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Wealth Management Strategies for Incorporated Physicians

Important Notice: Some of the content on this page may no longer be current due to proposals announced by the federal Department of Finance on December 13, 2017, to restrict income sprinkling and to the federal budget delivered on February 27, 2018. MD Financial Management is monitoring the proposals and budget details, and will update content in due course.

To learn how the 2018 federal budget may affect you, please read MD’s budget summary. If you have any questions about how you or your financial plan may be affected, please contact your MD Advisor.

Passive investment income earned by a professional corporation is not considered active business income. It does not qualify for the small business deduction. This means there is a tax incentive to structure your personal and corporate holdings to minimize taxes.

Taxes and your investment asset mix

The same guidelines apply to corporate-owned investments as for personal investments—focus your interest earning assets within your registered accounts, and capital gains and dividend earning assets in your non registered accounts.

Interest income attracts the highest rate of tax while dividend and capital gains are taxed more favourably. Investment income earned in registered accounts accumulates on a tax-deferred basis regardless of the type of income. This means that your overall tax payable will generally be lower if your non-registered accounts hold investments whose earnings are tax-advantaged such as equity type investments.

Keep in mind that tax preference is only one aspect of wealth management. Your investment portfolio must be consistent with your risk tolerance and objectives. Caution must be exercised when reducing diversification in an effort to minimize tax. Focusing too much on taxes and neglecting your investment objectives could increase your investment risk.

Corporate-owned permanent life insurance

How can you decide if you should consider a permanent life insurance policy?

  • Are you interested in tax sheltering the earnings on more of your assets?
  • Do you have corporate assets you likely won't need for retirement-income purposes?
  • Do you want to increase the after-tax value of your estate?

A permanent life insurance policy is paid for out of after-tax dollars, but earnings within the policy are tax-sheltered. Also, the death benefit of the policy will be paid tax-free to your professional corporation as the beneficiary. The excess of the death benefit over the policy's adjusted cost basis will be added to your company's capital dividend account and can be paid tax-free to your estate or heirs (as shareholders).

Using cheaper after-tax corporate dollars to fund the policy makes this an affordable way to transfer funds tax-efficiently to the next generation. Talk to your MD Advisor today about how insurance can help you achieve your goals.

Winding up your corporation

A corporate-owned permanent life insurance policy can help you mitigate income tax obligations and maximize the wealth-building potential of your assets because investment earnings within the policy are tax sheltered.

While it is possible to sell the shares of a professional corporation to another professional, this can be difficult with a medical practice, where there is unlikely to be a buyer. This means that most professional corporations may need to be wound-up at some point. But there is no need to wind it up upon retirement—you can continue to pay yourself and any shareholders dividends as long as there are assets in your corporation.

Your primary concern will likely be minimizing the taxes payable on distributions from the corporation. Your MD Advisor and your tax consultant can help you time the withdrawals to achieve this goal.

Winding up your corporation includes:

  • Liquidating and paying out the remaining assets
  • Filing a final corporate tax return
  • Having your lawyer legally dissolve the corporation

Until you wind-up your corporation, assuming you plan on winding it up in your lifetime, you should consider a professional executor or co-executor. (In Quebec a liquidator plays this role.) Your corporation does not automatically wind-up upon your death. A good estate plan including a well drafted will, managed by a knowledgeable executor, can mitigate the risk of double taxation.

Your MD Advisor can refer you to an MD Private Trust Estate and Trust consultant to review and update your estate plan.