JUNE 15, 2005

Doctors, Inc

ON docs can now join the rest of Canada and incorporate
their practices. Here's how to get in on the tax savings

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.

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.

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.

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.

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!"

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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