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Is It Time to Incorporate My Medical Practice?

12/01/2015


The simple answer to the above question is: Yes, if doing so would create a benefit to you.

Within the context of this article, let’s assume we are looking for financial benefits, not legal benefits or any other benefits that may exist.

Let’s also assume we are talking about the financial benefits of a medical practice incorporated within the province of B.C.

Finally, let’s suppose the financial benefits consist primarily of income tax saved (lower total tax paid) or income tax deferred (tax paid later, but not right now).

Now onto the rest of the answer and how to determine what financial benefits are potentially available to you…

1) Do you have family members who are at least 18 years old and earning less income than you are from your practice?

If your medical practice is incorporated, your family members can be shareholders of your corporation, holding non-voting shares directly or indirectly, which could entitle them to receive dividends from the “after-corporate tax” income of your practice. Since a B.C. corporation, earning active small business income up to $500K per year, pays corporate income tax currently at the rate of 13.5%, the ability to pass the remaining personal tax responsibility to a family member at a lower personal tax rate exists. This is called ‘income splitting’ and the financial benefit is income tax savings.

These tax savings can be very effective between spouses as each spouse is then able to contribute to the family personal living expenses equally. Families funding costs for post-secondary education of children can create tax savings by providing dividends to the student to pay their own education costs. Families providing financial support to elderly parents may find tax savings from funding such support via dividends to parents.

There are risks and risk-mitigating strategies unique to each individual situation that should be discussed with a qualified advisor

2) Do you make more income from your medical practice than you need for your personal living expenses?

Once your practice is earning more net income than you need to live on, you are in the position of being able to save / invest the surplus funds. If you are earning all of your net income personally, you will be paying the highest personal tax rate applicable to you each year on your surplus net income and as a result have less available to save / invest.

If you earn your practice net income in a corporation, any surplus can be left in the corporation for savings / investing and only the first 13.5% of income tax will have been paid, leaving more funds to invest within the corporation. The financial benefit in this case is tax deferral. In simple terms, you are able to invest the tax you have not yet paid to CRA. You are expected to pay the additional tax eventually (when you take the funds out of the corporation), but not right now.

3) Do you have ‘material’ debt / loans payable related to assets you have acquired for use in your practice?

Similar to the comments in point two above, repayment of corporate debt requires corporate funds, which are created from the net income of the corporation. Since less current tax has been paid to arrive at “after corporate tax income”, more funds are available to retire the corporate debt. The financial benefit in this case is also tax deferral.

The financial benefits created from any or all of the above scenarios must be measured against the cost of creating and maintaining the medical corporation. You should regularly review the answers to the above questions with your accounting / tax professional.

With 16 locations throughout B.C., MNP provides support to medical professionals at all stages in their careers. Visit mnp.ca/bcdoctors to learn more.