Every self-employed physician has an important decision to make as they move ahead with their career: whether to incorporate their medical practice or not.
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 not every physician will make it right now.
So is incorporation right for you at this point in your career? Answering these five questions will give you an idea of whether or not you’d benefit from incorporating your medical practice.
- 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. 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 or are still in residency, incorporation is not possible for you right now.
- Are you easily covering your living expenses, with savings to spare?
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 you don’t need in the corporation, where up to $500,000 per year is taxed at the small business tax rate.
No - If you’re spending almost everything, incorporation may not be right for you, at least right now. Sometimes, physicians need all of their income as they earn it. If that’s true in your case, you’d be missing out on one of the main benefits of incorporating your practice — deferring tax on the funds left in the corporation.
- Do you want to save a lot more than what you can in your RRSP and tax-free savings account?
Yes - In this case, incorporating could be of help to you, as the corporation adds substantial tax-advantaged savings room over and above RRSPs and TFSAs. By incorporating and keeping 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," this may change in time. This benefit could kick in at a later date, when your savings may increase.
- Do you have 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 to buy a medical building or expensive equipment.
No - If “no,” this particular benefit isn’t relevant for you right now.
- 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.
If you’re ready for a more detailed assessment of your incorporation options, an MD Advisor* can walk you through the ins and outs of incorporation. They’ll help you make the right choice, the one that optimizes your financial picture — not just for today, but over the long term.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.