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.
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.
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