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Third in a five-part series on what you need to know at various stages of your professional practice.
As a continuation of our series on the evolution of your practice, this article will focus on creating a financially efficient practice. This is typically the next step after Getting Started.
Financial efficiency is intended to indicate you are focused on ensuring you are able to retain as much of your practice income as possible and you are growing your wealth. Not surprisingly, income tax deferral or savings are part of your financial efficiency.
Because you have likely completed or are comfortable with your plan for repayment of your student debt, have purchased or saved the down payment for a home purchase (if you are planning to) and know that you are able to earn more from your practice than you need to support your personal lifestyle, you are ready to start making decisions about what to do with the wealth you are accumulating.
1. If you are not already incorporated, you likely should be, if you are able.
An incorporated medical practice will pay combined federal and provincial tax rates that are generally lower than the personal tax rates on similar levels of income. The personal tax you have not paid yet remains in your medical corporation and can be put to work earning you additional income.
2. If you are incorporated, you will be able to distribute your corporate after tax earnings as dividends to the shareholders of your medical corporation.
You will be the controlling shareholder of your medical corporation. You may choose to receive the funds you need personally from the practice as dividends compared to wages or self-employment income (before you were incorporated). Dividends do not attract Canada Pension Plan (CPP) contribution requirements. The ability to save the CPP contribution costs you don’t pay by receiving dividends can create a boost to your retirement assets accumulated within your medical corporation.
The ability for family members to invest in your medical corporation as shareholders will create an opportunity for you to provide them with dividend income as a return on their investment. Such dividends are taxable to the family member, if structured and planned properly.
3. Make the right investments in the right places.
Canadian dividend paying investments are very tax efficient within your medical corporation, when you are paying dividends to your shareholders regularly. By comparison, Canadian dividend paying investments do not work as well within your RRSP.
Because the income earned within your RRSP is not taxed until you remove it, the dividend tax credit received on Canadian dividends is lost when paid to your RRSP.
Interest income earned within your medical corporation can create more income tax paid than if you had earned it personally. Consider having your interest-earning investments within your RRSP since no tax is paid until the income is withdrawn.
By being financially efficient, you will maximize your growing wealth each and every year. Just be sure that you have a regular financial check-up with a qualified advisor.
With more than more 12,000 Professional Services clients, MNP has developed a diverse suite of services designed to provide a collaborative, cost-effective approach to doing business and personalized strategies to help professionals succeed at every stage of their practice.
Contact Don Murdoch, B.C. Leader, Professional Services at 1.877.766.9735 or [email protected]
Related Topics:Doctors; Business Structures
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