If you’re a doctor, there’s no better way to reduce your tax burden than to form a professional corporation. When doctors come to see me for tax advice, I almost always begin by walking them through these four benefits of incorporation.

1. Your rate isn’t sealed

First, let’s talk about tax deferral. Doctors who aren’t incorporated pay income tax at the highest rate of 45.8 per cent, whereas incorporated doctors pay only 13.5 per cent on their first $500,000 of earnings. So clearly, it’s more advantageous to leave any unneeded earnings in the company bank account. Doctors can invest this extra money at the corporate level to further credit-proof their assets or use it to pay down debt.

2. More bang for your buck

The next benefit is the income tax rate spread. In most cases, non-deductible items are less expensive when paid for using corporate dollars than personal funds. Let’s say a doctor makes a $5,000 payment on the principal of a loan. As an individual, she needs to earn $9,225 to make that payment, but if she’s incorporated and makes the payment through her company, she only needs to earn $5,780. That’s a savings of $3,445 on a single payment of $5,000. 

3. Split while you’re ahead

Another great advantage of incorporation is income splitting, the practice of employing and remunerating family members. These family members can be issued shares in the company, then be paid dividends. If they have no other income, they can receive up to $30,000 a year in dividends without paying any personal tax. 

4. No pain from gains

The fourth benefit is the capital gains deduction. Doctors aren’t always able to sell their practice upon retirement, but those who succeed can get up to $800,000 in tax-free gains.

Incorporation comes with many clear advantages, but also a few risks. While there are no clear disadvantages to incorporation, it will complicate your tax filing obligations. The annual costs to run a company and keep it breathing might be $3,000 to $5,000, but in most cases, the benefits far outweigh the costs.

You may find yourself wondering if there are any doctors who would not benefit from incorporation. If you spend absolutely every penny you earn, aren’t interested in saving for your future, and have no corporate debt, it might not be necessary, but that’s a rarity.

Did you buy a building for your practice? Did you have to borrow money for medical equipment? Do you have family members you would like to income split with? If you answered “yes” to even one of these questions it’s worth it to discuss incorporation with your financial service advisor.

Deron Freer, BComm, CPA, CA, has been a principal at Collins Barrow Victoria Ltd. (formerly Norgaard Neale Camden Ltd.) since 1997. He manages the firm's Audit and Advisory department and also provides accounting, income tax and related services to individuals, professionals and small to mid-market companies.

If you would like to connect with Deron contact him at dfreer@collinsbarrow.com or on LinkedIn.

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Deron Freer
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