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Private Corporations and Tax Planning: What Physicians Need to Know

The impact on incorporated physicians

The proposed changes target three tax strategies that are relevant to incorporated physicians:

  1. Sprinkling income using private corporations

    Currently, incorporated physicians can structure the shareholdings of their corporation such that they can pay dividends to their adult family members, who may be taxed at a lower marginal rate.

    Under the proposed rule change, dividend payments must meet a new “reasonableness” test, which would consider the extent to which a family member contributed labour or capital to the corporation.

    Where the reasonableness tests are not met, the recipient shareholder may be taxed on their dividend income at the highest marginal tax rate.

    Updated Oct. 18, 2017: Federal Government Changes Tax Rate and Tweaks Income Sprinkling


  2. Accumulating investments in a corporation: tax deferral

    The government is exploring a new concept of taxation on the income earned on investments held in a private corporation (called passive income).

    Incorporated physicians have generally been able to defer about 35% in tax on their medical practice income by earning it through a corporation compared to earning a salary. Because the 35% in tax doesn’t need to be paid until a future date, the money is left in the corporation, and when invested, can compound on a tax-deferred basis.

    This new concept would effectively eliminate the tax deferral benefit currently available when a physician invests through their corporation.

    Highest personal tax rate = 50%*
    Corporate small business tax rate = 15%*
    Difference = 35%

    *For illustrative purposes only

    Updated Oct. 18, 2017: Federal Government Introduces New Threshold to Passive Investment Income


  3. Converting a private corporation’s regular income into capital gains

    This rule change would eliminate certain tax strategies in use today that convert regular income taxed at a higher rate, such as dividend income, into capital gains income, which is taxed at a lower rate.

    Type of Income Average Top Marginal Tax Rate**
    Salary/self-employed income 50%
    Eligible dividends 35%
    Non-eligible dividends 42%
    Capital gains 25%

    **These rates represent the average top tax rates across Canada. Each province’s tax rates on these types of income will vary.

    Updated Oct. 19, 2017: Federal Government Steps Back from Tax Proposals Impacting the Conversion of Income into Capital Gains

Read the MD Blog for a detailed assessment of the government’s proposal.

Taking action

The department of finance has a 75-day public consultation process underway, which ends on October 2, 2017.

Anyone interested can participate in the consultation and share their ideas and perspectives on these proposed changes with the department of finance. Submissions can be sent to: fin.consultation.fin@canada.ca.

Among its many advocacy efforts, the Canadian Medical Association has created an electronic letter that physicians can send to their members of Parliament.

FAQs

How would the proposed new rules affect physicians?

Fundamentally, the proposed changes could significantly increase the amount of tax that incorporated physicians would pay. Read the CMA’s document Let’s Talk Facts and Fairness on the negative ramifications to frontline health care workers and to the Canadian economy.

By leaving you with less after-tax money in your corporation, these proposals could affect your financial planning strategies and retirement plan. Your MD financial advisor can help review your situation and keep you informed on the potential implications of these proposed changes and possible options as the legislation becomes more refined.

I am considering incorporation. Should I still go ahead and incorporate?

This is a personal decision, as it depends on your own circumstances and objectives for incorporating. It may make sense to delay the decision until it is clear whether the tax benefits of incorporation will be available in the future. However, there are still valid business reasons for some incorporation decisions and you can discuss these with your MD Advisor and a tax specialist.

Additional resources

Proposed Tax Changes to Private Corporations: What Physicians Were Asking at General Council (Sept. 5, 2017)

Webinar: Private Corporations and Tax Planning (Sept. 1, 2017)

Private Corporations and Tax Planning Under Review: What Young Physicians Should Know (Aug. 25, 2017)

Please check back regularly for updates. Contact your MD Advisor for more information.

1 Source: Canadian Medical Association