MDP partners with healthcare professionals and other professional companies throughout Ontario. For professionals who are considering incorporating their practice, there are numerous benefits that can be realized.
The pros of incorporating your practice:
- Corporation is a separate legal entity from its owner
- Ability to limit commercial liability (not personal liability for professional negligence)
- Estate and succession planning opportunities
- Low tax rate on first $500,000 of taxable income depending on association
- Lifetime capital gains exemption (“CGE”) available to certain health care professionals
- Pay salary and dividends to family members to income split and utilize lower marginal rates
- Opportunity to earn investment income at preferential tax rates
- Leave income in the company that is not needed for personal expenses and thereby defer income tax
- Defer paying personal income tax at the owner level
- Use insurance strategies to reduce income taxes at death and while living
Frequently Asked Questions | Planning For The Future – Investments
Here is a list of frequently asked questions concerning future investments. Click the question to reveal the answer.
Since the early 2000’s, regulated professionals are allowed to incorporate their practices as a result of new legislation. There are a number of specific requirements that must be met, one of which is contained in Paragraph 3.2 (2)(5) of the Ontario Business Corporations Act (OBCA):
“The articles of Incorporation of a professional corporation shall provide that the corporation may not carry on a business other than the practice of the profession but this paragraph shall not be construed to prevent the corporation from carrying on activities related to or ancillary to the practice of the profession, including the investment of surplus funds earned by the corporation.”
As a result, provided that the investing activities do not become so significant that they become the primary avenue of business, surplus funds within the corporation can be invested in stocks, bonds, mutual funds and possibly other financial instruments. We do not recommend the holding of investment-type real property in your professional corporation.
When the investment portfolio becomes substantial, additional planning may be required for a tax efficient mechanism in removing the funds to another entity.
We recommend investing through the corporation.
To fully utilize the income tax deferral benefit available to the corporation, we recommend only withdrawing funds needed for lifestyle. The residual can be invested by the corporation as mentioned above. Not only will the investment portfolio grow at a faster pace but your personal tax rate at withdrawal in the future could potentially be lower, achieving an overall tax saving.
RRSP is a great tax deferral vehicle for an unincorporated person. This may not be true for you after incorporation. In order to generate RRSP room, you must receive sufficient salary from your corporation. The problem with a salary is that a salary is not as tax efficient as a dividend. In addition, salary would trigger a requirement to contribute to the Canada Pension Plan, which costs over $4,000 per year currently. For these reasons, we recommend forgoing the traditional salary / RRSP route. Instead, your remuneration would consist of dividend only, with your corporate investment account being viewed as your “personal RRSP” going forward. There are some exceptions to this general principal.
TFSA, on the other hand, is a handy tool in saving for rainy days. Given the small annual limit, you may
consider contributing to the extent personal funds are available.
If your life insurance is not currently owned by your corporation, you should consider transferring it to the corporation. Although a payment of life insurance premium is not deductible either way, it is cheaper to pay from after-tax dollars in the corporation because of the low corporate tax rate. In addition, some types of life insurance product contain an investment component that will grow tax free.
At retirement, you may be able to borrow against the investment account for your retirement cash needs. When the life insurance death benefit is eventually paid out at your demise, an amount equal to amounts you have borrowed during your lifetime will be held back, with the balance being distributed to your estate with no tax.
Corporate-class investments are another tax beneficial investment which would provide overall tax effective financial growth.
Personal & Corporate Income Tax Rate Comparison