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.
Depending on the method of compensation that you choose as an incorporated physician, the province in which you reside can have significant impact on what regulations you must follow and how your income is taxed. Physicians often use their incorporated practice as a “savings vehicle,” and the current and investment tax gaps can both impact the corporation’s tax efficiency. The impact can vary by province and territory. For example:
Northwest Territories’ current tax rates most strongly favour dividends, as dividends have the greatest tax benefit.
Nova Scotia’s current tax rates most strongly favour dividends, as dividends have the greatest active benefit.
New Brunswick’s and Ontario’s tax rates create the most indifference to paying salary or dividends.
Here are some additional examples that illustrate why you should consider ramifications that may be unique to your province:
- CPRSP: If you practise in British Columbia, Doctors of BC (formerly BCMA) has a program in which RRSP contributions are matched. This is a material deterrent to an all-dividend strategy.
- Health taxes: If you practise in Quebec, health services contributions will be paid by the corporation if you choose salary over dividends.
- Family benefits: Participation in employment insurance is now an option, which may be a consideration in light of parental leave benefits. Quebec takes this further, with additional benefits that depend on salary.
- Physicians who move: As an example, huge “wild cards” exist regarding assets, income and retirement location for South African physicians who have moved to rural Saskatchewan. Newfoundland and Labrador and the Northwest Territories rely heavily on attracting physicians to a salaried position and group RRSP. Retiring in another province can also change the benefits or consequences of your strategy.
- Shareholder differences: All provinces now allow the spouse and children of physicians to be shareholders of a professional corporation. Several, however, including Alberta and Ontario, do not permit corporate shareholders or trusts except for minor children. This may constrain access to compensation conversion benefits when the recipient is not the physician.
- How long incorporation has been available in your province: More than 30 years? Less than five years? Physicians who practise in provinces in the former camp tend to have well-established processes and strategies related to incorporation. Physicians in the latter scenario tend to have accumulated more personal non-registered investments and have additional compensation considerations (perhaps neither salary nor dividends).
Adjusting for personal preferences
Are you working in a partnership? Many radiologists do, and the small business limit may need to be shared—reducing or even eliminating access to conventional conversion from salary to dividends. A similar challenge exists for those who are fortunate enough to retain more than the small business limit in their professional corporation.
If you have a teaching or other employee-type position, CPP/QPP could be a non-issue. Add a pension to the equation and RRSPs may also be a non-factor. If you eliminate CPP/QPP and RRSPs as factors, the tilt toward favouring dividends increases.
What if you have personal non-registered savings that were accrued prior to incorporation, lottery winnings, or a spouse who covers all expenses? It could be that you don’t want either salary or dividends.
More broadly, there are many personal factors—purpose, time frame, need for income, capacity for risk—that can help determine whether salary or dividends is the better option.
Risk management considerations
A dividend-only strategy that targets retention within the corporation frequently results in a higher concentration of savings in the corporation. Is the payoff worth this concentration risk?
How good of a saver are you? RRSPs carry a much stronger “savings” association in many physicians’ minds than does their corporation. In other words, if it seems “normal” to make withdrawals from the corporation, then the risk for those who don’t tend to save well is having less retirement savings.
Eliminating benefits like CPP/QPP can make for excessively risky retirement income streams that don’t hold up well when markets weaken. This may mean that a dividend strategy is better for an investor with a relatively high risk tolerance, or it could mean that significant changes in investment strategy would be better for a more conservative individual.
Decisions around choosing salary or dividends are complex and require a strong understanding of your unique circumstances and preferences. If you layer in provincial variations and other non-tax factors, decisions become more complicated. Contact your MD Advisor to get the advice you need to make the right choice.