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Wealth Management Strategies for Incorporated Physicians

Important Notice: Professional medical corporation information on MD's web site is based on existing incorporation rules which may be impacted by proposals announced in the Department of Finance's policy paper entitled "Tax Planning Using Private Corporations." MD is monitoring these proposals and we will update our tax planning strategies accordingly should rules change. For more details, please read MD's blog Tax Planning Using Private Corporations, What's Next: A Summary of Finance Announcements.

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.

The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.cma.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.

Insurance products are distributed by MD Insurance Agency Limited, a CMA company. All life-licensed MD employees have life licences with MD Insurance Agency Limited, a CMA company.

Estate and trust services are offered through MD Private Trust Company, a CMA company.

In the province of Quebec, notarial wills do not require probate, whereas all other wills do require probate which are subject to a fixed application fee. All references to probate and probate tax in this document should be read accordingly.