Physicians practicing in Ontario are permitted to incorporate their medical practices and operate as a medicine professional corporation (“MPC”). The law grants corporations certain powers that may be financially beneficial for physicians, such as the ability to hold assets and incur liabilities; as well as certain added responsibilities which may be somewhat onerous, such as additional paperwork and fees. For these reasons, recent graduates, solo or small groups of practitioners and newly resident physicians may be interested in exploring this option. This series of blogs explores the following topics:
i) Part 1: Advantages of incorporating as an MPC
ADVANTAGES OF INCORPORATING AS AN MPC
Corporations are separate legal entities from their owners (i.e. shareholders). This separate legal status can offer shareholders certain financial benefits, such as: tax deferral, income splitting, deducting business expenses and limited personal liability.
- Tax Deferral
Physicians practicing in Ontario are probably subject to the highest marginal personal income tax rate. In contrast, on the first $500,000 of income, MPCs can take advantage of the Small Business Deduction (“SBD”) and only pay the lower corporate income tax rate (in Ontario 15.5%). When compared to the highest Ontario personal tax rate (49.53%) this represents a 34.03% tax deferral – i.e. for every $100,000 left in the company, the net tax savings will be $34,030. To enjoy these savings, the earnings must be left in the MPC. However, any earnings left in the MPC may be invested as they would be outside of the MPC, which is an effective approach for the physician to accumulate savings in a tax-efficient manner.
- Income Splitting
Income splitting is another approach to limiting a physician’s personal tax burden by allowing income from an MPC to be reallocated to eligible family members (i.e. spouse, parents, adult children and trusts for minor children). These recipients are able to take advantage of lower tax brackets and available credits and deductions to minimize overall tax obligations. Typically, this is achieved by family members receiving non-voting (preferred) shares and having dividends declared on those shares. Dividends are treated more favorably than other types of income. For instance, a family member with no income can receive non-eligible dividends of approximately $35,500 without paying federal income tax. It is recommended that a tax adviser be consulted regarding provincial income taxes, Ontario Health Surtax and Alternative Minimum Tax implications.
- Paying life insurance through your corporation
Paying life insurance where the MPC is the beneficiary allows the physician to pay the premiums with pre-personal tax dollars. Although the premiums are not deductible by the MPC (unless insurance is required by a financial institution as a condition for financing) there is a net cash benefit of paying the premiums with dollars that have not been subject to the high personal tax rates. The insurance proceeds are then paid out tax-free using the company’s capital dividend account.
- Limiting Personal Liability
While physicians are still liable for their professional work when providing services via an MPC and subject to discipline from their licensing body, there may be some modest liability advantages with respect to non-professional matters (e.g. loans, leases). In such non-professional business transactions, the corporation will only be liable to the extent of the corporation’s assets, not the shareholder’s personal assets, unless the transaction implicates some legal wrongdoing and exposes the shareholder to personal liability.
We are always happy to discuss any of the advantages enumerated above, and answer any questions you may have about establishing an MPC.
Note: Tax information was graciously provided by our friend Scott Vloet, Partner at Vloet & Kan LLP.