You may have heard that incorporating your medical practice can help you save more money. But how does it really work?
When you incorporate, you create a legal corporation that owns your medical practice. The corporation is a separate entity and you, the physician, become a shareholder and either a director or employee of it. You, the physician, control the corporation, but it independently earns income and pays tax on it.
Incorporating your medical practice can help you defer some of your immediate tax burden and thus speed up your retirement savings.
That’s because medical professional corporations benefit from the small-business tax rate, which is about 12%, depending on your province or territory. After overhead expenses, your corporation would pay this lower rate on your practice income (up to $500,000 annually but this varies by province) instead of you paying income tax at your personal rate, which could be 50% or more for a physician.
The money you save on tax can be invested through your corporation, where it will grow. You will pay more tax later when you withdraw money from your corporation, but you will already have enjoyed the tax deferral benefit — and you’ll likely be in a lower tax bracket if you’re on leave, working part time or retired at that point.
An example of the tax advantages of incorporating
Maria,1 age 35, is a general practitioner with annual earnings of $300,000 (after overhead expenses but before taxes). Maria estimates her annual financial needs to be around $114,500, and she would like to maximize both her RRSP and TFSA contributions.2
We present two scenarios below: the first where Maria is unincorporated and the second where she is incorporated. This comparison shows you how much more she can save if she’s incorporated, based on her specific situation.
Scenario 1: Unincorporated practice
If Maria is unincorporated, she can invest a total of $77,500:
Scenario 2: Incorporated practice
If Maria incorporates her practice, there is a corporate and a personal component to the tax calculation.
Inside her corporation, she would be able to save about $73,000. Here’s how:
Now let’s see what happens in her personal accounts: her RRSP and TFSA.
If Maria is incorporated, she can invest a total of $106,270:
Taking advantage of tax deferral
To summarize, when Maria is unincorporated, she has $77,500 to invest. When Maria is incorporated, she has $106,270 to invest. (Both figures include her RRSP and TFSA contributions.)
With an additional $28,770 or more available for investment every year through incorporation, it can speed up her retirement savings. This is known as the tax deferral advantage.
1 This example is hypothetical and is for illustrative purposes only. It does not represent the financial situation of any actual client. Any resemblance to actual people or situations is purely coincidental.
2 The maximum RRSP and TFSA contribution amounts for 2020 have been used in the two scenarios.