# Incorporation as a doctor



## jumbalaya (Jan 17, 2013)

If a doctor making 200k is married to someone making 100k, is there a benefit to incorporating?

I read from here (http://www.visa.ca/small-business/a...rticles/government/should-you-incorporate.jsp, very old article) that:
1) However, if you're a professional, such as a doctor or lawyer, incorporating will not remove your professional liability for negligence, says Di Vito. 
2) If your spouse and children are shareholders, they can receive dividends from the company that will be taxed in their hands, says Cardy, so you can take advantage of the lower tax rates that your children and possibly your spouse are at. However, professional corporations - those of doctors and lawyers - are not eligible for this benefit, says Di Vito. 

Of course, I've seen many websites that are pro-incorporation, probably because they make $ off it. I'm curious as to CMF's point of view on this.

Thanks!


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## houska (Feb 6, 2010)

Am not a doctor, but have recently incorporated and started a professional business.

The tax system is (correctly, in my opinion) set up so that a professional in a high-ish tax bracket who pulls out money from a personal corporation comes out about even compared to having that money directly as income without the corporation being in the middle. There are still some optimization opportunities but if your earnings are going to lifestyle expenses and/or paying down debt you don't have that much to gain.

Income splitting can bring some benefits, but won't be that much if your spouse is pretty high income as well. (I am not aware of doctor and lawyer corporations being not eligible -- does not apply to me so don't know).

Where incorporation really pays off is if your revenues and costs are variable from year to year (flexibility to smooth across years), and/or if you don't need to pull your earnings out and can let them grow tax deferred as investments. Then (this is inaccurate in detail but true in spirit) your corporation basically acts like your own RRSP without the 18% limit that applies to personal income.


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## Davis (Nov 11, 2014)

Be sure to consider the set-up costs and the ongoing legal and accounting costs of having a professional corporation in your analysis. From what I understand, in some provinces, doctors are restricted in income/expenses can be run through the corp.


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## jumbalaya (Jan 17, 2013)

in this case they are saving the majority of the 200k, so I think the main benefit is the "RRSP" aspect. That by itself seems to be worth the cost of incorporation/ongoing costs...


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## heyjude (May 16, 2009)

I think the 2005 article that you posted is incorrect when it says that doctors and lawyers may not be able to split income with a corporation. However, the liability issue is correct. They can still come after your personal assets, though not an IPP (independent pension plan) that you set up through your corporation. 

I presume you have already checked out the MD Financial Management site.

https://mdm.ca/wealth-management/incorporation/benefits-and-opportunities/index.asp


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## nahc (Feb 22, 2011)

heyjude said:


> They can still come after your personal assets, though not an IPP (independent pension plan) that you set up through your corporation.


Correct me if I'm wrong, but isn't that what CMPA is for? If I recall correctly, they litigate on your behalf and payout as well, if you lose? Or is there a limit to their liability?


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## heyjude (May 16, 2009)

CMPA insures and defends physicians against the adverse consequences of medical errors. However, a professional corporation could be sued for business reasons not covered by CMPA, for example, employer - employee disputes, property management, etc, etc.


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## treva84 (Dec 9, 2014)

jumbalaya said:


> If a doctor making 200k is married to someone making 100k, is there a benefit to incorporating?
> 
> I read from here (http://www.visa.ca/small-business/a...rticles/government/should-you-incorporate.jsp, very old article) that:
> 1) However, if you're a professional, such as a doctor or lawyer, incorporating will not remove your professional liability for negligence, says Di Vito.
> ...


From what I've been told (from my accountant, other MDs)
1) If you have student loan debt or credit card debt, pay that off before considering incorporation

2) The break even point is about ~50k savings. So, if you can save 50+k in your annual income within the corporation (meaning, live on 50k less than what you earn) the fees and tax savings are worth it. This if course depends on your life style and how much you spend. 

3) PC's don't transfer indemnity from you to the corporation - you still need indemnity insurance such as CMPA

4) PC dividend payments are subject to tax, which is less than personal income (can't tell you exactly what it is - I think it's 18-20%).


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## nahc (Feb 22, 2011)

heyjude said:


> CMPA insures and defends physicians against the adverse consequences of medical errors. However, a professional corporation could be sued for business reasons not covered by CMPA, for example, employer - employee disputes, property management, etc, etc.


I think according to the Regulated Health Care Professional Act, the only "nonwaiver of liability" is costs from medical negliance (which is covered by the CMPA). The rest behaves like a regular corp re employer/employee disputes, etc, so they CAN'T go after your personal assets...


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## Ostracized (Feb 7, 2014)

I'm a dentist and I recently incorporated. Our professional corporation rules are pretty much the same.

Benefits:
-You can pay yourself in dividends and avoid paying into CPP or provincial pension plans (if you like).
-You can keep money in the corp and pay yourself a smaller income (only what you need to live) and defer a lot of income tax by mostly paying the low corporate rate.
-You can pay yourself or spouse or children dividends 'tax free' if their income is under ~$45K.


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## brad_g (Apr 12, 2013)

Ostracized said:


> ...
> -You can pay yourself or spouse or children dividends 'tax free' if their income is under ~$45K.


I believe "Kiddie Tax" applies on minor children. http://www.advisor.ca/tax/tax-news/beware-the-kiddie-tax-2-56027


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## Synergy (Mar 18, 2013)

Ostracized said:


> -You can pay yourself or spouse or children dividends 'tax free' if their income is under ~$45K.


The ability to issue shares to family members (non-professionals) is not an option in all provinces. If I recall correctly, Alberta does not allow dentists and medical doctors to perform that form of income splitting.


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## Smoothie (Jul 11, 2011)

It's a bonanza. Don't tell anyone about it or they'll come after us.

Seriously,I would get everything in place now even before paying off student loans and credit card debt. You will not benefit from income splitting but you'll get good tax savings. The plastics guys making a million a year just forego CPP and RRSPs and draw all their salary as dividends. I'm making less and I set my salary at whatever is needed to get maximum RRSP room and put the rest in the Corp. Corp pays witholding tax every month as an employer and issues me a T4 at year end. 

If you're just starting out, it's well worth it to think about whether you want to use RRSPs or not. In retirement you take dividends from corporate funds and pay 17% tax IIRC. Downside being the corporate account is taxable unlike RRSPs, so money won't grow as fast. But you pay less tax on the money you protect in the corp than if you had taken it as income, so more comes in.

I had a fair amount in RRSPs already before incorporation so that's going to be for deep retirement like when I'm 90 and have Alzheimers.

Build your practice, the big money years come slowly in some specialties!


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## diharv (Apr 19, 2011)

I don't think you will be able wait until 90 for the RSPs as do they not have to be withdrawn at age 71 or so ? If one has significant assets in RSPs they could become tax bombs from what I have read. My own situation is my wife and I have RSPs and I have a corp invest acct where I am the sole shareholder. Was single when I set it up and never bothered to restructure it. I am 50 now and at 55-65 plan to deplete the RSPs ,possibly sprinkled with dividends when needed. Then at 65 dividends. Of course all the while try to continue to max the TFSAs every year.


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## Eclectic12 (Oct 20, 2010)

diharv said:


> I don't think you will be able wait until 90 for the RSPs as do they not have to be withdrawn at age 71 or so ?


This is partially true ... by Dec 31st in the year one turns 71, one has to withdrawn, convert to an annuity or convert to a RRIF. I believe any combination that gets rid of RRSP is fine as well.

http://www.epr.ca/what-to-do-with-your-rrsp-investment-when-you-turn-71-or-you-retire/
http://www.theglobeandmail.com/glob...from-my-rrsp-before-i-turn-71/article7625160/


This is why some have posted that as they retired early, they have converted part to a RRIF nd/or started withdrawing well before age 71.




diharv said:


> If one has significant assets in RSPs they could become tax bombs from what I have read.


This is where what will make up one's retirement income will come into play as well as the size that the RRSP has grown to.
Where one dies without having a spouse to roll the RRSP over to on a tax deferred basis, the RRSP can also be a problem.




diharv said:


> Was single when I set it up and never bothered to restructure it. I am 50 now and at 55-65 plan to deplete the RSPs ,possibly sprinkled with dividends when needed. Then at 65 dividends...


You are probably okay as it sounds like there won't be many sources of income and that you will have a lot of control/flexibility. If you plan to avoid the OAS clawback for as long as possible ... keep in mind when checking income levels that from an OAS income test perspective, $1 of dividends received is something like $1.38 of income for the OAS test.


Cheers


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## Eclectic12 (Oct 20, 2010)

treva84 said:


> heyjude said:
> 
> 
> > CMPA insures and defends physicians against the adverse consequences of medical errors.
> ...


As I understand it, the CMPA is a membership based mutual defense organisation as opposed to insurance. 

Almost all insurance companies stop their services as soon as the premium payments cease. One can retire for ten years, not have paid membership dues and still be defended. As well, the CMPA is a not for profit unlike most insurance companies.

From what I've read, the help is not limited to law suits as advice is provided for college complaints, hospital investigations etc. There's also publication and training to avoid adverse events completely (everyone wins when a problem is avoided).

While it may make it more understandable to think of it as similar to insurance - there are important differences.




heyjude said:


> However, a professional corporation could be sued for business reasons not covered by CMPA, for example, employer - employee disputes, property management, etc, etc.


+1 ... the legal system can be counter-intuitive at times. To get help for injuries sustained while riding in her father's car, which was hit by another driver who was determined to be at fault - my cousin had to sue her father.


Cheers


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## Eclectic12 (Oct 20, 2010)

brad_g said:


> Ostracized said:
> 
> 
> > I'm a dentist and I recently incorporated. Our professional corporation rules are pretty much the same.
> ...


Depending on whether the wording is incomplete or as is written ... there appear to be a couple of issues. 

The first is that the dividends must be eligible. 
The second is that the wording makes it sound like "$44K income" plus dividends is okay. As I understand it, income such as interest or employment is automatically taxable and will reduce the amount of eligible dividends that can be received on a tax free basis. The $45K is likely assuming there are no other sources of income.



> In 2010, an Ontario resident earning $50K in Dividends (and *no other income*) only paid $600 in provincial tax and zero federal tax!


https://stockcents.wordpress.com/2011/10/01/dividends-the-50k-tax-free-strategy/


Cheers
As usual ... make sure to followup with the appropiriate


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## CPA Candidate (Dec 15, 2013)

houska said:


> The tax system is (correctly, in my opinion) set up so that a professional in a high-ish tax bracket who pulls out money from a personal corporation comes out about even compared to having that money directly as income without the corporation being in the middle. There are still some optimization opportunities but if your earnings are going to lifestyle expenses and/or paying down debt you don't have that much to gain.


Indeed. If a lawyer or accountant is trying to get you to set one up, they are probably more interested in the benefits for themselves in charging you fees. Professional corporations (basically an incorporated employee) do not get the small business deduction and can deduct fewer expenses. When you consider the taxes on the corporation and the taxes on dividends coming out, they will net to be very close to your personal taxes. This is by design and represents the concept on integration, the goal of which is to make the taxpayer indifferent to the way they receive income (ie no loop holes). The benefits of incorporation exist, but are not that related to tax issues.

You cannot give minor children private corporation shares and dividend cash to them, it will be attributed back to you.

Overall, you cannot outsmart the tax system much, they've seen it all and if they haven't, they will button up the leaks quickly.


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## jumbalaya (Jan 17, 2013)

Been doing a little more research since asking the question. I think incorporation is probably the way to go... the dilemma has switched to "dividend vs salary" (this was discussed in at least 2 threads on this forum).

CPA Candidate: What do you think of the following article?

"Business owners may end up with more money after-tax by funding their personal living requirements with dividends and leaving the excess cash in the company," said Jamie Golombek, CIBC's managing director of tax and estate planning. After crunching the numbers in a specially built model, Mr. Golombek found that in every province other than Quebec, the strategy left business owners with more after-tax cash.

http://www.theglobeandmail.com/repo...-paying-yourself-in-dividends/article1391246/


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## atrp2biz (Sep 22, 2010)

Synergy said:


> The ability to issue shares to family members (non-professionals) is not an option in all provinces. If I recall correctly, Alberta does not allow dentists and medical doctors to perform that form of income splitting.


Alberta does. I think that changed 4-5 years ago.

Health Professions Act See page 82.


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## nahc (Feb 22, 2011)

CPA Candidate said:


> Indeed. If a lawyer or accountant is trying to get you to set one up, they are probably more interested in the benefits for themselves in charging you fees.


Yes, but for the most part you can DIY. I think it cost me in total <1000$ to incorporate less than five years ago. Most of it were college and registry fees.



> Professional corporations (basically an incorporated employee) do not get the small business deduction and can deduct fewer expenses.


Professional corps for doctors benefit from the small business deduction. 



> When you consider the taxes on the corporation and the taxes on dividends coming out, they will net to be very close to your personal taxes. This is by design and represents the concept on integration, the goal of which is to make the taxpayer indifferent to the way they receive income (ie no loop holes).


Only if you take all the money out. Otherwise, if you save more than about 50k, as above, you gain from treating your corp like a no-limits RRSP. If you're not saving 50k a year as a doctor, either you are very junior or you should re-examine your needs and wants...


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## jumbalaya (Jan 17, 2013)

does anyone have a source for the 50k number? just curious


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## uptoolate (Oct 9, 2011)

I believe that when incorporation first became and option in Ontario that the OMA used to have the number 70k as the dollar amount to make it worthwhile to consider incorporation. They had 4 or 5 criteria in total that they felt should be fulfilled to make it worthwhile. Last time I looked on the site, some years ago, I couldn't find the article.


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## heyjude (May 16, 2009)

nahc said:


> Yes, but for the most part you can DIY. I think it cost me in total <1000$ to incorporate less than five years ago. Most of it were college and registry fees.
> 
> Professional corps for doctors benefit from the small business deduction.
> 
> Only if you take all the money out. Otherwise, if you save more than about 50k, as above, you gain from treating your corp like a no-limits RRSP. If you're not saving 50k a year as a doctor, either you are very junior or you should re-examine your needs and wants...


+1


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## heyjude (May 16, 2009)

jumbalaya said:


> does anyone have a source for the 50k number? just curious


You need to cost it out and do your own break even calculation. But $50K In annual retained earnings is not far off the break even number that I calculated when I was making this decision in 2001. I met the criterion. I now have over $1m in my corporation, which I am using to generate eligible (and some ineligible) dividends for retirement. Unlike an RRSP, I can use the funds when I decide.


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## Synergy (Mar 18, 2013)

atrp2biz said:


> Alberta does. I think that changed 4-5 years ago.
> 
> Health Professions Act See page 82.


Good to know, thanks.


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## Synergy (Mar 18, 2013)

Drawing capital dividends (tax free) is another perk of setting up a corp.


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## treva84 (Dec 9, 2014)

heyjude said:


> You need to cost it out and do your own break even calculation. But $50K In annual retained earnings is not far off the break even number that I calculated when I was making this decision in 2001. I met the criterion. I now have over $1m in my corporation, which I am using to generate eligible (and some ineligible) dividends for retirement. Unlike an RRSP, I can use the funds when I decide.


One question I have is can you hold investments in your PC account - ie holding stocks and bonds? How are they taxed?


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## uptoolate (Oct 9, 2011)

Yes the corp can have a brokerage account and hold pretty much any investment product. As was mentioned upthread, investment income is not taxed at the small business rate but rather at almost 50% (unless it is flowed through in the year it was earned). There are lots of twists and turns but the concept of integration definitely applies. Recent changes made the difference between salary and dividends even less than the maybe 3% that it was before the changes. 

I wouldn't say that Professional Corps are a 'bonanza' for the average MD but they certainly are helpful for high earning MDs as a way to defer taxes and defer and split income. With the OP's 200K income, a PC probably wouldn't be that beneficial if not for the spouse's income of 100K which allows the OP to keep significant funds inside the corp. Unfortunately, many MDs suffer from marked lifestyle creep once they get into practice. The Millionaire Next Door should be required reading for all MDs.


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## GPM (Jan 23, 2015)

*Absolutely incorporate.*

Doctor/Dentist Combo Here.
ABSOLUTELY INCORPORATE. PERIOD. But get 2 corporations. (We have 3). You need a holding company when you reach $100,000 in investments. You and your corporation are are protected by liability insurance, but any chance of failure in a lawsuits and your personal wealth is gone. The holding company just owns shares in the operating company. $50,000 limit is untrue. $10-25,000 is just fine. It's tax advantaged money, it just doesn't grow tax free. Get your life insurance in one of the companies as well. You use tax advantaged money. It comes out tax free. Sometimes, it's worth putting your disability in and dividend out the payments. You get some tax, but you have a spouse making enough to support a family anyways. The kiddie tax ruined some of the fun, but once your kids hit 18, you can still give them non voting shares. Pay for school, help them out, or have them give the amount to you. Great tax savings. The dividend vs salary debate never ends. At $200,000, you can max out an RRSP,,and TFSA while still leaving plenty in the company. Not much difference in total outcome if totally dividend, but lose CPP for what it's worth. However, you are a sole proprietor so you pay both ends off cpp. A proper accountant, example a partner at KPMG, will give you the advice you need on this and are worth their weight in gold as they have specialists in every area. You will accumulate wealth extremely fast. This isn't friend territory. You need a great accountant. I retract KPMG statement as there are fantastic independents. Two final words of advice: 1. GET COST PLUS. Roy Olnicheck in Calgary (cost efficient benefit plan - Google cost plus) is the cheapest and easy to deal with. You don't pay insurance premiums for things you never use which is 90% of what your paying for. Submit a claim, pay 5-8% and the money comes out of your company tax free. You can do the same with critical illness if you chose to buy (check out the diseases and make your own descision using your medical knowledge, keeping in mind what a hassle dental claims are). 2. READ THIS FORUM. Stay away from MD MANAGEMENT. They don't act in your best interest, but they have a closed market. This group is way more qualified than them. You gotta great wealthy future ahead. Enjoy it! Agree with up to late, millionaire next door or the two wealthy barbers should be read as most MD's spend like drunken sailors eventually. I know too many who are a .5% interest rate increase away from bankruptcy. Mind boggling, when making $100,000's/year.


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## Eclectic12 (Oct 20, 2010)

heyjude said:


> ... I now have over $1m in my corporation, which I am using to generate eligible (and some ineligible) dividends for retirement. Unlike an RRSP, I can use the funds when I decide.


To be clear ... one can make an RRSP withdrawal whenever one wants before age 71. It is a huge limit where one plans on working up to and past age 71.

IMO, the more important difference is that the corp can issue eligible dividends which are at a tax advantaged whereas the RRSP withdrawals are 100% income taxed at a high rate.


Cheers


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## heyjude (May 16, 2009)

Eclectic12 said:


> To be clear ... one can make an RRSP withdrawal whenever one wants before age 71. It is a huge limit where one plans on working up to and past age 71.
> 
> IMO, the more important difference is that the corp can issue eligible dividends which are at a tax advantaged whereas the RRSP withdrawals are 100% income taxed at a high rate.
> 
> ...


Thank you for clarifying that. I should have been more precise: one can withdraw money from an RRSP at any time, and pay the tax. In fact, as an early retiree, that is what I am doing in a gradual manner while in a low tax bracket, in order to avoid being forced to take RMDs at age 71 and up that would immediately boost me to the highest marginal tax rate.


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## jumbalaya (Jan 17, 2013)

GPM said:


> Doctor/Dentist Combo Here.
> ABSOLUTELY INCORPORATE. PERIOD. But get 2 corporations. (We have 3). You need a holding company when you reach $100,000 in investments. You and your corporation are are protected by liability insurance, but any chance of failure in a lawsuits and your personal wealth is gone. The holding company just owns shares in the operating company. $50,000 limit is untrue. $10-25,000 is just fine. It's tax advantaged money, it just doesn't grow tax free. Get your life insurance in one of the companies as well. You use tax advantaged money. It comes out tax free. Sometimes, it's worth putting your disability in and dividend out the payments. You get some tax, but you have a spouse making enough to support a family anyways. The kiddie tax ruined some of the fun, but once your kids hit 18, you can still give them non voting shares. Pay for school, help them out, or have them give the amount to you. Great tax savings. The dividend vs salary debate never ends. At $200,000, you can max out an RRSP,,and TFSA while still leaving plenty in the company. Not much difference in total outcome if totally dividend, but lose CPP for what it's worth. However, you are a sole proprietor so you pay both ends off cpp. A proper accountant, example a partner at KPMG, will give you the advice you need on this and are worth their weight in gold as they have specialists in every area. You will accumulate wealth extremely fast. This isn't friend territory. You need a great accountant. I retract KPMG statement as there are fantastic independents. Two final words of advice: 1. GET COST PLUS. Roy Olnicheck in Calgary (cost efficient benefit plan - Google cost plus) is the cheapest and easy to deal with. You don't pay insurance premiums for things you never use which is 90% of what your paying for. Submit a claim, pay 5-8% and the money comes out of your company tax free. You can do the same with critical illness if you chose to buy (check out the diseases and make your own descision using your medical knowledge, keeping in mind what a hassle dental claims are). 2. READ THIS FORUM. Stay away from MD MANAGEMENT. They don't act in your best interest, but they have a closed market. This group is way more qualified than them. You gotta great wealthy future ahead. Enjoy it! Agree with up to late, millionaire next door or the two wealthy barbers should be read as most MD's spend like drunken sailors eventually. I know too many who are a .5% interest rate increase away from bankruptcy. Mind boggling, when making $100,000's/year.


thanks for the post. this is what i was expecting from you CMFers... not going with the mainstream MD Management. I'm curious as to why a holding company is necessary when investments within the corp hit 100,000... can you explain more?


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## atrp2biz (Sep 22, 2010)

My understanding is that the holding company (HC) does not own shares of the PC (it can't...it's not a family member)--it is capitalized by 'loans' from the PC. The HC pays interest at the prescribed rate the the PC. If something happens from a liability standpoint with the PC and personally, since the HC is not a PC, the assets of the HC are liability protected. This is what someone told me many moons ago. 

Is this correct?


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## Cal (Jun 17, 2009)

I think the biggest benefit of incorporating is to retain earnings within it. You know how much money you need to carry your lifestyle. I am sure your accountant could direct you in regards to the rules of your professional governing body in regards to shareholder qualifications.


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## CPA Candidate (Dec 15, 2013)

nahc said:


> Professional corps for doctors benefit from the small business deduction.
> 
> Only if you take all the money out. Otherwise, if you save more than about 50k, as above, you gain from treating your corp like a no-limits RRSP. If you're not saving 50k a year as a doctor, either you are very junior or you should re-examine your needs and wants...


Yes they can, if more than 6 employees or provide services for an associated company. I should have mentioned that.

The tax deferral of leaving the money in the business is real, but this isn't a capital intensive business. What are you going to do with excess cash? Investments with get hit will get hit with the additional refundable tax on interest and Part IV tax in dividends.


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## nahc (Feb 22, 2011)

CPA Candidate said:


> Yes they can, if more than 6 employees.


From T4012 - T2 Corporation Income Tax Guide:
A business is eligible for the Small Business Tax Deduction if

-it is a private corporation;
-it is a corporation that was resident in Canada and was either incorporated in Canada or resident in Canada from June 18, 1971, to the end of the tax year;
-it is not controlled directly or indirectly by one or more non-resident persons;
-it is not controlled directly or indirectly by one or more public corporations (other than a prescribed venture capital corporation, as defined in Regulation 6700);
-it is not controlled by a Canadian resident corporation that lists its shares on a designated stock exchange outside of Canada;
-it is not controlled directly or indirectly by any combination of persons described in the three previous conditions;
-if all of its shares that are owned by a non-resident person, by a public corporation (other than a prescribed venture capital corporation), or by a corporation with a class of shares listed on a designated stock exchange, were owned by one person, that person would not own sufficient shares to control the corporation; and
-no class of its shares of capital stock is listed on a designated stock exchange.
-taxable capital employed in Canada of less than $10 million

You don't have any limits on employee number. My PC has one employee--me; the taxes are done by a professional accountant and I have structured my PCs so that I benefit from the small business deduction.



> The tax deferral of leaving the money in the business is real, but this isn't a capital intensive business. What are you going to do with excess cash? Investments with get hit within the additional refundable tax on interest and Part IV tax in dividends.


Invest and invest it, on a tax-advantaged basis. Try and do extreme buy-and-hold, and avoid dividend stocks if possible (cf:atrp2biz's previous posts on the subject). Flow-through any dividends from your investments to yourself. I think it's a very efficient way of saving money and well worth the small expenses of paperwork/licensing/regulatory you make each year.


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## CPA Candidate (Dec 15, 2013)

If that's the case, you haven't been declared as a personal service corporation for whatever reason. I don't know your situation or what you do. A personal services corporation is the case where a corporation get set up between what would normally be a employer-employee relationship.

Like I mentioned, investments held in a private corporation get hit with additional taxes on interest and dividend. You cannot use a private corporation to hold investments and gain any tax benefit over holding them as an individual. Otherwise, we'd all be doing this.

https://repsourcepublic.manulife.co...ERES&CACHEID=9f9b1800433c3fd8b844fe319e0f5575

This link explains the taxes on types of investment income earned in a corporation. Pay particular attention to Appendix B.


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## nahc (Feb 22, 2011)

A PSB is Where:
• an individual or a related person (called an “incorporated employee”) is a specified shareholder of Corporation A (ownsmore than 10% of any class of shares), and
• the incorporated employee provides services on behalf ofCorporation A to Corporation B, and but for the existence of Corporation A, the incorporated employee could reasonably be regarded as an employee of Corporation B,
then
• Corporation A will be considered to carry on a “personal services business” in a taxation year
Exceptions
• Corporation A employs more than 5 full-time employees, or
• the amount paid or payable for the services provided by Corporation A to Corporation B is received or receivable from related Corporation C



CPA Candidate said:


> If that's the case, you haven't been declared as a personal service corporation for whatever reason. I don't know your situation or what you do. A personal services corporation is the case where a corporation get set up between what would normally be a employer-employee relationship.


From a very ancient law opinion http://www.wvllp.ca/assets/files/pdf/Recent Developments Affecting Professional Corporations.pdf
"In the many rulings that have been issued relating to the incorporation of professionals, a ruling has
always been sought that merely having the professional incorporate and enter into an employment
contract with the professional corporation does not attract the application of the personal services
business rules. In most cases, it is clear whether the professional is carrying on an independent
practice."

I provide very standard, government-paid-for, medical services. If I wasn't incorporated, I would be considered in independent practice, as would the majority of doctors on this forum. The only time I've been an employee (as defined by the CRA) was when I was a resident. There are not a lot of positions (unless in academia or Alternative Renumeration Plans) where a doctor is considered an employee.

All of the incorporated doctors I have worked with (must be hundreds if not a thousand), have never been deemed a personal service business by CRA. I would say about 50% of my partners are incorporated. I would have heard the moaning by now if they owed back-taxes a PSB.



> Like I mentioned, investments held in a private corporation get hit with additional taxes on interest and dividend. You cannot use a private corporation to hold investments and gain any tax benefit over holding them as an individual. Otherwise, we'd all be doing this.


The key point is to keep the money in the corp so you can compound it in a tax-advantaged manner =). Appendix B is what happens if you take it out. If there is no advantage, why are so many doctors (etc) incorporated? From what I remember, the government allowed doctors to incorporate because medicine is really a business and to allow them some method to save for their retirements. It's considered a perk. MD management and most accounting firms that specialize in MD finances wouldn't be recommending this if PC were considered PSBs or if it didn't make financial sense (regardless of the fat fees they charge for what you can do yourself).


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## jumbalaya (Jan 17, 2013)

interesting that "only" 50% of the doctors youve worked with are incorporated... is there a reason behind this?


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## Eclectic12 (Oct 20, 2010)

heyjude said:


> Thank you for clarifying that.
> 
> I should have been more precise: one can withdraw money from an RRSP at any time , and pay the tax. In fact, as an early retiree, that is what I am doing in a gradual manner while in a low tax bracket, in order to avoid being forced to take RMDs at age 71 and up that would immediately boost me to the highest marginal tax rate.


From other posts, I was less worried about you and more worried about those who either don't think they can withdraw or confuse the RRSP withdrawal withholding tax with a "penalty" for early withdrawal. 


There must be a fair amount in it for a 7.38% of the FMV to be the deciding factor at age 72 ... so it's good you are running with the plan.


Cheers


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## Jagas (Feb 11, 2013)

In what situation would an employee-employer relationship ever exist between a Doctor and their patients? The PSB issue is very separate from a Professional Corporation issue.

As far as whether it makes sense to incorporate it will depend on the specific facts for every different situation. The major benefit is when far more income is being earned than is required to fund personal lifestyle. Thus, the ability to be able to save money in a corporation, paying a much lower rate of initial tax allowing one to earn additional income with the resulting larger amount of capital available due to the tax deferral. If the ultimate after-tax earnings on the resulting capital differential exceeds the set-up and maintenance cost of the corporate structure, you win. In certain jurisdictions for certain professions you get the added benefit of income splitting.


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## nahc (Feb 22, 2011)

jumbalaya said:


> interesting that "only" 50% of the doctors youve worked with are incorporated... is there a reason behind this?


The other 50% *of my partners* spend ALL their money (Aston Martins, custom-built homes, yachts, wines, etc)-- and a small minority can't be bothered because they are retiring soon. The newish partners of mine that are frugal and/or without mortgage all have incorporated.


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## atrp2biz (Sep 22, 2010)

CPA Candidate said:


> Yes they can, if more than 6 employees or provide services for an associated company. I should have mentioned that.
> 
> The tax deferral of leaving the money in the business is real, but this isn't a capital intensive business. What are you going to do with excess cash? Investments with get hit will get hit with the additional refundable tax on interest and Part IV tax in dividends.


Another thing to consider is an efficient use of the Capital Dividend Account. Using *tax-deferred capital*, half of the capital gains within the corp flow through tax-free to shareholders through the CDA. This is another material benefit to the use of PCs.


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## GPM (Jan 23, 2015)

jumbalaya said:


> thanks for the post. this is what i was expecting from you CMFers... not going with the mainstream MD Management. I'm curious as to why a holding company is necessary when investments within the corp hit 100,000... can you explain more?


The 4 reasons for us to stop at $100,000 were to make the cost of the holding company worthwhile, the accounting easier (no mixed up earnings-straight returns and company profit), keeping the money safe in case the liability failed (unlikely but my accountant, lawyer and financial advisor were more comfortable), and the government frowned on more. You can keep the holding company totally separate where you own the holding company, and you own the operating company and they are not associated. We did this with our companies while in Saskatchewan. To be honest, I had an accountant who was a partner at KPMG, and a lawyer who was much better than I needed. We had two op co's feeding the holding company, keeping all as seperate entities. I was young and still have no idea how the money was transferred, but there was lots of paper work. In BC, we simplified it by the holding company owning shares. Everyone is satisfied it's secure. I had the discussion here about combing the holding company with one of the operating companies to save money, but everyone involved liked the extra layer of protection. It's relatively cheap if you build up a few hundred thousand dollars. Also, as an aside, having a corporation really simplifies your taxes- business income, personal income. A sole proprietorship situation is much harder to track. Hope this helps!


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## atrp2biz (Sep 22, 2010)

GPM said:


> [...] In BC, we simplified it by the holding company owning shares.


This is a material difference between AB and BC.

BC Health Professions Act
http://www.bclaws.ca/EPLibraries/bclaws_new/document/ID/freeside/00_96183_01

43 (1) A board must issue or renew a permit authorizing a corporation to operate as a health profession corporation if satisfied that all the following requirements and conditions have been met:

(a) the corporation is a company within the meaning of the Business Corporations Act and is in good standing under that Act;
(b) if a term is prescribed under section 50 (2) (b) for the designated health profession, the name of the corporation includes the term;
(c) all voting shares of the corporation are legally and beneficially owned by
(i) registrants of the college, or
(ii) companies as defined in the Business Corporations Act, all the voting shares of which are legally and beneficially owned by registrants of the college and all the non-voting shares of which are legally and beneficially owned by persons
(A) who are registrants of the college,
(B) who are the spouse, children, parents, siblings or other relatives of a shareholding registrant of the college, or
(C) who reside with a shareholding registrant of the college;
(d) all non-voting shares of the corporation are
(i) legally and beneficially owned by persons who are
(A) described in paragraph (c) (ii) (A) to (C), or
(B) *companies as defined in the Business Corporations Act, all the shares of which are legally and beneficially owned by persons described in paragraph (c) (ii) (A) to (C)*, or


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## GPM (Jan 23, 2015)

Very interesting, the differences between the provinces. BC and Alberta allowed professional corporations long before Saskatchewan. We may have been more like Alberta, hence the three seperate corporations that had no association with each other. The money movements were beyond my knowledge level as a young dentist, so I let the pros handle it. Pity I wasn't older to understand and explain it. BC certainly simplifies things! I think the main point was stated before. Use Accountants and Lawyers that deal with many doctors and dentists so you have the proper information for your Province. I don't think that can be stressed enough. I was lucky to have the accountant who worked with the college of family physicians to set up the corporations guidelines in Saskatchewan. Now I deal with a boutique that only works with professionals in BC. The fellow above who said half his friends spent everything or were retiring makes a very good point. In my experience unincorporated physicians have been misinformed or are completely unaware of the advantages. Not necessarily bad advisors, just ignorant of of the value to professionals. As a side note my sister is also a physician in a different city. She was told not to incorporate by her accountant. Switched to a more knowledgeable one and incorporated.


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