Are you thinking of incorporating your medical practice? As with any opportunity, there are risks and rewards to consider. Before making this decision, there are legal and tax implications you should be aware of. We summarize these implications here and provide you with some recommendations.
Incorporating your medical practice can be complex. It is advisable to have a team of professionals to support you throughout the process. This would include seeking experienced legal, accounting and financial advisors.
Once incorporated, you are required to obtain a certificate of authorization from the College of Physicians and Surgeons of Ontario (CPSO). Without this certificate, your corporation is not permitted to practice.
Issuing shares is a necessary step in incorporating your medical professional corporation (MPC). You may choose to issue common stock or preference shares to members of the CPSO.
However, only non-voting shares may be issued to family members. Family members being a spouse, child, parent or a trust held for a minor. The use of trusts are permissible only to hold shares for children who are minors. However, holding companies cannot own shares in a MPC.
A corporation is a separate legal entity from its shareholders. Although shareholders' liabilities are normally limited to their investment in the corporation, they may still be liable for issues arising from malpractice and negligence in a MPC.
Potential tax savings are one of the biggest advantages to incorporating your medical practice. Consider carefully the several tax planning opportunities that exist. These include:
Transfer of practice
After the MPC is incorporated, you will need to transfer your existing practice to the new entity. To avoid tax repercussions, the Income Tax Act states that the assets and liabilities must be transferred to the MPC at fair market value (FMV). Following the Act's provisions will allow for a tax-free transfer. As part of the transfer, you could choose to trigger a capital gain to utilize capital loss carry forwards. You must receive compensation equal to the FMV in the form of shares and non-share consideration, such as cash and/or promissory notes.
Retained earnings and tax deferral
For individuals in Ontario, personal income is subject to marginal tax rates, the highest being 47.97% in 2012 increasing to 49.53% in 2013. However, income eligible for the small business deduction (SBD), which is earned in the corporation, would be taxed at 15.5% on the first $500,000. Consequently, the corporation may pay you salary or dividends in order to keep you in a lower personal tax bracket with the excess taxed in the company. The additional personal tax on earnings retained in the company are deferred until you decide to pay out income in the future.
As a practitioner, you make Canadian Pension Plan (CPP) contributions and are exempt from employment insurance (EI) contributions. With the corporation, if you choose to pay salaries, this will not change. In addition, total salaries in excess of $400,000 paid by the corporation are subject to Employer Health Tax, which is currently 1.95%. You can avoid making CPP contributions and save the Employer Health Tax by choosing to pay dividends instead.
As mentioned, common shares can only be issued to the medical practitioner.It is important to note that when incorporating the practice, preference shares issued to your spouse and children should be a different class from those that you receive. This allows the MPC to pay dividends to these other shareholders, which would be taxed at their marginal tax rates.
Where a MPC is in partnership with other MPCs or practitioners, it is important to note that you must share the SBD with your partners. If deciding to enter into a partnership, consider this tax consequence.
Corporations must issue financial statements. They are also responsible for filing corporate income tax returns and preparing payroll reporting forms. These requirements result in additional annual costs.
Sale of corporation
Selling your unincorporated practice may result in substantial capital gains. However, should your MPC qualify, under the small business capital gains exemption rules, the capital gain on disposition would be exempt, up to the first $750,000. The Federal Budget 2013 proposes to increase the exemption to $800,000 effective in 2014. This lifetime capital gains exemption could be multiplied based on the number of family members who own shares.
Although incorporating your medical practice comes with significant benefits, you should be prudent in following guidelines set out by your governing body, and strongly consider all options with regards to tax planning strategies. Discussion with the professional advisors at Crowe Soberman LLP throughout the process is recommended.
Important dates to RememberApril 30, 2013
- Deadline for filing 2012 individual income tax returns if you or your spouse do not have self-employment income.
- Deadline for paying any income tax balance owing for 2012.
June 15, 2013
- Second personal income tax instalment for 2013 is due.
- Deadline for filing 2012 individual income tax return if you or your spouse has self-employment income. However, any tax balance owing must be paid by April 30, 2013.
- Deadline for taxpayers in the construction business reporting on a calendar year basis to file information return T5018 to report all payments greater than $500 paid or credited to contractors for construction
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.