Many medical professionals when they transition from residency to practice, tax is the least focused topic among themselves. However, if they understand the significance of when and why to incorporate their practice, they can easily save their hard-earned money. Their practice comes under professional incorporation that would confer many of the same tax and non-tax advantages enjoyed by other incorporated self-employed individuals. However, it is necessary to understand that in this case professional liability will not be limited through incorporation and shareholders are restricted to members of the same profession.
Regulated medical professionals in Ontario have had the option to incorporate their practices since 2001. The types of medical professionals eligible to incorporate is broad and includes doctors, dentists, social workers, physiotherapists, massage therapists, veterinarians, psychologists, opticians, nurses, mid-wives, etc. Before you decide to incorporate you need to understand your finances. Find out whether the revenue from your practice is only sufficient to cover the salary requirements and business expenses then there is not much benefit from incorporation. On the other hand, if there is a lot of cashflow after such expenses then you are better off incorporating.
What are the benefits of incorporating?
1.Lower Tax Rate: For businesses the first $500,000 of net taxable business income in Ontario are currently 11.5%. If we look at the sole proprietor, they are facing a marginal tax rate of 53% of their taxable income after they cross $220,000 in taxable income.
2.Carry forward losses: Many small businesses incur start up costs and sometimes they face losses before they turn a profit. Such incorporations allow losses to be carry forwarded to future years when there is a profit so no tax is paid until the carry losses are cleared. There are some restrictions, but this is the general guideline.
3.Life insurance: This is another advantage of incorporating as life insurance for professionals and their executives can be paid from the corporation. Although it is not deductible, but it can be paid from the corporation thus avoiding the tax trigger of taking out additional funds from the corporation to pay personal tax and then the monthly life insurance premiums.
4.Legal liability: The corporation is a separate entity from the shareholders thus incorporated medical practice has the added benefit of shielding the professional from civil liability, but not professional negligence.
5.Income splitting: If you have family members working with you at the same practice. Incorporation gives flexibility to use income splitting with family members who are in a lower tax bracket.
6.Deferred Tax: Tax on excess revenue can also be deferred by retaining the proceeds within the corporation. These proceeds can in turn be invested by the company. As the assets of the corporation grow other opportunities for savings on tax also increase.
7. Succession Planning: Those who are looking to sell their practice in future, instead of selling the assets of a practice, the seller may be able to transfer the incorporated practice to a new professional. This will provide for the orderly succession of a business and access capital gains exemptions for the seller.
For more information on this you can look at the Ontario Government website https://www.fin.gov.on.ca/en/publications/2001/ibprof.html
Or Contact IDM Professional Corporations.
