Incorporation for Physicians
Discover 7 Benefits for Your Practice
7 Advantages of Incorporation for Canadian Physicians
Incorporation offers extensive benefits for physicians whose goal is to achieve the growth potential of their medical practice. Incorporating in Canada has significant advantages including reducing taxes, introducing financial discipline, leveraging allowable tax deductions and setting up a retirement plan for you and your partner.
What is a Medical Professional Corporation?
When you incorporate, you create a new legal entity (the corporation) that becomes the owner of your medical practice. You own shares of the corporation and are paid a salary, bonuses and/or dividends for your work.
Once you incorporate, your practice will have its own revenue, expenses, assets and debts, separate from your personal income and property.
The Advantages of Incorporation for Physicians
In the absence of incorporation, higher earning physicians face punishingly high levels of personal income tax.
By creating a medical professional corporation, you can keep more of what you earn and build wealth faster. Any funds you don’t need for personal use can be retained in the corporation where it is taxed at the small-business rate (approximately 12%).
When you are starting out, or need additional capital to grow a practice, an incorporated entity may be able to achieve greater access to cash flow and financing options.
Perhaps the most important part of incorporation is the ability to defer taxes. One might think that tax deferment isn’t that powerful – what is the value of delaying taxes if one has to pay them eventually?
Actually, it makes a striking difference.
Imagine you earn $100,000 per year more than you need for living expenses, and wish to use those funds for retirement savings.
If the funds are received as an individual, taxes must be paid before you can invest the money. At the highest marginal rate, you may have pay up to 53% in tax, leaving $47,000 to invest. Let’s assume you invest monthly and achieve a 5% rate of return, compounded annually. After 25 years, you would have saved $2,303,669. That’s not bad!
However, let’s assume that you incorporate your medical practice and are able to keep those funds in your corporation. You’ll be able to invest the $100,000 each year after paying 12% corporate tax (about $7,333 left to invest each month). After 25 years, you would have $4,312,690. That’s a lot more due to tax-deferred growth.
Essentially, you get to invest the money that otherwise would have been paid in excess personal income tax. While you will need to pay taxes when the funds are withdrawn, you’ll be paying taxes at what will likely be a much lower marginal rate as you’ll no longer have a high clinical income. Moreover, if you have a partner, you can split your income between the two of you to maximize tax savings (after the age of 65). This strategy is referred to as retirement income sprinkling.
Reasonable Business Expenses
Running a medical corporation allows you to claim reasonable business expenses as tax deductions, including professional development activities such as attending conferences and professional use of a vehicle or home office. Some physicians will understandably choose to attend conferences in locations where they are excited to visit.
A business expense that is often overlooked is a corporately managed health benefit plan. For a business with few employees, traditional health insurance plans can be exceptionally costly and restrictive. A strategy that is often overlooked is to create a health spending account or private health services plan, such as the CarbonFibre Health Benefit Plan.
Under this type of CRA-authorized structure, healthcare expenses of a physician-employee can be 100% reimbursed tax-free and the costs are considered legitimate business expenses of the medical corporation (so they are 100% tax-deductible). While this may seem too good to be true, it it should be remembered that many companies, including the Canadian federal government, offer health benefits to their employees. Those insured benefits are received tax-free by employees and are tax-deductible to the employer. So this program just levels the playing field between large and small businesses.
A program like the CarbonFibre Health Benefit Plan provides a very liberal coverage with no copays or management fees and doesn’t take a percentage of each reimbursement. It is also self-administered which avoids delays in reimbursement.
Income Splitting with a Spouse Employed in the Medical Practice
Now, if you have a partner who works at least 20 hours per week in your medical practice who earns T4 income, then you can pay them a reasonable amount of dividends. This allows you to split income and reduce taxes even before you reach the age of retirement.
This gives you more fund for personal use, while allowing you to leave more cash in your corporation for saving & investing. This can accelerate your retirement or increase your income during retirement.
Parental Leave or Sabbatical
If you have a period of time where your income drops, such as if you take a sabbatical or go on parental leave, you can withdraw corporate funds at a lower personal tax rate.
Life Insurance & Pension
Your corporation can provide insurance protection for key people in the corporation as well as those affected by partnership agreements. For example, your medical professional corporation can own and pay for life insurance policies and may, depending on how you are paid, be able to contribute to pension plans.
Insurance policies can also be used as another means to defer taxes and achieve tax-deferred growth.