A frequent question that is asked by professionals, especially medical and dental professionals, is whether or not they should incorporate or continue to operate as a sole practitioner.
While in the majority of instances, medical and dental professionals can save thousands of dollars each year by incorporating, there are also instances when incorporating may provide little benefits.
The following is a list of some general things to consider when forming a professional medical or dental corporation:
- Tax deferrals
- There is an opportunity to defer taxes if income is earned by a corporation versus income earned by a sole practitioner. A tax deferral is available to the extent that you are able to leave money in the company because of a lower corporate tax rate (13.5%) that is applied to corporate income up to $500,000, whereas the marginal personal tax rate in the highest income bracket (income in excess of $150,000) is approximately 46%.
- A corporation can help flow income to the shareholder (i.e. physician) in the form of salaries and/or dividends, and any excess earnings can be retained in the corporation to be invested in other assets. Tax is deferred on this income that is retained in the corporation until it is paid to the shareholder.
- Choice of year-end for tax reporting purposes
- A corporation may choose a taxation year-end at its own discretion, compared to the required calendar year-end for individual tax reporting purposes. With appropriate advice, this flexibility can provide tax planning opportunities for the shareholder.
- Opportunities for income splitting
- Tax savings can be achieved through income splitting, where income from the corporation can be shifted from an individual with a higher personal tax bracket to an individual with a lower personal tax rate within one family unit.
- For example, a physician’s spouse can be made a shareholder of the corporation, and discretionary dividends can be paid to the spouse instead of paying a greater amount to the physician; thus, taking advantage of lower marginal tax rates.
- Reduction of personal risk exposure (creditor protection and limited liability)
- A professional medical or dental corporation is considered a separate legal entity from the medical or dental professional for legal liability purposes which can aid in creditor protection. On the other hand, a sole practitioner is exposed to unlimited personal legal liability for all general debts and liabilities of the medical/dental practice (i.e. creditors may seek compensation/make claims against the physician personally).
- Lifetime capital gains exemption
- The lifetime capital gains exemption can be a powerful exemption for qualifying small business corporation shares if the physician sells his or her shares of the professional corporation at a gain and the shares of the professional corporation meet the criteria of qualifying small business corporation shares.
- Provided that the corporation meets the definition of a qualifying small business corporation, each shareholder of the corporation is eligible for an exemption of $800,000 of capital gains.
- Educational/Professional Development Conventions
- A professional corporation is permitted to deduct more than two continuing education conventions per year, which is the current limit permitted by the Canada Revenue Agency if a physician operated as a sole practitioner.
- Operating a professional medical/dental corporation will require additional time and costs to handle the extra administrative obligations, such as record keeping, filing of corporation tax returns, preparation of corporate financial statements, filing of T4 (statement of employment income) and/or T5 (statement of investment income).
- A professional medical/dental corporation will exist until it is dissolved. As a result, these additional administrative obligations are required until this time.
While the above noted items are applicable to most medical and dental professionals, there may be specific restrictions on structures depending on the type of professional corporation and the practitioner’s professional association, as well as other advantages and disadvantages that are specific to an individual’s situation, which need to be considered.
If you need more guidance or have any questions about whether incorporation is right for you, please feel free to contact our experienced professionals.
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