The value of financial advice: An MD-guided process. This series from MD Financial Management (MD) illustrates financial situations faced by Canadian physician households, along with our planning process to solve problems and help you achieve your personal goals. While these composite case studies do not portray any single individual, they do reflect real-life conversations that MD Advisors* have with physicians and their families every day.
Sonia, 37, is starting to feel confident and comfortable in her clinical work as a young physician, but is still trying to figure out the business side of the profession. A few colleagues have suggested she should incorporate, which sounds good, but she's not sure why.
Currently in her third year of practising medicine at a community hospital on Vancouver Island, Sonia enjoys an easy rapport with patients, sees many of them regularly for nephrology care in her outpatient practice and has made many friends in the community.
After whirlwind years of studying in Kingston, residency rotations in Toronto, then a move to California for a fellowship at Stanford, she has surprised herself lately with thoughts of settling down more permanently. Sonia and her partner, Susie, have been in a common-law relationship for a decade. They have always made the most of free time — whether it’s an hour splurge at the spa, a last-minute mini break at a luxury Airbnb or a two-week spiritual trek through Nepal.
The challenge: “I love my current situation as a physician and plan to settle down. Is it time to incorporate?”
Sonia admits she doesn’t pay much attention to her finances, and laughs that she is “clueless” about how much things cost. She is grateful for financial help she received through medical school, thanks to a family inheritance. Her grandmother left her money specifically to help fulfil her dream to become a doctor.
That windfall took pressure off the normally lean years of residency. It was easy to dip into the inheritance account, and Sonia tended not to track expenses or check the balance.
Given the demands of her job and long hours, it made sense to keep a joint account with her partner. She says Susie is great at planning everything, organizing trips, finding good deals on Amazon and keeping fridge and wine cellar provisions topped up.
Now Sonia feels it’s time to set roots in both her career and household — maybe even start a family. She keeps hearing from other physicians that as a self-employed physician she should incorporate her practice. The benefits seem mysterious, but she doesn't want to miss out!
- $80,000 in annual personal expenses, according to a statement prepared in advance of meeting a financial advisor
- $50,000 in her RRSP, plus an outstanding balance of $20,000 to be repaid under the Home Buyers’ Plan, for a down payment to buy a condo outside Victoria
- $150,000 in unused RRSP contribution room; she hasn’t invested in it since buying the home
- About $100,000 in a joint account with her partner, Sonia’s share from an inheritance
- $300,000 mortgage on a 1-bedroom condo (currently valued at $550,000); amortizing payments over 10 years to quickly build equity, her housing costs are about $5,000 per month
The analysis: An advisor’s fresh eyes
While doing some late-night research, Sonia came across a short video highlighting the benefits of incorporation and decided to contact an MD Advisor*. We introduced her to Ralph, who proposed how MD could help, and the two agreed to work together. Over the next few weeks, they spoke at length and Ralph gathered more information by secure email. It soon became obvious to him that something wasn’t adding up. Sonia's personal expense statement ($80,000) didn’t seem to match her financial situation.
Numbers not adding up. Sonia's RRSPs and other savings had stalled. Money in the inheritance account was depleting. While Sonia has billed as much as $400,000 per year through her practice, she takes home closer to $150,000, after overhead costs and taxes. Her partner was taking care of most household expenses through the joint account, but they weren't keeping track or reviewing the balance together. There was a lot less left than Sonia had presumed!
Lack of savings a big hint. Her runaway expenses, housing costs and lack of savings suggested that Sonia was not currently in a position to enjoy the benefits of incorporating her practice, at least until she can reconsider her financial priorities. One way to assess if it makes sense to incorporate is to check whether you earn significantly more than needed to meet daily expenses. Extra savings can help reduce your total tax bill by allowing you to leave funds that you don’t need right now in the corporation. That way, up to $500,000 per year may be taxed at the small business tax rate of 11% (federal, and British Columbia rate; provincial rates vary), until it is withdrawn from the corporation as income. Rather than invest savings for retirement, Sonia has been accelerating mortgage repayments. She thinks building equity in the condo will help financially when she's ready to sell and upsize to a more costly, family-ready home.
Sonia had been keen to incorporate – which sounded like a solid, grown-up commitment to her career – so she was taken aback when Ralph advised against it, for now.
Ralph notes: “I could see Sonia was reaching a milestone time in her life: she has the desire to commit herself to build a practice and set roots at home. I learned that she and her partner have been talking about having a child together. In Sonia's mind, incorporating her practice was a way to add more structure to her financial life.
“It's true that incorporating a medical practice opens up additional planning opportunities and can potentially strengthen the practice and help build wealth faster, but only under the right circumstances and at the right time. For now, we created a three-part plan to steady Sonia's finances, both in her practice as a physician and to support a growing family in the next few years."
The decision to incorporate is not a catch-all: it needs to address the life circumstances and financial goals that Sonia is still trying to define. First things first!
- Go “back to school” to track spending
Sonia was fortunate not to have to worry about money as a student, but she missed out on learning good spending habits.
"We'd chat for a while, and she'd declare she 'forgot to mention' a few expenses: a new home gym, gifts for her team at work, plane tickets for Susie's mom, and other spontaneous purchases," says Ralph.
We encouraged her to track spending more closely for the rest of the year, so we can calculate a better sense of cash flow and help redefine financial priorities. Are the couple’s choices helping them achieve their goals? We suggested a team effort, enlisting Susie's help in the role of CFO of household finances.
It's part of a process to have Sonia rethink her financial priorities and set expectations for the future.
- Press “pause” on incorporating
Incorporating offers a physician control over the amount of taxable earnings taken home each year. The surplus can be left inside the business for later.
Right now, we'd like Sonia to focus on managing expenses and then increasing her savings. There's no benefit to incorporation just for the sake of it. We also recommended she catch up on unused RRSP contribution room before incorporating. Not only is this advantageous for tax purposes, there are also provincial contribution grants in B.C. that could further enhance her savings.
Sonia needs to reach the point where incorporation can add value to her plan, given her priority on reducing debt. Once we get spending and savings on track, we can revisit incorporating to manage Sonia’s income and save for the future.
Incorporation can also help self-employed professionals secure a reliable source of retirement income, whether that's through saving within the corporation or by being a member of a multi-employer benefit plan like the Medicus Pension Plan™, designed specifically for Canada’s incorporated physicians.
We'll track Sonia’s progress: it could make financial sense to redirect some spending, such as housing costs, to invest in other opportunities.
- Plan finances as a couple
After being together for a decade, it’s time for Sonia and her partner to step up their financial teamwork and talk to each other about money.
"I see this a lot with younger couples in common-law relationships. We can show them how they may make better use of tax credits and reduce their tax burden through a household financial plan, coordinating income tax filing, or even splitting income through contributions to a spousal RRSP," Ralph explains.
If Sonia incorporates in the future, there may be other benefits. While corporate assets are separate from personal income and property, they form an important part of household financial planning and retirement savings, alongside RRSPs, spousal RRSPs, tax-free savings accounts and other assets.
For additional financial security, a corporation could also allow access to contribute to a registered pension plan, if Sonia and Susie want predictable lifetime retirement income. Their “power of two” offers them more financial flexibility — say, if Susie plans to stay home to raise a child.
Preparing for a new phase: medical practice and family life
The financial planning process is helping this couple transition from starting out to moving ahead in both their personal and professional lives.
Through the guidance of their MD Advisor, they have been able to take control of their finances, plan for a growing medical practice and establish the family life they wish for.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.