Incorporate now to save taxes

Too few doctors take advantage of this
great tax shelter

By Abe Konigsberg

You could reap considerable financial benefits from incorporating your practice. Despite the potential savings, if you have yet to take the plunge you're hardly alone. Only 14% of specialists and 2% of GPs practice through corporations even though you can do so in every province except Quebec and that province is about to join the professional corporation club.

There's no reason to hold back. Incorporating will not much affect the way you practice and it will save you taxes by permitting you to use the lower corporate rate on a portion of your earnings.

GET DOWN TO BUSINESS
Vancouver FP Dr Dan Ezekiel incorporated his practice about 11 years ago and he couldn't be happier with his decision. "I found that within my first year of incorporating it easily paid for the corporate set-up costs. The annual costs are about $1,500 a year but I save $25,000 a year in taxes in an average year by having a corporation."

But isn't it a hassle?

"No," says Dr Ezekiel, "it's really quite simple. You need to see a corporate lawyer who will set up your company. The lawyer will then draw up a contract for you where, for example, Dr Dan Ezekiel works for Dan Ezekiel Inc."

The company then pays you a salary, the amount of which you determine. You pay personal taxes at around 45% on those earnings, but anything you take in over your salary stays in the corporation and is taxed at corporate rates — about 30% lower than personal rates depending on the province you live in. That's about all there is to it.

There is some red tape but it's straightforward. "You have to see a corporate lawyer who will write articles for your company," Dr Ezekiel says. "Between paying the lawyer and registering with the government it costs about $5,000 to set up a corporation. Then there are some ongoing fees. You have to do a tax return for yourself and for the corporation and you have to file an annual corporate report. You have to have a log book with corporate resolutions and minutes from meetings. But the accountant or your lawyer does all this — you don't have to worry about actually having a meeting with yourself."

FRINGE BENEFITS
Garth McIntosh, president and CEO of the consulting firm Inter Canadian Business Services (ICBS) in Montreal, is also enthusiastic about the benefits of incorporating medical practices. "The lessened tax burden is the biggest benefit," he says. "But the corporation is allowed to have a building and write it off as a business expense. Also, being an incorporated body, a physician can take advantage of things like government research and development grants of the sort that are only open to universities, hospitals and pharmaceutical companies." He adds: "Let's say I'm a physician and I want to go to a trade show. Under a grant from the Economic Development Corporation, I can claw back 50% of those expenses — but only if I'm incorporated."

YOUR GOLDEN YEARS
For Dr Ezekiel, incorporation gave him a much more flexible retirement strategy. "My father was an investment advisor so I grew up aware of money and retirement and RRSPs and thinking about saving for the future," he says. "We live in a country that's taxed quite high and doctors don't have a pension — so if you want to maintain the lifestyle you had while you were working when you retire, you have to plan ahead for that. I personally don't think RRSPs are enough, that's why I think that incorporation, with all its tax advantages, is such a good idea."

Mr McIntosh is even more enthusiastic about the retirement planning benefits of incorporation. "An incorporated doctor is going to be in a much better position to retire," he says. "They could invest their money as a corporation — and since corporations don't pay any capital gains tax, they only pay when the investment is cashed in and even then at a much lower tax rate — plus you can write off expenses — something you can't do with RRSPs."

It's the notion of paying yourself a salary out of your practice income that makes Dr George Matthew, a Winnipeg-based gastroenterologist, so happy about his decision to incorporate. "That's one of the biggest things," he says. "I find it so much easier to save money. It's great how the money I don't pay myself is taxed at the lower corporate rate."

THE RIGHT TIME
If you're a young doctor who isn't saving very much money, you may want to wait a while before you set up a corporation. "I incorporated after I had been in practice for five years. Up until that point I had been doing locums and not really working too hard," recalls Dr Ezekiel. "I think the incorporation is only worthwhile once you start making more money than you spend. Once I stopped doing the locums I had excess money that I couldn't spend and that's when incorporation became a practical thing to do — both according to my accountant and my own research."

But there's no reason you can't incorporate earlier. Dr Matthew says he and his business-savvy pals were already thinking about incorporation during med school. "I incorporated after six months of practice," he says. "I easily recouped all the setup costs within a year."

Dr Ezekiel has a handy formula to see if you're ready. "An easy way to figure out if incorporating is worth it for you is to remember: you'll save 30% of the difference between what you make and what you spend," he says. "So make $50,000 more than you spend — you'll save $15,000 in taxes."

For further information on incorporation visit the Industry Canada website for entrepreneurs: http://strategis.gc.ca.