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Family Physician, 37, Wonders: Will Incorporation Be Worthwhile?

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.

case study of Dr. A

If you’re a specialist earning more than $500,000 per year, incorporating your medical practice may seem like an obvious decision. If you are a family physician like Dr. A, however, the choice may not be so clear, particularly if you’re balancing other financial goals.

Dr. A, age 37, has earned between $250,000 and $350,000 a year since finishing residency in 2007.

Currently, the Ontario physician splits his time between two jobs. Twice a week, you can find Dr. A working with his regional cancer program as a clinical lead. The rest of the week, he’s at his group clinic, serving some of the city’s most marginalized patients.

It was great to work with someone who had the financial expertise and the experience of seeing so many of us go through medical school and residency,

Dr. A’s Profile

Current annual income: $300,000 to $350,000

Approximate annual disbursements: $90,000 to $100,000

Assets: RRSPs/investments, $270,000; condo, $630,000; corporation, $60,000. Total: $960,000

Liabilities: Line of credit, $50,000; mortgage, $415,000. Total: $465,000

“We see people who are homeless, people who are new to Canada, people who are LGBT (lesbian, gay, bisexual, transgendered),” says Dr. A, who himself is gay. “We also see people who don’t fit into those categories.”

Besides these two jobs, Dr. A also takes on consulting work from time to time.

Given his income level, it may have made sense for Dr. A to incorporate earlier in his career. But he had two short-term goals he wanted to focus on: repay his student debt and buy a home. “I was $180,000 in debt and I just wanted to be rid of it,” says Dr. A. “I didn’t want to be paying for a cheeseburger that I ate in 2001.”

One of the things that helped Dr. A deal with his enormous debt was the guidance of an MD Advisor. “It was great to work with someone who had the financial expertise and the experience of seeing so many of us go through medical school and residency,” he says.

While aggressively paying down his student debt, Dr. A also bought his first home in 2008, a pre-construction condo for $540,000. He paid off the loan by 2011 and moved into his unit in 2013.

Once he had achieved his short-term goals, Dr. A was ready to consider whether incorporating would be worthwhile. “I wanted to see what my cash flow was like before making this decision,” he explains. “When I saw how much tax I was paying, I really welcomed the idea of finding a way to pay less tax.”

Incorporating helps physicians minimize taxes in two ways: by deferring taxes on the funds in the corporation; and by splitting income with family members (in Ontario, it includes a spouse, children or parents). In order for income splitting to result in tax savings, the family members’ income must be significantly lower.

That’s one reason Dr. A wondered if incorporating would be the right decision for him. He can’t benefit from income splitting because he has no dependants, and his parents and long-time partner are all high-income earners. What’s more, he and his partner prefer to maintain separate homes and finances.

Despite this, it still looked like Dr. A might come out ahead if he incorporated—so he took the leap in September 2014. To his surprise, getting started was not nearly as daunting as he had expected. Dr. A’s MD ExO® team connected him with a lawyer and accountant, as well as a bookkeeper. “The lawyer pretty much got everything done in a meeting or two, and I’ve been in regular contact with my accountant,” he says.

For any incorporating physician, the key is to earn enough from your practice to draw a salary that covers personal needs while retaining enough money within the corporation to benefit from the lower corporate tax rates.

How did Dr. A’s numbers look to his MD ExO team? Here is what they had estimated:

Professional income (from medical practice)$325,000$325,000
Salary (amount he pays himself)–$132,000
Net income$325,000$193,000
Personal income $325,000$132,000
Taxes, personal–$130,000–$40,500
Net salary$195,000$91,500
Corporate net income$193,000
Taxes, corporation (15.5% in Ontario)–$30,000
Available for deferral$163,000
Total funds$195,000$254,500*

*Initial setup costs are not included in this example, nor are annual legal and accounting fees. Note: Calculations are rounded off to the nearest hundred.

The table showed that if Dr. A remained unincorporated and earned $325,000 from his medical practice, he would pay income taxes of $130,000, resulting in a net salary of $195,000.

For the incorporation scenario, Dr. A estimated that he would need to draw a pre-tax salary of $132,000 ($91,500 after tax) from his $325,000 income. If he needs additional cash flow, the corporation could pay it to him as a dividend.

For any incorporating physician, the key is to earn enough from your practice to draw a salary that covers personal needs while retaining enough money within the corporation to benefit from the lower corporate tax rates.

The corporate net income of $193,000 would be taxed at 15.5%, leaving $163,000 in the corporation. After tax, Dr. A’s total funds would be $254,500 ($91,500 salary plus $163,000 retained in the corporation). That’s potentially $59,500 more for being incorporated.

“Depending on my future income, it’s not completely clear yet how beneficial incorporating will be,” says Dr. A. “We’ll see how it goes this year and go from there.” That said, he’s not losing any sleep over it and feels time will tell if it was a good decision.

Dr. A will continue working with his MD ExO team on all aspects of his financial plan, just as he has since starting medical school. “It’s hard to believe how fast time has gone,” he says. “Ten years ago, I was graduating from med school, owing more money than I’d ever made in my life. And now I actually have savings, a home and an incorporated practice.”

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The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or Canadian non-residents, or for situations involving such individuals. Any tax-related information is based on benefits under the Income Tax Act (Canada) for Canadian residents only. MD Financial Management does not provide taxation, accounting or legal advice or similar professional advice licensed by the United States or other foreign jurisdictions. The information provided is not intended to offer such advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Employees of MD Financial Management are not authorized to make any determination of a client’s U.S. status or filing obligations.

The MD ExO® service provides financial products and guidance to eligible 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). MD Financial Management is owned by the Canadian Medical Association. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Professional legal, tax and accounting advice regarding incorporation should be obtained in respect to an individual’s specific circumstances.