Can I pay eligible dividends from my corporation?
Starting January 1, 2006, Canadian Controlled Private Corporations (CCPC), as are most professional corporations, can pay eligible dividends from a notional account known as the General Rate Income Pool (GRIP). While the Income Tax Act provides a complex formula for calculating the GRIP, as a general rule this pool will consist of active business income subject to the general corporate rate (as opposed to the small business tax rate) and will also include eligible dividend income received by the corporation. Your tax consultant should be able to calculate your corporation's GRIP account and provide you with details on ensuring that an eligible dividend is properly designated as such. For personal tax purposes, eligible dividends will be more favourably taxed than non-eligible dividends. Depending on the province, due to a new enhanced dividend tax credit, the top marginal rate on eligible dividends will be approximately 20% rather than the top rate of about 30% applied to non-eligible dividends.
The introduction of eligible dividends could make it more attractive for physicians who have active business income in excess of the small business limit to retain those earnings in the corporation rather than bonusing down. Due to the favourable tax treatment of eligible dividends, if income is taxed at the general corporate rate and then distributed to shareholders by way of eligible dividends, the combined corporate and personal tax should be similar to that paid had the income been distributed immediately as a bonus.
Do I need to update my estate plan when I incorporate?
Yes. A corporation adds a layer of complexity to an estate that, if not properly managed, could result in your heirs paying significantly more tax. Your MD advisor can review your estate plan and refer you to an MD Private Trust Estate and Trust consultant. They can help explore options including an estate freeze, universal life insurance, tax implications of winding up the corporation, revising your Will, and appointing a professional executor or co-executor.
What expenses can I deduct from my corporation?
The Canada Revenue Agency has very strict rules on what can be deducted as a business expense. As a general rule, in order to be deductible for tax purposes, an expense must be reasonable and must incurred for the purpose of earning income. Personal expenses are not usually deductible to the corporation. That being said, contributions paid to a properly structured personal health services plan are generally deductible to the corporation.
Does my corporation protect me from professional liability?
No. Provincial legislation makes it clear that physicians remain personally liable for any medical acts they perform. You may have some limited liability for non-medical incidents, such as slip and fall type lawsuits.
Is it possible to transfer my life insurance policy to my corporation?
Yes. You should discuss any transfer with your MD Insurance Consultant so that you understand any potential tax implications. Read this article for more information.
Who should own my life insurance - me or my corporation?
It's generally more cost-effective to pay for insurance with your corporation's after-tax dollars. And, as passive investment income earned in your corporation is generally taxed at a rate higher than your personal marginal tax rate, it makes sense to explore corporate owned life insurance as investment earnings within your policy are tax-sheltered. Read this article for more information, and be sure to discuss with your MD Insurance Consultant.
What does bonus-down mean?
Income earned in the corporation in excess of the small business limit - $400,000 in most provinces - is taxed at a higher general corporate rate. Some physicians may prefer to pay themselves a bonus and to pay personal tax on this amount in order to avoid this higher corporate rate. However, as a result of new tax measures introduced in the 2006 federal budget, a portion of active business income earned at the higher rate could be paid out of the corporation as an eligible dividend. As such, there is now less need for physicians to bonus down as the combined corporate and personal tax rates on income earned in the corporation in excess of the small business limit and then distributed by way of eligible dividends will be comparable to top personal tax rates. As the top general corporate tax rate is lower than the top personal tax rate, the introduction of eligible dividends means there may be a tax-deferral advantage to retaining these earnings in the corporation that could translate into absolute tax savings should you withdraw these earnings when you are a lower personal tax bracket. Your tax consultant can help you determine the appropriate amount of dividends to distribute from the corporation and can also determine the corporation's capacity to pay eligible dividends.
Can I employ family members?
Yes. You need to ensure that the salary paid to the family member is reasonable for the services being rendered and is comparable to what you would pay a person in an arms length relationship for similar services. You should have written employment contracts for all employees, including family members. Contact the Practice Solutions hotline at 1-800-361-9151 for information on employment contracts.
