For many business owners, incorporation may provide considerable benefits, notably in terms of tax savings and personal liability protection. If you are a medical practitioner, you should take advantage of these benefits by forming a medicine professional corporation. When it comes to knowing when it’s the proper moment to incorporate, it varies based on your individual situation, but generally, the sooner the better. Let’s go over the major components of professional companies as they relate to health practitioners, as well as the benefits and drawbacks of incorporation.
What is the difference between an employee and an independent contractor?
If you have a contract of service as a medical practitioner, the Canada Revenue Agency will normally consider you to be an employee generating employment income. If you have instead entered into a contract for services, the CRA will treat you as an independent contractor in a business partnership generating professional income, rather than an employee, for tax reasons.
In this post, we’ll assume you’re an independent contractor who works as a sole proprietor and earns professional fees. Let’s take a look at how your sole-proprietorship will be taxed.
How is a sole proprietor’s professional income taxed?
A business, according to the CRA, is an activity that you intend to carry on for profit and for which you have evidence. It’s worth noting that a business doesn’t have to be run through a corporation. Professional services, such as those you provide as a physician, can be considered a company. As a result, determining professional revenue will be similar to determining other types of company income.
For tax reasons, you sum the revenue from your professional fees and deduct qualifying costs to arrive at your net professional income or loss. Your T1 personal tax return is where you record your professional income. The entire amount of your taxable income is calculated by adding your net professional income to your other taxable income, such as net investment income.
Many accounting expenditures can also be subtracted when computing taxable income. Membership dues to various governing bodies, as well as union dues such as those paid to provincial residency associations, are tax deductible. This also applies to payments for professional or malpractice liability insurance, as well as costs for external accounting services. You may be eligible to deduct other expenses such as rent, utilities, or salary paid to nurses or helpers if you manage your own clinic.
Your net taxable income, including professional income, is taxed at combined federal/provincial marginal tax rates that range from around 20-54% as of 2021, depending on your province or territory of residence.
Keep professional and personal costs separate
You must keep accurate records to back up the income and spending you disclose. Professional and personal costs may get mixed when you generate professional revenue on a part-time basis. It’s critical to be able to distinguish between costs for professional activities, which may be deducted on your tax return, and expenditures that are non-deductible personal expenses. If your business and personal expenses are merged in the same account, it can cause confusion when it comes time to separate them.
Having two distinct bank accounts: a personal account and a company banking account, is one of the easiest and best methods to distinguish professional from personal spending. Having two credit cards, one for personal usage and the other for professional use, is also a smart idea.
While banks will demand separate bank and credit accounts for a company since it has its own legal identity, sole owners should also separate their accounts. When it comes to separating professional and personal costs, having a separate bank account and credit card for your professional services will make tax time a lot easier. It will also be useful in the event of a future CRA business cost audit.
Professional income taxes, particularly those imposed on a sole-proprietorship medical practice, can be complex, and these are just a few of the steps and possible roadblocks to consider. Always speak with qualified consultants, such as tax and legal specialists, before starting your practice and on a frequent basis.
Visit medtax.ca to learn more about the financial alternatives that are currently available for your practice today!
