As a physician or dentist, you have a unique opportunity to shape your financial future by deciding to incorporate your practice. Although many physicians and dentists in Canada opt to incorporate, that doesn’t mean it’s a must for you. This guide outlines the considerations you may want to consider.
What is a professional corporation?
If you incorporate, you will create a separate legal entity — your professional corporation — that owns your dental practice. Your services will be paid to the corporation as you continue to practice.
To meet your day-to-day spending needs, you can withdraw funds from your corporation through salary, dividends, or bonuses, depending on whether you are acting as an employee, shareholder, or owner.
Can the costs of incorporation outweigh the benefits?
The costs to start and maintain your corporation will vary depending on your circumstances. If you decide to incorporate, you’ll likely need professional legal and accounting advice to help you get started and ensure your corporation meets all its legal, tax, and reporting obligations each year.
If your situation is straightforward, the start-up costs may only be a few thousand dollars. On the other hand, prices can rise significantly if your circumstances are more complex, such as if you have multiple shareholders or if you are subject to U.S. taxation, for example.
Once you have incorporated, ongoing professional legal and accounting advice may be an essential part of helping you ensure you meet tax filing and other annual reporting requirements, such as keeping a corporate minute book and ensuring it is up to date.
What are the tax implications of incorporating?
One key reason physicians or dentists incorporate in Canada is the associated tax benefits. However, those benefits are only helpful to physicians or dentists who can use them. Thus, before deciding to incorporate, it’s good to understand how incorporating your practice will affect your taxes.
If you are an incorporated physician or dentist, your services are paid to your corporation. So, after you’ve paid any eligible expenses, your net earnings in the corporation are taxed depending on your province.
This is a much lower tax rate than if you’d earned the same income personally and paid tax at your personal tax rate. However, you can only benefit from the lower tax on earnings in your corporation if you can leave some of your earnings in the corporation rather than drawing them out to cover your living expenses.
If you need most or even all of your earnings to meet your day-to-day living expenses — which is not uncommon for physicians or dentists in the early years of practicing — then you may not be able to benefit from the tax rates on earnings in the corporation.
Eventually, you will withdraw the funds in the corporation, such as during retirement. At that time, the withdrawn funds will be taxable at your personal rate. During all of the years, the funds were in the corporation; however, they were taxed at lower rates — meaning your savings might grow more quickly than if they were subject to higher personal tax as you earned them.
That’s why an essential question in determining whether you should incorporate or not is whether you can put aside income and save it in the corporation.
Early-stage physicians or dentists may have higher expenses — such as repaying a student loan, establishing their practice in a new community, or saving for a down payment — so there’s not as much to set aside to meet future needs. As you get established, however, incorporation may become an option you should consider.
Visit www.rbc. com/healthcare for more information or to connect with an RBC Healthcare Specialist today.
Ahad Ahmed is a seasoned professional and passionate about enabling healthcare professionals to achieve their personal and professional goals. As one of the founding members of the RBC Healthcare team, he leverages his deep understanding of the industry to lead RBC’s dental segment strategy and develop key partnerships and tailored solutions that create value for dentists.