The tax deferral advantage available to an incorporated person may be substantial. This is because Canadian Controlled Private Corporations (as are most professional corporations) may be able to access the small business deduction under the ITA. More specifically, in an incorporated practice, the first $500,0001 of annual “business related profit” – the amount remaining after deducting all eligible expenses – may be eligible for the small business tax rate of about 13%-18% (depending on the province), which is significantly lower than top marginal personal income tax rates. A person who would otherwise pay tax at the top marginal personal tax rate may be able to defer the payment of tax by leaving money within the professional corporation to be used for investment or corporate debt repayment. This deferral advantage is equivalent to a tax-free loan from the government. Retaining income in the corporation may also create savings for retirement. On retirement, these savings may be distributed, usually by way of dividends to shareholders, during a time when you are in a lower tax bracket.
Income splitting, which can be achieved in some provinces through the establishment of a family trust or through the payment of dividends to shareholding family members, can be an effective way to reduce the total tax bill paid by your family. Although the “kiddie tax” rules negate the advantage of distributing dividends to minors, you may still be able to reduce your overall family taxes by making distributions to your spouse and/or adult children if they are in a lower marginal tax bracket than yourself.
All partnerships, sole proprietorships, and professional corporations that are members of partnerships are required to use the calendar year as their fiscal period. Professional corporations that are not members of a partnership can have an off-calendar year-end, which can provide an opportunity for certain tax deferrals at a personal level.
In addition to the primary advantages of tax deferral and income splitting, there are numerous miscellaneous secondary benefits that may be available to incorporated physicians. These include:
- Individual Pension Plans
- Capital gains exemption
- Affordable Benefits
- Flexibility – Salary vs. Dividend
- Corporate Owned Universal Life Insurance
- Cash Flow Maintenance
- Retiring Allowance and Death Benefits
- Employee Profit Sharing Plan
Due to the general nature of the bulletin, it should not be relied upon as legal or tax advice.