In the day-to-day of practising your profession and helping your patients, the business discussions of how you structure and operation your practice can sometimes take a back-seat. Consider, if you are a self-employed physician, dentist, chiropractor, or similar medical professional, incorporating your practice may provide much lower overall tax rates than if you remain unincorporated. Let’s explore.
The first $500,000 of your practice income, if earned through a professional corporation, is taxed at a flat rate of only 12.2 percent (and 26.5 percent for income above $500,000). By comparison, the top rate in Ontario for the same income earned personally is as high 53.53 percent. So, incorporation can defer tax by as much as 41.33 percent!
This tax deferral allows your professional corporation to accumulate and invest funds for your retirement more efficiently.
Yes, you will pay an additional layer of personal tax when you eventually withdraw the funds from your corporation but the further away your retirement, the greater the benefit of the deferral. If your personal tax rate is lower in retirement than during your years of practice, the deferral becomes a real tax reduction. You may also realize investment gains in the interim.
An Example
Using 2021 Ontario tax rates, if you leave $100,000 of practice earnings in your professional corporation, there is an annual tax deferral of about $41,000. This allows an additional $41,000 to be retained in the corporation that can be invested for your retirement.
Corporate Earnings Retained |
Personal Earnings Retained |
Annual Income Tax Deferred |
|
| Pre-tax earnings | $100,000 | $100,000 | |
| Income tax | (12,200) | (53,530) | |
| After-tax earnings retained | $20,800 | $46,470 | $41,330 |
Important other considerations
Before deciding to incorporate, review your personal circumstances to consider:
- Whether your practice generates enough net income to fund both your personal needs and leave a surplus that can be left in your professional corporation.
- If you need to withdraw corporate funds in the near term or if you plan to retire within a few years, the benefit of the tax deferral could be significantly reduced.
- If you are a US citizen, setting up a Canadian corporation can create US tax issues.
- Whether the benefit of the tax deferral will make the initial setup costs, annual legal and tax filings, and costs to dissolve the corporation worthwhile.
Need help determining if professional incorporation is for you? The experienced team of professionals at Ernst and Company is available for personalized assistance. Contact us today to discuss.
