If you’re a doctor nearing the conclusion of your residency or fellowship, you might be wondering if you should incorporate your own medical practice. This is not an issue to be taken lightly because there are several elements and personal situations that might impact your decision. 

By deciding to incorporate your medical business, you have a unique chance to control your financial destiny as a physician. Let’s take a closer look at how to incorporate a medical practice, as well as the benefits and drawbacks of doing so. Talk to our team of experts at Medtax for guidance.

What is the definition of physician incorporation?

If you incorporate, you’ll be forming a separate legal organisation — your medical professional corporation (MPC)— that will own your practice. Payments for your medical services will be given to the corporation as long as you continue to practice. 

You can then take cash from your business in the form of pay, dividends, or bonuses to fulfill your day-to-day spending needs. How you pay yourself is the subject of another post.

Is it possible that the expenses of incorporation will outweigh the benefits? 

Depending on your circumstances, the charges to form and operate your organisation will vary. If you decide to incorporate, you’ll need the expert guidance of a lawyer or accountant to get started and ensure that your company is structured properly now and in the future. 

If your case is simple, your startup expenses may be as little as a few thousand dollars. Following that, once you’ve incorporated, competent legal and accounting counsel will be crucial in ensuring you fulfil tax filing and other yearly reporting obligations. 

When compared to the benefits of incorporating (tax deferral on income), the costs involved in setting up your MPC and managing it annually will, generally, be minimal in nature. 

What are the tax consequences of forming a corporation? 

The corresponding tax savings are one of the main reasons physicians choose to incorporate in Canada. Those advantages, on the other hand, are only useful to physicians who can make use of them. It’s important to understand how integrating your medical practice will influence your taxes before making the choice to incorporate.

Payments for your services are made to your corporation if you are an incorporated physician. After paying any qualified costs, your net earnings in the corporation are taxed at a rate ranging from 9% to 14%, depending on where you live (net corporate earnings of more than $500,000 may be subject to a higher rate of taxation.)

This is a substantially lower tax rate than if you had earned the same amount of money and pay tax at your personal rate, which would likely be as high as 50% or higher. However, you can only profit from the reduced tax rate on corporate revenues if you can leave part of your earnings in the firm rather than withdrawing them to fund your living expenditures. If you rely on the majority, if not all, of your revenues to cover your day-to-day living costs — as many physicians do in their early years of practice — you may not be able to take advantage of the corporation’s tax rates.

You will eventually take the cash from the corporation, such as when you retire. The withdrawn monies will be taxed at your own rate at that time. However, because the funds were taxed at a lower rate while in the company, your net worth will increase quicker than if they were subject to higher personal tax when you earned them.

Is incorporating right for you? 

One of the most significant factors to consider when deciding whether or not to incorporate is your ability to retain income in the MPC on an annual basis. In order to determine your ability to do this, you need to assess your monthly lifestyle expenses and compare them to your after-tax income. It is important to consult a professional when doing this to ensure you have correctly allocated expenses to the MPC as that will play a role in the calculation. 

Generally, we see doctors are able to save at least $25,000 annually by incorporating. Over a 30-year career, that equates to an increase in your net worth of $750,000 assuming there is no growth in the tax savings. Since the tax savings will very likely be invested to amplify the benefits of incorporating, we often see clients generating additional net worth of $1,000,0000 to $3,000,000 by incorporating, situation-dependent. 

If you have any questions regarding financial planning or if incorporation is suitable for you, contact one of our Medtax.ca specialists to see how they can assist you!

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