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.
What is incorporation?
Many physicians choose to incorporate their medical practice, but does it make sense for your own circumstance? When you decide to incorporate, you create a corporation that “owns” your medical practice, and you become a shareholder, director and/or employee of the corporation. The corporation then pays you a salary, bonuses and/or dividends, which will be taxed at your personal income tax rate.
Significant opportunities that arise when you incorporate your practice include:
(1) deferring taxes by keeping some income within the corporation; and
(2) reducing your family’s overall tax bill by splitting income with family members.
Now that we’ve considered, at a very basic level, what incorporation is, let’s turn to four key considerations related to incorporation, to help you decide whether it meets your needs.
- Is your bottom line adequate for a tax-deferral strategy?
As a self-employed physician, the money you earn (less eligible expenses you incur to earn that income) is taxed at your marginal personal tax rate—the average combined (federal and provincial) top marginal rate is 45%.1 However, as an incorporated physician, up to the first $500,0002 of active business income earned by (and retained within) your corporation may be taxed at a rate of only 15%,1 depending on your province.
This tax-deferral strategy is only beneficial if you have adequate income from your practice to draw a salary that covers your personal needs, while still having cash remaining within your corporation to shelter.
Example of the potential savings benefit
Taxes, personal (45%)
Corporate net income
Taxes, corporation (15%)
In this example, being incorporated means you would have an additional $30,000 available to invest.
- Are you able to take advantage of income splitting?
Certain non-physician family members, including spouse and children, are permitted to be shareholders of a professional corporation. This allows income splitting, which can significantly reduce your family’s overall tax bill. This strategy requires you to have at least one eligible family member, such as a spouse or an adult child, who is in a lower tax bracket and who is a shareholder (directly or indirectly) of your corporation.3
- Will the benefits of incorporation cover all related costs?
There are legal and setup fees involved in creating a corporation, as well as ongoing accounting, administration and compliance costs. If you are designated a “U.S. person” for income tax purposes, you should be aware of different tax laws between the two countries and a potentially greater tax burden for U.S. persons in Canada. It is important to make sure the benefits of incorporation in your particular situation will offset these costs.
- Can integrating your corporation enhance your overall investment tax efficiency?
In order to make the most of tax-deferred investing within your corporation, you need to take a holistic view of your personal, family and corporate investment assets. For example, your corporation may have a different time horizon, risk tolerance and tax profile than your registered retirement savings plan account or the non-registered investments that you own jointly with your spouse.
Medical practice incorporation is the right move for many physicians, but it isn’t for everyone. Always consult with your professional, legal, accounting and tax advisors before making a decision about incorporation.
1 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 taxpayer to taxpayer.
2 Provincial small business limits may vary from the $500,000 federal limit.
3 Shareholder restrictions for medical professional corporations vary by province.