As most physicians now know, the federal government has proposed tax changes that will affect private corporations and their shareholders. MD Financial Management is following these developments closely.
At the recent General Council meeting in Quebec City, our incorporation and tax experts addressed questions from members of the Canadian Medical Association (CMA) during a session on private corporations.
Here are some of the questions physicians asked about incorporation and the proposed tax changes:
What is the annual cost of incorporation?
There are a number of costs associated with setting up a corporation, as well as annual costs to maintain it. Legal and accounting fees associated with incorporating a medical practice typically range from $2,000 to $5,000. For more complex situations, however, they could be more than double that. Disbursements, including the application fee to the professional licensing body, will vary from province to province. Expect to pay a minimum ranging from $2,500 to $10,000.
Once you are incorporated, your annual legal costs should range from $300 to $500, depending on whether the company maintains its own registers and records or not. In addition, your annual accounting fees will likely increase by between $2,000 and $5,000 to cover the cost of preparing a corporate tax return and other potential tax returns. Finally, there may also be other new costs to consider, such as payroll and other taxes.
What is passive income and passive investing?
First, let’s define active business income. This is income generated from the core business and/or practice activities of a corporation. If a physician doesn’t need all corporate earnings to pay annual practice expenses, the excess can be invested within the corporation, in an investment portfolio. The income generated from this portfolio is called passive income.
How will the proposals impact the taxation of passive investment income inside corporations?
The federal government has proposed a new concept of taxation on passive investment income earned within private corporations that would result in a significant increase in the effective tax rate on passive income.
This increase in tax rate on passive income would conceptually level the playing field with unincorporated physicians, who generally have less after-tax cash to invest in passive investments because personal tax rates, which average around 50% at the highest marginal rate, are much higher than small business corporate tax rates, which average around 15%.
The government has indicated that passive investment portfolios currently held in private corporations will be grandfathered from any proposed changes.
If I hold investments in my corporation, is it better to sell them now?
Be very careful about implementing any new investment strategies at this stage even if you are managing the investment-related risks. Not only are the proposals not yet law, you may harm a pool of capital that you can’t replace. The government is currently reviewing its proposed legislative changes, and until these changes become law, it’s important to carefully consider any investment decisions and discuss them with your financial advisor and tax advisors.
Is life insurance purchased through my corporation tax exempt?
Life insurance is typically purchased with after-tax dollars and is best suited for Risk Management and Estate Planning. Having your corporation own the policy and pay the premiums can make the policy more affordable—or make more insurance affordable.
With permanent life insurance, deposits in excess of the actual cost of insurance can be invested in the policy—earnings and growth on investments within the insurance contract are exempt from tax.
The policy paper is silent on the use of permanent life insurance to shelter investment income from tax. Accordingly, permanent life insurance appears to remain attractive under the new proposal. However, until the proposals are finalized, we recommend careful consideration before contributing more to these policies.
Are these proposed tax changes final?
No, they are not. Keep in mind that these are proposals, open to a public consultation period. The 75-day consultation period ends on October 2, 2017. The government is inviting comments on the proposed tax changes.
Anyone can participate in the consultation and share their ideas and perspectives on these proposed changes with the federal Department of Finance. Submissions can be sent to email@example.com. Please note that the CMA is planning to make a submission on behalf of members. The CMA has also created an electronic letter that physicians can personalize and send to their member of Parliament.
We continue to review and analyze these proposals and will share any additional information as it becomes available.
The rules surrounding medical practice incorporation are complex, so we recommend that you talk to your MD Advisor if you have any questions.