Medical Professional Corporations & Tax Benefits

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.

Doctor With AppleIn 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. This is important since the costs of dental are sky high and increasing, if you are wondering, what is the full cost of teeth implants? Find out here –

Note that currently only physicians and dentists are permitted to have family 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.

Personal Taxes

Without a corporation, the doctor’s cash flow will look something like this:

Professional Income$250,000
Income Taxes($94,464)
CPP Premiums($4,613)
Lifestyle Needs($100,000)
Remaining Cash$50,923

Using A Professional Corporation

Professional Income$250,000
Corporate Income Taxes:($38,750)
Dividends to Generate $100,000 of personal lifestyle needs($120,000)
Personal Income Tax($18,973)
Remaining Cash$72,277

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

A graduate of Simon Fraser University, Dean started and operated an independent painting company while perusing a degree at SFU. After graduating from Simon Fraser, Dean entered the Certified General Accountants Program of Professional studies where he obtained the professional CGA designation. After a number of successful years as the head of finance for the Canadian operations in a global financial services firm, Dean moved into a marketing role and established and launched a tax, estate and financial planning support department and service to advisors and clients. During this time Dean successfully obtained the Certified Financial Planner (CFP) designation. Dean has been a member of the Canadian Forces Reserve spanning three decades serving in the Royal Westminster Regiment (B.C.), the Military Police and later as a commissioned officer in the Cadet Instructors Cadre in Hamilton Ontario. Dean Paley CGA CFP has been interviewed and quoted in major media such as the National Post, Financial Post, Toronto Star, Canadian Business, Money Sense and Investment Executive. Dean is married to his lovely wife Deborah and has four lovely children.