Is Incorporating Beneficial for Medical Practitioners?
A serious question that is bound to cross your mind as you begin your new career as a medical practitioner is whether you should incorporate your medical practice, or not. The answer to this question varies for each person and depends on your current financial situation.
What is Incorporation?
Incorporation is a process in which you register your medical practice as a separate legal entity distinct from your personal finances. After incorporation, your practice gains its own assets, revenues, expenses, and debts.
Once the process is complete, you become a director or employee of the corporation and the corporation pays you.
What are the Benefits of Incorporating Your Medical Practice?
The main benefits of incorporating your medical practice are the tax benefit you gain.
For instance, corporations benefit from a low tax rate of around 11.5%-16% depending on what province your business is in. However, if you are not incorporated, you will be taxed at your marginal personal tax rate, which is much higher at around 25%-50%.
Apart from saving on your general taxes, you can also benefit from income splitting. Income splitting is when you allocate your income to other members of your family who are in a lower tax bracket.
You can do this through:
- Paying salaries to your family members for helping you with your medical practice (such as for administrative support)
- Paying reasonable dividends to related shareholders
It is important to keep in mind that the Canada Revenue Agency requires the amount paid to be reasonable based on the contribution made by your family members.
After incorporation, your liability becomes limited and as a shareholder, you are not personally responsible for the corporation’s liabilities (such as debts). However, you are still responsible for any medical malpractice liabilities and the directors will be responsible for dealing with payroll taxes and unpaid wages.
After incorporation you will pay tax on the corporation’s net income and you will pay personal taxes on any salary or dividends you receive from the corporation. You are able to defer any personal taxes on the after-tax professional income that is in the corporation until you withdraw it. The longer the funds remain in your corporation, the greater your tax advantage becomes.
Variety in Remuneration and Employee Benefits
Once incorporated, you gain access to various forms of remuneration or income that includes bonuses, dividends, and salaries. Through this, you can get the most possible benefit from your tax deferral without losing out on other benefits such as participation in the Canada Pension Plan or RRSP contribution room.
You also gain access to the Individual Pension Plan (IPP) and Retirement Compensation Arrangement (RCA) that is only accessible to incorporated practices.
What are the Cons of Incorporating Your Medical Practice?
Though there are many benefits to incorporating your medical practice, there are some drawbacks as well.
When you incorporate, your tax situation becomes a lot more complex so you will need to spend more money on accounting and financial services to help you keep your numbers in order.
However generally the lower tax paid by the corporation and the ability to defer taxes outweigh the increase in the professional fees you may have to pay.
Taxes on Death
The estate will be required to pay tax on the value of the corporation’s shares. It is therefore important to plan for this eventuality by having adequate life insurance or liquid assets to pay any taxes.
Use of Corporate Funds and Business Losses
After incorporating, you also must keep in mind that if you want to use the money for personal reasons you will have to withdraw it first, and any withdrawn funds are subject to personal taxes.
Also, after incorporation, any business losses cannot be used to reduce your personal taxes and must remain in the corporation.
When Should You Incorporate Your Medical Practice?
You need to consider the following factors before deciding when to incorporate your medical practice:
- Your debt repayment amount
- Your total Income
- Your investment plans
- Your spending necessities
You should also speak with a professional tax expert to figure out if incorporating is right for your medical practice’s specific financial situation.
If You Incorporate Too Early?
Incorporating too early may increase the professional fees you are paying and if you withdraw all the funds from the corporation, you will lose the benefit of the lower corporate taxes.
Therefore, the timing of incorporating should done after reviewing the above benefits and cons. It is also advisable to discuss the timing with your tax accountant.
Are There Benefits and Drawbacks of Incorporation Specific to Medical Professionals?
The average new medical school graduate in Canada owes at least $100,000 in debt. Apart from having significant debt, new physicians must also cover the initial fees of starting their own practice, malpractice insurance, monthly rent/mortgage, and will have to buy updated medical equipment regularly.
If you are still in the early phases of your practice, it is advisable to meet with your tax advisor to determine if you should incorporate and the timing of the incorporation.
However, it is generally beneficial for physicians who are in practice to incorporate as the average gross income before income taxes is around $339,000. Incorporating is a great choice for physicians when the benefits earned through tax deductions, income splitting, and tax deferrals are much more than the costs of being incorporated.
What are the Steps of Incorporating?
To incorporate your business, you must follow five basic steps:
- Select a name that does not coincide with another existing corporation in Canada, this can be done through a Nuans search.
- Decide whether you want to go through federal or provincial incorporation.
- Select a board of directors and create your articles of incorporation.
- Establish an office address in the province where the incorporation took place.
- Get your business number.
MMT Chartered Professional Accountants can assist you through this process to ensure you make the right decisions that are specific to your financial situation.
Get in touch with a tax expert today at MMT Chartered Professional Accountants to determine whether incorporation is the right move to make for your medical practice.
The articles posted here provide information of a general nature. These articles should not be considered specific advice; as each visitor’s personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in these articles.
Have A Question? Need A Quote?
Contact us to find out how we can help your business reach its potential.