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Putting Junior on the payroll
If you're currently paying family
members as employees of your practice, it may
be better to change their status from employee
to shareholder when you incorporate to avoid rousing
suspicion at Revenue Canada. If family members
are receiving income as shareholders and not as
employees, you'll only have to prove ownership
and not whether they're a bona fide employee.
So if you're paying your son
a $25,000 salary for administrative work at your
practice in Toronto while he's attending university
in BC, you run the risk of having to answer some
tough questions - questions that won't arise if
he's just another shareholder.
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It seems mad that it took so long,
but in all provinces physicians can finally turn their
practices into corporations. The potential for tax deferrals
and savings is huge, especially for docs who can keep
excess earnings in the company and/or income split with
family members. Here's the lowdown on how to keep your
money in your pocket -- and out of Ottawa's coffers.
1.
Tax deferrals and wealth accumulation
Professional corporations have a preferred tax rate
of between 16.12% and 18.62% for the first $400,000
of profits, depending on where you live. By contrast,
if you're not incorporated, you pay a substantially
higher personal tax rate of up to 49.25% (the rate varies
province to province).
The key to making incorporation
work for you is leaving earnings to grow in the company.
Take for example an Ontario physician earning $200,000
a year who's able to set aside around $60,000 a year.
Here's a breakdown of what she ends up with if she's
incorporated or not:
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Not incorporated
(Tax @ 46.41%)
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Incorporated
(Tax @18.62%)
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| Savings |
$62,500
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$62,500
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| Tax
paid |
- $29,000
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- $11,600
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| Total after
tax |
= $33,500
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= $50,900
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The difference between the incorporated
and unincorporated savings is a tidy $17,400.
These additional amounts can grow
to a tidy sum over the years. Under the same example,
if our doc invested her $50,900 each year with a compounded
return of 10% before tax, she'd end up with around $2.6
million after 25 years. Compare this to only $1.7 million
if she's not incorporated and invests $33,500 a year.
That's a difference of $900,000.
This money can be taken out personally
when you are in a lower tax bracket (during retirement
or sabbatical), converting the tax deferrals to actual
tax savings.
2.
Income splitting with your family
Do you have any kids in university or just starting
out? Is your spouse a stay-at-home parent and/or a lower
income earner? Do you (or do you expect to) support
your parents in retirement? If so, it's time to corral
your dependants into an income splitting powerhouse.
In many provinces, non-members
of the profession (including family members and, in
some provinces, non-family members) are permitted to
own professional corporation shares. What this means
is that these shareholders (usually family members)
can receive dividends from the corporation and those
dividends would then be taxed in their hands.
As an unincorporated physician
who's supporting adult family members, the funds are
coming from your after-tax income. But if you paid them
in dividends, the funds would then be taxed at the lower
rate of the family member, which could result in substantial
savings.
For example, if our Ontario physician
has two adult children in university and a low income
spouse, she can move a combined total of up to $110,000
in income to those family members tax free, which results
in tax savings of as much as $30,000 per year.
John
McMillan, LL B, is a Toronto corporate/commercial
lawyer serving health professionals and an executive
of the Ontario Bar Association Health Law Section. He
can be reached at 416 364 4771 or [email protected]
Andrea
Wong, CA, is a Toronto chartered accountant at Horwath
Orenstein LLP specializing in providing strategic and
tax advice to health professionals. She can be reached
at 416 596 6767 x 289 or [email protected]
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PERSONAL FINANCE
