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How does incorporating help with taxes?

A man using a calculator to do paper work.

You may have heard that incorporating your medical practice can help you save more money. But how does it really work?

When you incorporate, you create a legal corporation that owns your medical practice. The corporation is a separate entity and you, the physician, become a shareholder and either a director or employee of it. You, the physician, control the corporation, but it independently earns income and pays tax on it.

Incorporating your medical practice can help you defer some of your immediate tax burden and thus speed up your retirement savings.

That’s because medical professional corporations benefit from the small business tax rate, which is about 12%, depending on your province or territory. After overhead expenses, your corporation would pay this lower rate on your practice income (up to $500,000 annually but this varies by province) instead of you paying income tax at your personal rate, which could be 50% or more for a physician.

The money you save on tax can be invested through your corporation, where it will grow. You will pay more tax later when you withdraw money from your corporation, but you will already have enjoyed the tax deferral benefit — and you’ll likely be in a lower tax bracket if you’re on leave, working part time or retired at that point.

An example of the tax advantages of incorporating

Maria,1 age 35, is a general practitioner with annual earnings of $300,000 (after overhead expenses but before taxes). Maria estimates her annual financial needs to be around $114,500, and she would like to maximize both her RRSP and TFSA contributions.2

We present two scenarios below: one where Maria is unincorporated and the second where she is incorporated. This comparison shows you how much more she can save if she’s incorporated, based on her specific situation. 

Scenario 1: Unincorporated practice

[Show me the text version: A] 

If Maria is unincorporated, she can invest a total of $77,500: 

[Show me the text version: B]

Scenario 2: Incorporated practice

If Maria incorporates her practice, there is a corporate and a personal component to the tax calculation.

Inside her corporation, she would be able to save about $73,000. Here’s how: 

[Show me the text version: C] 

Now let’s see what happens in her personal accounts: her RRSP and TFSA.

[Show me the text version: D] 

If Maria is incorporated, she can invest a total of $106,270:[Show me the text version: E]

Taking advantage of tax deferral

To summarize, when Maria is unincorporated, she has $77,500 to invest. When Maria is incorporated, she has $106,270 to invest. (Both figures include her RRSP and TFSA contributions.) 

Graphic illustrating the comparison between cash available for investment for unincorporated versus incorporated.

[Show me the text version: F]

With an additional $28,770 or more available for investment every year through incorporation, it can speed up her retirement savings. This is known as the tax deferral advantage.

NEXT STEPS: If you’re not ready to decide, learn more about how incorporation works.

1 This example is hypothetical and is for illustrative purposes only. It does not represent the financial situation of any actual client. Any resemblance to actual people or situations is purely coincidental.

2 The maximum RRSP and TFSA contribution amounts for 2020 have been used in the two scenarios.

TEXT VERSIONS 

A. Maria’s cash available for investment

Net practice income (after overhead) $300,000
RRSP contribution ($27,230)
Personal taxes payable** ($108,000)
After-tax personal cash $164,770
Living expenses  ($114,500)
TFSA contribution  ($6,000)
After-tax personal cash available for investment $44,270
 

[Back to Illustration: A]

B. Unincorporated: How much Maria can invest in total

RRSP $27,230
TFSA  ($114,500)
Personal non-registered investment account ($6,000)
Total for investing $44,270

[Back to Illustration: B]

C. Tax impact if Maria is incorporated

Net practice income (after overhead) $300,000
Annual administrative costs ($4,000)
Physician salary ($213,000)
Practice taxable income $83,000
Corporate tax rate***  12%
Corporate taxes payable ($9,960)
After-tax corporate cash available for investment $73,040

[Back to Illustration: C]

D. Maria's personal account

Physician salary $213,000
RRSP contribution ($27,230)
Personal taxes payable** ($65,270)
After-tax personal cash  $120,500
Living expenses ($114,500)
TFSA contribution $6,000

[Back to Illustration: D]

E. Incorporated: How much Maria can invest in total

Corporate cash available for investment $73,040
RRSP  $27,230
TFSA $6,000
Total available for investing $106,270

[Back to Illustration: E]

F. Tax deferral advantage

Unincorporated $77,500
Incorporated $106,270
Tax-deferral advantage: $28,770

[Back to Illustration: F]