Four Tax Tips for Incorporated Professionals

Tax strategies are an important part of managing your business. If your healthcare practice is setup as a professional corporation, there are tax strategies that you can consider as both a shareholder and an employee of your professional corporation:

  1. Bonus Accrual:

    You can defer personal tax by having your corporation accrue a bonus payable to you at the end of its fiscal year but not pay it to you until the following calendar year. Provided the payment is made within180 days from the end of the PC’s fiscal year, it is deductible to your corporation in the year it was accrued but not included in your personal income until it is paid.

  2. Life Insurance:

    You can increase your overall cash flow if your corporation owns and pays for a personal life insurance policy

    Since life insurance premiums are generally not tax-deductible, they must be paid from after-tax dollars. The low small business corporate tax rate means that the gross revenue that corporation needs for payment of the premiums is much less than required if you fund them personally

    For example, there is an annual cash flow advantage of $20,259 when $20,000 of life insurance premiums are paid through your corporation at a tax rate of 12.2 per cent instead of personally at a tax rate of 53.53 per cent.

     

    Personal Funds
    Corporate Funds
    Cash Flow Advantage
    Pre-tax Amount $43,038 $22,779 $20,259
    Income Tax  (23,038) (2,779)
    Cost of Insurance Policy $20,000 $20,000
  3. Estate Payments:

    As a result of your employment status, your spouse (or other family members or your estate) can receive a tax-free, lump sum payment of up to $10,000 from your corporation following your death.

  4. Individual Pension Plan (IPP):

    Your corporation can establish a type of defined benefit pension plan, called an Individual Pension Plan (“IPP”), for you. In certain situations, an IPP can provide greater annual contribution room than an RRSP. Generally, they are best when you are over the age of 40 and have been earning a substantial salary.

    Contributions to your IPP provide an immediate tax deduction for your corporation and are exempt from payroll and healthcare taxes. You will not pay personal tax until you receive payments in a future year (i.e., when you are potentially in a lower tax bracket). In addition, you may be able to split your future IPP retirement benefits with your spouse, which can lower your family’s overall tax bill.

 

Would you like more information about of any of these tips? The experienced team of professionals at Ernst and Company is available to explain further if these planning ideas could be a good fit for your situation. Contact us today.

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