Running a practice, like any business, is an expensive
undertaking. And just when you think you've got your head
above water, the taxman's there to send you back under.
So when a young and energetic Kitchener family doctor
decided to set up a solo practice back in 2003, an Edmonton-based
physician friend urged her to incorporate. The tax savings
are well worth the price of the lawyer, he said, having
put the "Inc" in his own practice a few years earlier.
After three years he was able to buy a family cottage
with the money he'd saved.
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THE
SPENDER AND THE SAVER
Whether a physician needs
all of their business income to live or they can
afford to save some, incorporation can deliver
tax relief.
The Saver
If a physician is in the top income tax bracket
in Ontario, they will pay 46% in income tax. If
this doctor is managing to save $2,000 per month
(besides RRSP contributions), they can leave this
money in their corporation and it will only be
taxed at the corporate rate of 18.62%. MD Management's
Lowell Thiessen says this means the savings-oriented
doctor would be saving $3,000 per month, as opposed
to $2,000, just by taking advantage of the lower
tax rate.
The Spender
An Ontario doctor with $150,000 in practice income
after expenses who needs the full amount to live
on is more suited to the income splitting/spouse
shareholder model. If the physician claimed all
of this income they would pay $51,671 in income
tax. By only taking $115,000 as their salary and
leaving the remaining $35,00 in the corporation,
they can then have this money taxed at the lower
rate. The remaining after-tax $28,483 could then
be paid as a dividend to their spouse, thus offering
a total tax savings of almost $8,000.
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Intrigued, she asked her accountant
to look into it, only to learn that it wasn't really
worth it in Ontario. All that's about to change, however,
thanks to a tasty detail in the province's new physician
contract, ratified in April, which allows doctors to
get in on the substantial incorporation tax breaks already
enjoyed elsewhere.
THE
BUSINESS OF DOCTORING
Professional incorporation first arrived for doctors
in Alberta in the late 1970s and spread to every province
except Quebec. But though a law allowing physician incorporation
has been on the books in Ontario since 2002, a particularly
attractive benefit — income splitting and having
family members as shareholders — wasn't possible.
That's set to change as of January 1, 2006 when Ontario
doctors will be allowed to have family members as non-voting
shareholders in their professional corporation, allowing
them to maximize their tax saving potential, and bringing
the province in line with most of the country.
So what does this mean in real
terms? Big tax savings. No, really. How much you save
will depend a lot on the way you handle your money,
and whether you're a saver or a spender (see our sidebar
below for profiles of these two financial types), but
most physicians can benefit.
"Across the country, a physician
could be increasing non-registered savings by as much
as $100,000 per year if they are a saver," enthuses
Lowell Thiessen, the Western Canada practice manager
for MD Management, the financial services company owned
by the Canadian Medical Association. There are also
advantages for those who tend to spend what they make.
"Income splitting really helps if you're spending —
you can save up to $15,000 per year, per beneficiary,"
adds Mr Thiessen.
WHAT'LL
IT COST?
Ok, so this all sounds good, but what about those fees?
Andrea Chun, a Toronto lawyer who has helped many medical
professionals incorporate, says a doctor can expect
to pay between $2,000-3,000 in lawyer and accountant
fees in order to incorporate. In addition to these fees,
a physician must also pay a fee to their provincial
medical college. In Ontario, for example, the cost is
$750 for the initial incorporation and $150 to renew
it each year.
"In most cases the benefits probably
outweigh the costs," says Ms Chun. "The first time around
is a hassle to deal with the changeover. Doctors tend
to not like paperwork and try to stay away from that
part of the business."
As an argument in favour of doctors
looking into incorporation, Ms Chun points to another
regulated profession that was recently offered the same
opportunity — accountancy. "All these accountants
I know are incorporating — they were first through
the door," she says. "And they're good with numbers.
They're kind of the exact opposite of physicians!"
NOT
FOR EVERYONE
Incorporation offers benefits for many physicians —
but not everyone. Both Ms Chun and Mr Thiessen say that
doctors on salary, with a group practice, or who have
other businesses on the side may not benefit as much
as a sole practitioner. Some doctors simply may not
be eligible to incorporate. They also both strongly
recommend you include your financial planner in the
decision process for incorporating to make sure it's
the best way to plan for the short and long term.
"Incorporation is kind of like
getting married," says Mr Thiessen. "It's a really big
deal when it happens but the reality is that most of
the experience happens after that day. There are a host
of issues to deal with along the way: investments, bank
accounts, insurance, pension plans. How do you deal
with retirement? What about education plans for kids?
We spend much more time dealing with those things than
with the up front decision."
Doctors should also be aware that
incorporating their practice doesn't eliminate the need
to carry liability insurance, a point that is lost on
some lawyers and accountants not accustomed to dealing
with professional incorporation for physicians.
"Make sure you're getting tailored
advice," advises Mr Thiessen. "Incorporation can turn
a good saver into a great saver, and turn a good spender
into a better spender. So you want to work with people
who understand the nuances of a medical corporation."
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