Are you a Doctor or Dentist? It May be Time to Incorporate
One of the most common questions we get asked by our doctor and dentist clients is whether they should incorporate a professional corporation. Our response is often that they should and soon. If not, they may be missing out on some significant tax advantages. Tax Deferral A doctor or dentist who carries on a professional
A doctor or dentist who carries on a professional practice in Ontario is likely paying the highest marginal tax of approximately 46.4%. Conversely, professional corporations pay on their first $500,000 of income, approximately 15.5%. The difference is staggering, on $100,000 of income you are looking at tax savings of $30,900. To achieve these savings however, you have to leave the earnings in the corporation. The after tax money can be invested just like it could be outside of the corporation and provides a great way for you to build up savings in a tax efficient manner. If you ever need money from the corporation you can always declare a dividend to yourself, however you will be taxed at a higher rate then if you left the cash in the corporation.
If you thought taking advantage of the tax deferral was beneficial it gets better. Income splitting allows income from a professional corporation to be redirected to certain family members (spouse, parents, children and trusts for minor children) to take advantage of a family member’s lower tax brackets, credits and deduction. This is set up by giving the family member non-voting shares of the professional corporation and by declaring dividends on those shares. Dividends are taxed more favorably than other types of income. Further, a family member with no income can receive dividends of approximately $30,000 tax free. This would work well for a doctor or dentist with children in university or a spouse who is not working.
Are there any advantages from a liability perspective?
Our clients often ask us whether there is an advantage from a liability perspective for setting up a professional corporation. The answer is yes and no. The professional is still liable for their professional work but there may be some liability advantages with respect to non-professional matters. For example, if the professional enters into a loan, lease or other type of commercial contract it may provide a layer of liability protection depending on the circumstance.
What else should doctors and dentists consider with regard to incorporation?
There are several other factors a professional will want to consider when setting up their professional corporation. How do I set up the share structure? How do I transfer assets and agreements into my professional corporation? What are the legal requirements for setting up a professional corporation? Kutner Law LLP has the experience to deal with the nuances of the professional corporation and would be happy to walk you through all of these questions and any other concerns you may have. Feel free to contact us for a free consultation to determine whether setting up a professional corporation is the right decision for you.