Hi. Today I’m going to give you some thoughts on the question of whether to draw a salary or dividends from your incorporated medical practice.
One of the great things about medical practice incorporation is flexibility when it comes to compensation.
When you’re self-employed, you have no flexibility—all the net income from your practice is taxed at your full marginal rate.
When you incorporate, you get to make some choices, and the optimal choice is usually some combination of salary AND dividends. It’s rarely an either/or situation.
Let’s run salary and dividends through the lens of three factors that can give us a better understanding:
- The Canada Pension Plan, or CPP
- The Registered Retirement Savings Plan, or RRSP, and
- The income tax you’ll ultimately have to pay
We’ll start by looking at salary…
When you earn a salary, there’s a built-in expense: you have to pay into the Canada Pension Plan. Now there are two ways to look at this. Some physicians are happy to pay into the plan today in exchange for a source of government-guaranteed income during retirement. Others place less value on this future income and prefer to avoid paying CPP premiums so they can invest their money themselves. Your personal preference on this point may be a factor in deciding whether you want a salary or not.
Next, a salary qualifies you to make an RRSP contribution. Is this a good thing? It depends on your situation. For example, in British Columbia, Doctors of BC offers a benefit program for practicing physicians that provides a financial incentive to contribute to an RRSP. Some employers may offer incentives as well, such as matching your contributions. In these conditions, you almost definitely want an RRSP.
But if neither of these conditions apply to you, you may prefer to skip having an RRSP. The final factor is income tax. Salary is taxed at your full marginal rate but doesn’t qualify for a tax credit like dividends. So we’ll give salary an ‘X’ on that point.
Now let’s talk about dividends. When you earn dividends, you are not required to make CPP contributions. As I mentioned, there are some physicians that are happy to opt out of paying CPP premiums.
Dividends also do not create RRSP contribution room. Again, this is not necessarily a bad thing, depending on your overall tax and investment strategy.
And finally, income tax. Dividends generally do not attract any less income tax than salary, but they do enable some unique tax planning opportunities.
For example, say your corporation has income of more than $500,000 per year. Income above that level will attract a much higher rate of corporate tax, but you may be able to use something called an eligible dividend to withdraw that money tax-free. So that’s a special case where dividends could be very helpful.
Another more common strategy is income splitting. If you have a spouse, adult child, dependent parent or other eligible family member with a lower income than you, you may be able to make them a shareholder in your corporation and split your dividend income with them. This can take you into a lower tax bracket and significantly reduce your family’s overall tax bill.
I think you can see why the answer for most physicians is actually some blend of salary AND dividends in proportions that suit your needs and your individual circumstances. There’s no question that finding the right mix for you can get a bit complicated, but my advice is simple. Talk to an MD advisor.
The team at MD are not accountants, but they are excellent financial planners with decades of experience working with and guiding incorporated physicians.
MD can help you consider your options and set your overall strategy so you and your accountant have a framework to help maximize your wealth.
MD can also optimize your personal and corporate investments, both from a tax point of view, and also in terms of pursuing investment income and growth over time.
In fact, incorporated physicians have more than $5 billion in corporate accounts invested with MD right now.
So, salary or dividends? There’s no universal answer, but MD can certainly help guide you to the right conclusions.
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.
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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.