In Canada, medical professionals have control over how they run their practices. They may choose sole proprietorship in which they own and run the business. Alternatively, a number of physicians may join together in partnership, sharing responsibilities and revenue while maintaining individual tax profiles. Finally, medical professionals may opt to incorporate their practice, creating a legal entity which effectively ‘owns’ the practice and pays the physician a salary, dividends, or a combination of both.
Deciding how your practice will run financially is an individualized decision that’s dependent on your unique situation. Getting expert advice will help you recognize when or if incorporating is the right option for you. Here are some of the reasons you might want to consider incorporating your practice:
1. You’ll benefit from lower tax rates.
By incorporating, you’ll be able to benefit from lower tax rates aimed at small businesses. This is dependent on the province in which you operate, but British Columbia, for instance, offers a 2% tax rate for up to $500,000 active small business income, compared to the usual 12% general tax rate.
You’ll also have a lifetime capital gains exemption, and opportunities to access additional tax deferrals. This can amount to significant savings for small businesses.
2. You’ll benefit from income-splitting if you have a partner who works with you.
The rules have recently changed on income-splitting in Canada, no longer allowing for the general ‘sprinkling’ of income between family members to reduce taxes. However, in some cases, you may still be able to benefit from splitting your income if you have a partner who contributes to the work of your practice.
In this case, incorporating your practice would enable your partner to become a shareholder. If that partner contributes by working for the practice, then you may be able to pay dividends to both yourself and your partner, thereby effectively splitting income from your practice.
Tax on split income (TOSI) is complex and has recently undergone numerous updates. Before incorporating, it would be wise to seek the advice of a financial professional to find out if this is something that would benefit you.
3. You can shelter additional retirement money.
Incorporated businesses have a big advantage in being able to put earnings back into the corporation, rather than drawing them as income. This enables you to defer taxes on that financial growth until the time you withdraw it.
The benefit is that you can create additional tax-advantaged savings beyond Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs). For physicians who have traditionally not had access to workplace pensions, this can provide a financial advantage in planning for a retirement standard of living that is relatively comparable to the one enjoyed throughout your career.
4. You’ll enjoy flexibility in how you get paid.
One advantage of incorporating is that you will be able to decide how you want to be paid. Incorporated physicians can pay themselves a salary, dividends, or a combination of both. Both have different advantages, so it will depend on your specific situation and you might want to seek some expert advice before you decide.
Paying yourself a salary maintains your RRSP contribution room, but also requires you to pay employee and employer portions of Canada Pension Plan (CPP) contributions. Your income will still be taxable as an individual, but once incorporated, it will be a deductible business expense.
Dividends allow you to enjoy a lower tax rate as an individual, but aren’t a deductible business expense and don’t create RRSP room. However, you won’t be required to contribute to CPP.
Blending these strategies might enable you to maximize the benefits of both by paying yourself a salary, then topping up your income with dividends to meet your financial needs.
Having the flexibility to decide how you get paid can give you some significant advantages in the long run, but you’ll only have these options by incorporating.
5. You’ll open up new avenues for cash flow and financing.
Incorporating your medical practice gives you new tools to finance your growth. Corporations can typically borrow money at lower rates and also enjoy the benefit of being able to sell shares or bonds to increase cash flow. This easier access to capital can help you plan for your practice’s growth and success.
Whether or not you should incorporate your medical practice is a big decision. Despite its many benefits, it still might not be the right decision for you or maybe it’s just not right at the moment.
Seeking financial advice from an expert with experience helping medical professionals manage their finances can give you valuable insight into your own unique situation. Chartered professional accountants are skilled at identifying the risks and benefits of incorporating and can help you decide which is the right path for you.
Finances are complex, but recent changes in tax laws and the complicated environment in which medical professionals operate can feel overwhelming. Before incorporating, find out how it will benefit you by asking for advice from a financial professional.