Incorporation – The Right
Choice for Your Practice?
Presented by:
Mark Donato, CFP
Senior Financial Consultant
Wednesday September 26, 2012
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Agenda
 Advantages of incorporation
– Tax deferral
– Income splitting
 Incorporation myths and facts
 Is incorporation the right choice for me?
– Questions to consider
 Q&A – MD Advisor Panel
Should I incorporate my
medical practice?
Running the numbers
The Tax Deferral Advantage
2012 Tax Rate Comparison
Corporation
Individual
Active Business Income
<$500,000
15.50%
45.00%
>$500,000
27.50%
45.00%
Interest
47.00%
45.00%
Non-eligible dividends
33.33%
33.00%
Eligible dividends
33.33%
26.00%
Capital gains
23.50%
22.50%
Investment Income
Total tax example: Corporate small business rate x Personal non-eligible dividend tax rate
1 - (1-0.1550) x (1-0.3300)
(1-0.5728) = Total tax of 43.41%
Integration
 A general tax policy designed to ensure that:
– Income earned and distributed by a Canadian Controlled
Private Corporation (CCPC),
– is subject to (virtually) the same amount of total tax,
– as if the same amount of income was earned by an individual
taxpayer directly.
Should I Incorporate?
Case 1 - Mary
 Mary is a single GP who has been paying down debt and
saving in her RRSP.
 She has now paid off her mortgage and is considering
incorporating her medical practice.
 In order to meet her current lifestyle needs, Mary, along
with the help of her accountant, has determined that she
would need to pay herself a salary of $150,000 from the
corporation.
 This salary level also allows for continued RRSP
contributions.
Case 1: The Numbers
Unincorporated
Income (after expenses)
Salary
Ongoing incorporation costs
Net income
300,000
300,000
145,000
(22,475)
122,525
Corporate net income
Taxes - corporation
After-Tax Income (Retained in Corp.)
Personal income
Taxes - personal
Net salary
Combined Personal & Corporate
After-Tax Income
Deferral advantage
Corporation
Year 1
Year 2+
300,000
300,000
(150,000)
(150,000)
(5,000)
(2,500)
145,000
147,500
147,500
(22,863)
Taxed
Corporately
124,637
300,000
(122,000)
178,000
150,000
(52,100)
97,900
150,000
(52,100)
97,900
178,000
220,425
222,537
42,425
Income
44,537
Taxed
Personally
Case 1: Conclusions
 Mary will benefit from tax deferral on the savings
she retains in her professional corporation.
 Mary can also use RRSP contributions (from her
salary of $150,000) for additional tax deferral.
 Conclusion:
Incorporation is a valid option for Mary.
Should I Incorporate?
Case 2 – Joe and Julie
 Joe is a young GP, married to Julie. They have three
children and a large mortgage on their principal
residence.
 To meet Joe’s cash flow needs, the corporation would
need to pay him a salary of $132,500 as well as a
dividend distribution equal to the funds remaining in
the corporation.
 Due to Julie’s income level there are no splitting
opportunities.
Case 2: The Numbers
Unincorporated
Income (after expenses)
Salary
Ongoing incorporation costs
Net income
300,000
300,000
Corporate net income
Taxes - corporation
After-Tax Income
Dividend Distribution (non-eligible)
Funds retained in Corporation
162,500
(25,188)
137,312
137,312
0
165,000
(25,575)
139,425
139,425
0
132,500
139,425
(89,597)
182,328
182,328
Personal salary income
Personal non-eligible dividend income
Taxes - personal
Net salary
(122,000)
178,000
132,500
137,312
(88,909)
180,903
Combined Personal & Corporate
After-Tax Income
178,000
180,903
Increase (decrease) in savings
300,000
Incorporated
Year 1
Year 2+
300,000
300,000
(132,500)
(132,500)
(5,000)
(2,500)
162,500
165,000
2,903
4,328
Income
Taxed
Corporately
Taxed
Personally
Case 2: Conclusions
 For Joe and Julie: Little savings retained in the
corporation means minimal tax deferral
 Due to the additional expenses of incorporation,
there is little tax savings
 Incorporation for Joe would mean more
administrative work and very little (if any) tax
savings
 Result?
Joe may decide not to incorporate
Key Considerations: Tax Deferral
 In order to defer taxes, earnings must be retained
within the corporation.
 The tax deferral advantage is greater when funds
retained in the corporation are taxed at the small
business rate rather than the general corporate rate.
 Should still consider RRSP contributions and the Tax
Free Savings Plan (TFSA).
Looking Long-Term:
Realizing the Benefits of Tax Deferral
 Reducing tax now so you can invest the money and make
more money over time can be, at least partially, a
temporary benefit.
 Turning tax deferral into tax savings:
– To maximize the amount you will receive personally, drawing the
money out at the right time is essential.
– It may be possible to withdraw funds and incur little or no tax: early
retirement, leave of absence, and income-splitting
The Income Splitting
Advantage
Share Ownership Regulations
 Legislation governing incorporation differs between
provinces and includes restrictions on who can own
shares of your medical professional corporation.
– Can family members, trusts, or even other corporations
own shares? Your MD Advisor can provide this information
as well as help with analysis.
– Speak to your legal advisor for recommendations
regarding the structure most appropriate for you.
Simplified Case
The Income Splitting Advantage
 Back to our example with Joe who has high cash flow
needs which prevent him from realizing deferral
benefits.
 Again, we assume the corporation pays Joe a
$132,500 salary so that he can maintain his RRSP
contributions.
 Julie, Joe’s wife, earns no income for this example.
The Numbers
Unincorporated
Corporation
Year 1
300,000
300,000
(132,500)
(5,000)
162,500
300,000
(132,500)
(2,500)
165,000
(25,188)
137,312
(25,575)
139,425
Taxed
Corporately
300,000
(122,000)
132,500
(44,000)
137,312
(25,004)
132,500
(44,000)
139,425
(25,693)
Taxed
Personally
178,000
200,808
202,232
22,808
24,232
Income (after expenses)
Salary
Ongoing incorporation costs
Corporate net income
Taxes - corporation
Available for deferral (or paid as a div.)
Salary - Joe
Taxes - Joe
Non-eligible dividend income - Julie
Taxes - Julie
After-Tax Income
Increase in After-Tax Income
Year 2+
Income
Key Considerations
 Splitting income with a spouse or adult child (or both)
who is in a lower tax bracket than yours can provide
for very attractive tax savings.
 “Kiddie tax” rules negate the benefits of splitting
income with minor children.
 Speak with your tax advisor about attribution rules
which may also negate the benefits of income
splitting.
Physician Incorporation
Myths & Facts
Incorporation Myth #1
 Greater expense deductions? No
– No—same rules for deducting expenses
– Expenses must be incurred to earn income
– The amounts must be reasonable
– Proof of payment is required
 Other considerations:
– Medical / Dental expenses (Health & Welfare Trusts)
– The use of “cheaper” after-tax corporate dollars
– Non-deductible expenses (i.e. 50% of meals & entertainment)
– Repayment of business debt
Incorporation Myth #2
 Limited liability
– No—physicians still liable for professional acts
– Limited liability for corporate creditors
The Real Advantages
 Tax deferral
 Income-splitting
 The use of sophisticated products:
– Individual Pension Plans for retirement planning
– Health & Welfare Trusts
– Permanent and Term Life Insurance policies
 More efficient business debt repayment
Advantage:
Retirement Income Planning
 Withdrawals from a corporation are part of overall
retirement planning.
 Integrate with other tax-advantaged products such as
RRSPs or Individual Pension Plans.
 Plan for Old Age Security clawback and CPP start date.
Incorporation
Dilemmas/Disadvantages
 Incorporation Dilemmas
– Disability insurance
– Partnerships and Alternate Funding Arrangements
– Employees
– U.S. Citizenship
 Incorporation Disadvantages
– Losses do not flow through to shareholders
– Risk of changes to tax laws
Incorporation Costs
Time & Money
 Initial set-up costs
 Ongoing annual fees for legal and accounting support
 Additional administrative burden
– New bank & investment accounts for professional corporation
– Regular corporate tax installments and source deductions on
salaries
– Tax information returns (T4s, T5s)
– Annual corporate returns; director and shareholder resolutions
Is Incorporation the Right
Choice for Me?
Questions to
consider
Questions for You
 How much debt do I have?
 Am I a good saver?
 Does my lifestyle allow me to retain a sufficient
amount of money in my corporation over a longterm period?
 Am I willing to split income with my spouse and/or
children?
More questions for You
 Am I well-organized financially?
 Do I handle financial complexity well?
 Am I averse to the risk of legislative change?
 Do I have a good relationship with my
accountant/lawyer?
Questions for your MD Financial
Consultant
 How might incorporation impact my saving strategy
(RRSPs, TFSA, insurance)?
 What is the opportunity for income splitting in my
situation?
 What are your thoughts on my compensation plan?
 Do you see any significant ramifications for my
investment, risk management, retirement, or estate
plans?
Questions for your Accountant
 Have you incorporated many physicians?
 What expenses can I expect to pay from the
corporation?
 In my particular situation, how much tax could I save
by incorporating?
 How sensitive to change are these savings?
 Could I benefit from a permanent life insurance policy
or an Individual Pension Plan?
More questions for your Accountant
 How will I set up the books?
 What mix of dividends and salary should I have?
 What legal structure should I have for my situation?
 Can I use the enhanced capital gains exemption?
 What range of fees will I be expected to pay?
Questions for your Lawyer
 Have you incorporated many physicians?
 What are the limitations of incorporation in this
province?
 What happens to the corporation in case of marital
breakdown?
 How much will your fees be?
What next?
 Incorporation is a complex issue.
 MD’s goal is to ensure that you receive valuable
advice tailored to your specific situation.
 We will work with your current advisor to ensure this
is achieved.
 Be sure to consult your:
– MD Advisor & personalized MD Team
– Accountant
– Legal counsel
MD Delivers Total Wealth Management
Team based approach synthesizes a full range of
professional perspectives to create an integrated plan
Thank you!
All tax calculations are for illustrative purposes only and are based on tax legislation enacted or proposed as of
May 31, 2012 (unless otherwise indicated). Actual tax amounts will vary according to your specific facts and
circumstances.
MD Management Limited does not intend to provide taxation, accounting, legal or similar professional advice
to clients or potential clients. The information contained in this document is not intended to offer such advice,
nor is it to replace the advice of independent tax, accounting and legal professionals
MD Physician Services provides financial products and services, the MD family of mutual funds, investment
counselling services and practice management products and services through the MD group of companies.
For a detailed list of these companies, visit md.cma.ca.
The information in this presentation is for information purposes only and is not intended to be used as direct
investment, legal or tax advice. Please contact your MD Advisor before acting upon any of this information or
before implementing any investment or tax strategy.
Questions?