximum you can contribute is based on your income but also grows as you age—so the limit can be significantly higher than your maximum allowable RRSP contribution. Another advantage is that contributions made by your corporation to your IPP are tax deductible.
Yet, be aware that IPPs are complex. They typically benefit those who are 45 to 65 years old, face a higher general corporate tax rate and are more focused on risk management, and may be better suited to those developing a strategy to exit the corporation.
In summary, now that you’ve incorporated, the next step is to make your corporation’s assets an integral part of your overall financial plan. You want to take full advantage of opportunities to reduce your taxes and, thereby, increase your net worth.
1 IPP contributions must be made in accordance with an actuarial valuation. Your MD Advisor can explore the pros and cons of these often complex plans, and can arrange for an actuarial quote.