Should I incorporate my medical practice?

As you move from resident to a practicing physician or dentist, there are many important financial decisions that you’ll be faced with.  One of the most common questions my team fields from our medical professionals is whether or not they should incorporate their medical practice?

What does it mean to incorporate?

Before delving into ways to determine whether you should incorporate, it’s worth looking at what incorporating actually means. Incorporating is the process of creating a separate legal entity, the corporation. Your corporation becomes the owner of your medical practice and you, the medical professional, become a shareholder of the corporation, owning either a part or all the shares issued by a corporation.

What are the reasons one might want to incorporate?

A corporation allows you to manage taxes on income and to create wealth because of better tax efficiency.  Many medical practitioners ultimately do decide to incorporate, however, that doesn’t mean you need to do it right away. Let’s review some of the signs from a financial planning perspective that will help you to determine whether incorporating may be right for you.

Are you self-employed?

In Canada, many physicians and dentists do end up being self-employed. Having a corporation allows them to direct their billings into the corporation where they can take advantage of the Small Business Deduction, which depending on which province you practice in, means you’ll pay tax on your first $500,000 of corporate income at tax rates ranging from 9% - 12%.

If we look at a medical practitioner living in Ontario with $400,000 of taxable income, who only requires $200,000 of gross pay to live. By incorporating, they save themselves nearly $81,740 of taxes each year (Table 1)

Are your living expenses less than your income?

If you are earning significantly more money than you need to live off, incorporating can help you reduce your total tax bill as discussed above. This means you’ll be left with a whole lot more to invest either back into your clinic or passively for future uses like retirement.  In our example, if we assumed that this professional without a corporation, would at the very minimum make the maximum contribution to their RRSP of $29,210, they would be left with $80,286 for total investable assets of $109,496 (RRSP + cash left over after spending needs).  By incorporating and using preferential corporate tax rates, this number jumps to $175,600, a 60% increase in investible funds each year (Table 1)

Table 1

Is there an opportunity to split income with family?

If you are married and or have children, by being incorporated, there is an opportunity to do what we call “Income splitting”. This is where we take some of the income earned within the corporation and pay it out to a family member who is in a lower personal tax bracket and realize some tax savings on that income. This can be done in two ways:

1. Salaries: Medical practitioners can pay a spouse or child to perform work for the practice (an example would be administrative support). However, Canada Revenue Agency (CRA) does specify that the amount paid must be reasonable for the work      performed (defined as the amount that would be paid to an unrelated person for the same work).
2. Dividends: In 2018, dividends paid to related shareholders are now subject to the reasonability test. That is, the amount of dividends matches the contribution the family member shareholder has given to the corporation. There are a couple of      ways for medical practitioners to assure dividends to a family member shareholder will not be subject to the reasonability test which includes if the shareholder is:

• A spouse that is aged 65 or older,
• Adult aged 18 or over who have made a substantial labour contribution (typically at minimum an average of 20 hours per week is required) to the business during the year, or during any five previous years,

The reality is, for medical practitioners, it’s become much more difficult to split income with family members since the changes made in 2018.

Additional costs and complexity

A corporation is a separate legal entity, which will ultimately increase the complexity of one’s financial and tax circumstances. You can expect additional costs in the form of legal, accounting, and tax filing fees.  Someone who needs most of their income paid to themselves personally would likely see very little benefit of incorporating, as it would come with additional and unnecessary expenses.

Summary

An individual's unique situation will ultimately determine whether incorporating is the right thing to do.  Things like debt payments, lifestyle expenses, level of income, and investment goals will all play a role in making the right financial decision. It’s always recommended to engage your accountant and other trusted tax professionals in the conversation as they will bring a specialized and expert understanding of your personal and corporate tax situation.

- Brandt Butt, Investment Advisor, CIM®

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Brandt is an Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.  

Brandt’s team delivers value through advanced financial planning solutions for incorporated professionals while working closely with their accounting and legal professionals.  By doing so, Brandt’s clients’ situations are optimized which can save them hundreds of thousands in taxes each year allowing them to grow their net worth faster with the goal of reaching complete financial independence.

This information has been prepared by Brandt Butt who is an Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.