With recent changes in capital gains rules, many Canadian doctors are evaluating how best to manage investments through their Medical Professional Corporations (MPCs). At MedTax, our focus is on helping you navigate these changes from a tax efficiency standpoint, reinforcing the MPC as a smart tool for wealth-building even amid the 2024 capital gains inclusion rate adjustments.
The Tax Advantages of Capital Gains in Corporations vs. Personal Accounts
Investing through an MPC allows you to leverage tax-deferred capital to maximize growth, a significant advantage over personal investments. Despite a higher corporate tax rate on capital gains (now at a two-thirds inclusion rate), corporate investing can lead to greater after-tax returns. This is because, through your MPC, you invest pre-tax business income, enabling you to put more money to work upfront.
In contrast, personal investments require income withdrawal, which incurs personal income tax, reducing your initial investment capital. For each $10,000 of corporate income, you have roughly 65-90% more starting capital than if you invested personally, creating a significant compounding advantage even after accounting for higher corporate taxes.
Additionally, when an investment is sold and generates a capital gain within a corporation, the non-taxable portion of the gain (one-third) is allocated to a Capital Dividend Account (CDA). Over time, as these amounts accumulate in the CDA, the corporation can issue tax-free dividends to shareholders. This unique feature of corporate investing is not available for personal investments, and the non taxable portion of the capital gains is basically forfeited as nothing can be done with it (other than not being taxed for that portion).
Deferring Tax with Compound Growth: The Power of MPCs
Consider an example where your MPC invests $10,000 of income at a 5% annual return. Thanks to tax-deferred growth and the capital gains inclusion rate, this setup amplifies compounding benefits, potentially yielding up to 60% more in net returns over 30 years compared to a personal investment. By maintaining a larger investment pool within your MPC, you can make compounding work harder for you—proving that strategic tax deferral can play a pivotal role in long-term wealth building.
Making the Decision: Corporate or Personal Investment from a Tax Perspective
Several factors should guide your decision between corporate and personal investing, including:
- Income Type: Small business deduction (SBD) income creates greater after-tax capital, which can be further enhanced by tax-efficient corporate investing.
- Long-Term Goals: Corporate investing is especially beneficial for long-term horizons where tax-deferred compounding can have a substantial impact.
- Current Tax Rates: While corporate tax rates on capital gains are higher, the tax-deferred advantage of a larger initial capital often outweighs this.
At MedTax, we’re here to help you maximize tax efficiency and financial security through your MPC. Our experts specialize in the unique tax needs of medical professionals, ensuring you leverage every tax advantage available.
Explore the Tax Benefits of MPCs with MedTax
Whether you’re deciding to invest corporately or personally, our team can help you strategize based on tax efficiencies specific to medical professionals. Book a free 15-minute consultation with MedTax today and take a confident step toward a financially sound future.