Hi. Today I am going to give you some clarity on the question “Should I incorporate my medical practice?” I can tell you that the answer for a significant majority of physicians is “yes”. For the rest, the answer is either “no” or “not right now.”
The benefits of medical practice incorporation really centre around tax: both deferring it and reducing it. However, there are some financial planning considerations—some that can make incorporation a bad idea, and some that can make it even more beneficial.
I’m going to use simplified numbers here, but that shouldn’t get in the way of understanding the concepts.
Let’s look at tax deferral first. Let’s say your practice generates $300,000 per year. As an unincorporated physician, you’d pay about $100,000 of that in tax, leaving you with $200,000.
But now let’s say you really only need $150,000 per year to pay your bills. This is where it gets interesting.
An incorporated physician could have their corporation earn that $300,000. They could pay themself $200,000 and end up with $150,000 after tax.
That leaves $100,000 still in the corporation, where it is taxed at a much lower rate. In fact, when the dust settles, you’d be left with $235,000 after tax—an improvement of $35,000 per year. Not bad. Eventually, when you take that money out of the corporation, there will be tax consequences. But you may not ever have to think about that until you retire. In the meanwhile, you can invest and grow that money inside your corporation.
That’s tax deferral. Now let’s look at income splitting.
Now, you’re taking annual income of $200,000 from your corporation. That puts you well into the highest tax bracket, and you’re left with $150,000 in your pocket.
But with a corporation, you don’t have to take all the income in your own pocket. You are allowed to have other shareholders and split your income with them.
You could decide to take, say, $100,000 in income for yourself, pay your spouse $50,000 of dividends, and pay an adult child or even a dependent parent another $50,000 of dividends. The advantage is that these smaller amounts attract lower tax rates.
In this scenario, you could be left with $170,000 after tax—which is an extra $20,000 per year in your family’s pocket.
So, just to recap, we went from a salaried physician earning $300,000 per year and ending up with $200,000 after tax, to an incorporated physician earning $300,000 per year and ending up with $255,000 in their pocket. That’s more than a 25% increase in take home pay.
Medical practice incorporation really seems like an obvious choice, doesn't it? Well, as I said, that’s true for the majority of physicians we see. But let me just quickly share with you some of the areas where you’re really going to want some individual advice.
First, income and expenses. Tax deferral isn’t really an option unless you are earning more income than you need to cover your expenses each year. If you can’t afford to retain some earnings within your corporation, there’s no tax deferral benefit. Sometimes this as just a temporary situation, for example, because you’ve gone back to school or decided to have a baby, and it makes sense to incorporate a bit further down the road when your income is higher.
Next, your family situation. If you don’t have a spouse with significantly lower income, or an eligible adult child or parent, income splitting may not be possible. Again, this can always change down the road.
And third, there is cost and complexity when you incorporate. You’re going to have to deal with a lawyer, an accountant, and a little more complexity than perhaps you’re used to. The cost and the benefit have to make sense for your situation.
My advice is simple. Talk to an MD advisor. MD can help you make the right decision. MD can help you get all your thoughts in order before you put a lawyer and accountant on the clock.
MD can also help you develop an overall plan that addresses all of the issues and opportunities that surround your corporation. For example:
- Your income. A corporation gives you flexibility to have a mix of salary and dividends.
- Your investments. A corporation permits some great tax and investment planning opportunities.
- Your healthcare. A corporation can enable you to set up a trust to pay your personal healthcare expenses.
- And we can also help you prepare the right strategies for when you eventually retire and start thinking about your estate.
So, should you incorporate? Well, with the right planning, medical practice incorporation is a great opportunity for most physicians, but it really makes sense to get personalized on advice on the whole process.
If you have any questions, please contact an MD Advisor. This has been an MD Quick Clinic.
Thanks for watching.
All examples are for illustrative purposes only and not applicable to US Persons living in Canada.
MD Financial Management does not intend to provide taxation, accounting, legal or similar professional advice to clients or potential clients. The information contained herein is not intended to offer such advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals.
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 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.