Is there any benefit to incorporating and if so when is the best time?

Medical students and residents are a busy bunch. With long hours and a hectic schedule, figuring out your tax filings can slip down your priority list.

Medical students and residents typically ask about five topics: deductions against your income, moving expenses, impact of extra income, reducing taxes on salary and the benefits on incorporation.

In a five-part article series, we are looking at each of these topics, providing guidance for you to maximize your money.

Is there any benefit to incorporating and if so when is the best time?

As medical residents complete their residency, there are generally two big milestones. The first is higher income as you enter practice and the second is the consideration of whether incorporation is right for your situation.

The second milestone is a big decision. Discuss incorporation with your accountant and financial advisor as this is an individual decision. To start the conversations, here are a few things to keep in mind.

The first item to consider is the benefits of incorporation. Due to recent tax changes, the value incorporation has decreased but there are still several remaining benefits. First, the tax deferral of earning income in a corporation at a lower tax rate allows the individual to save money faster. Second, earning employment income from your corporation allows for the potential to maximize RRSP room personally. This means you can have a diversity in investments and the potential for an individual pension plan through the corporation as you approach retirement age. Third, you reach age 65, you can split your income with a spouse, leading to reduced personal taxes for both parties. Individual needs vary but, in many cases, all these benefits outweigh the additional costs of maintaining a corporation.

Second, you should consider the expected income you would earn in practice compared to the cash flow required to support your lifestyle. The main benefits of incorporation come from the ability to save at tax-advantaged rates. If you need all your income to support your lifestyle, the benefits of incorporation disappear as your overall tax rate is the same.

Third, keep your future needs in mind. Weddings, buying a house or having kids are exciting events but they are typically expensive and happen shortly after graduation. Corporations are great tools for long-term savings but may not be very beneficial in the short term. If you need excess cash to finance these events soon, consider delaying incorporation.

Incorporation is a complicated decision. To learn more about your options, contact a personal accountant.