Posted: September 2, 2010
Written by: Bradley Madison
Doctors, like many Manitoban professionals, are permitted by their governing Act to incorporate and practice through a “professional corporation.” What does this mean? For the patient, not a thing. But for the physician, it can mean substantial tax advantages.
But, of course, there are disadvantages as well. The main drawbacks to incorporation are the initial and ongoing costs associated with it together with the added burden of documenting corporate decisions and transactions and complying with corporate and tax filing requirements. However, these may be greatly outweighed by the advantages, especially if one employs professional assistance.
As my colleague, Brant Harvey, mentioned in his post relating to small business, generally one of the main advantages to incorporation is protection from liability. However, as with many other Manitoba professionals, practice through a professional corporation does not insulate physicians from professional liability claims brought by patients/clients. So with this substantial advantage removed, why incorporate?
Tax Deferral – This is the main advantage for most incorporated professionals. To the extent that not all the income generated is required by the physician for day-to-day expenses, income can be retained in the corporation and invested, and the taxes deferred until a later time. In Manitoba, each dollar that an unincorporated physician earns as income is taxed at up to 46.4% (the top marginal rate) before it lands in her hands, leaving 55 cent after-tax dollars with which to pay business expenses or invest. However, in Manitoba, the first $400K of corporate small business income is currently taxed at 12% (and headed downward to 11%). So when the incorporated physician’s professional corporation earns a dollar of income, it pays the tax and effectively has 88 cents worth of buying power left to pay business expenses and invest – a substantial difference. Additionally, the incorporated physician can draw money out of the corporation as she sees fit. If she stops working for a period (say for a maternity leave), she can continue to pay herself over this time. So for example, instead of paying herself $200K in tax year 1 and nothing in tax year 2, she can pay herself a steady income of $100K over both tax year 1 and 2 for an overall tax savings (not to mention making it easier to budget).
Income Splitting – If the physician has lower-income immediate family members some of the corporation’s income may be paid out to these family members, and taxed at a lower marginal rate, potentially reducing the overall tax burden of the physician’s immediate family. There are strict tax rules around this so please seek professional advice.
Other Advantages – There may be a number of other potential ways that, depending on the physician’s personal situation, a professional corporation may yield tax and estate planning advantages. Navigating the requirements for incorporation can be well worth it.