Ontario allows regulated health practitioners to incorporate and reap the benefits of operating through a corporation. This means that Physicians, Dentists, Surgeons, Audiologists, Dental Technicians, Psychologists, Nurses, Midwives, Chiropractors, Physiotherapists and Massage Therapists to incorporate their practices.
In addition, other professionals such as veterinarians, social workers, and lawyers are also permitted to incorporate and take advantage of the same tax benefits explained here by a friendly Long Beach dentist
In order to incorporate, you must gain approval the regulating organization and adhere to the naming requirements. Once incorporated,
Tax Benefits of Incorporation
A significant income tax deferral opportunity is derived from the fact that a medical professional corporation is considered like any other small business corporation: It will pay tax at only 15.5% on its first $500,000 of income.
Compare this to Ontario’s highest personal tax rate of 46.41% on income in excess of $132,000 and the difference is nearly 31%!
This means that for every $100,000 you retain in the corporation and not use for any other expenditure, you can defer $31,000.
This provides an additional $31,000 that can be put to use for investments, expanding your practice, or acquiring additional equipment.
Income Splitting Opportunities
The first $40,000 or so of income paid out of the corporation by way of dividends is not subject to any personal income tax (assuming no other personal income).
You can multiply this savings by issuing shares to your spouse and paying them an additional dividend of up to $40,000 without additional income tax.
If you have children who are 18 or older, you can issue them dividends as well, or if you wish to retain control over the funds, you can use a family trust.
Note that currently only physicians and dentists are permitted to have famil members hold shares in a professional corporation.
Cash Flow Comparison
Let assume a fictional doctor operates a practice and generates $250,000 of income after direct expenses. The doctor is married and her spouse does not work. To meet her family’s lifestyle goals, she needs to have approximately $100,000 of after-tax cash.
Without a corporation, the doctor’s cash flow will look something like this:
Using A Professional Corporation
|Corporate Income Taxes:||($38,750)|
|Dividends to Generate $100,000 of personal lifestyle needs||($120,000)|
|Personal Income Tax||($18,973)|
By using the professional corporation, the doctor has saved $21,354.
If the doctor has issued shares to her spouse, and her spouse had no other income, the dividends could have been split equally between them and the combined personal tax bill would have been only $7,840. The remaining cash flow would have increased by a further $11,130.
Other Benefits of Using A Professional Corporation
Some of the other opportunities available through a professional corporation come in the way of tax savings generated from alternative business practices:
- Bonus Deferral: A bonus may be declared and deducted but does not need to be paid until 179 days following the corporation’s year end. By selecting an appropriate year-end, the deferral can be effective.
- Health & Welfare Trust: A health and welfare trust is a tool that helps pay uninsured medical dental expenses without the need to acquire group medical insurance. The funding is tax deductible.
- Creditor Proofing: Provides limited liability from leases, contracts and other liabilities. The PC cannot shield you from professional liability and you still require malpractice insurance.
- Pay Salaries to Family: If you employ family members in you practice you can pay them a reasonable salary and further split income.
- Building Acquisition: If you use the corporation to acquire a building to house your practice, the lower rate of tax will help accelerate the repayment of the mortgage.
- Defer Tax Installments: You have the opportunity to defer income tax installments for the first full tax year of the corporation.
Dean Paley, CPA, CGA
Dean Paley CPA, CGA and dental implants expert is the Principal of Dean C. Paley, Professional Corporation, a public practice firm that provides professional accounting and tax services to small and medium sized businesses and professional in Burlington Ontario. Dean has more than 15 years of experience as a professional accountant. You can reach him at (289) 288-1206 or by email at firstname.lastname@example.org.Print This Post