New doctors often face the question of whether to incorporate or not early on in their practice. In that regard the question that I am most often asked is whether incorporating a medical practice is necessary, and what are its advantages. While the answer to these questions depends on many different factors, below are some of the factors that new doctors should have in mind when making the decision.
Under the Regulated Health Professions Act, medical professionals are permitted to establish corporations for the purpose of practicing medicine. In Ontario, these medical professional corporations must be incorporated under the Ontario Business Corporations Act. While liability protection is generally the main non-tax reason for incorporation, a professional corporation does not provide the same limitations on liability as a regular corporation. In other words, as a doctor you may be sued for malpractice and your professional corporation will not provide any additional limitations on the liability faced. The only limitation that the professional corporation will provide is in the form of some protection from creditors if capital was borrowed in the form of loans for such things as financing an office or medical equipment. In such instances, the professional corporation will shield its shareholders from personal liability should the corporation be unable to meet its responsibilities under the loan.
The more important benefit of incorporating, aside from limited liability protection, is primarily in tax and retirement planning. Consider the following:
- Practicing through a professional corporation allows for the issuance of salary or dividends to family members in lower tax brackets thus making it a very attractive tax planning tool. In Ontario, the college of Physicians and Surgeons allows for the direct family members of a practicing doctor to own non-voting shares. The ownership of shares by family members provides the option of distributing income (income – splitting) and therefore lower the tax burden of the practicing doctor and the family as a whole.
- Professional corporations also allows for tax deferral by retaining earnings in the corporation. The corporation can choose when to pay the practicing doctor and other shareholders, therefore creating tax deferral opportunities with proper planning. In other words, the corporation can determine the fiscal year in which to make distribution to the shareholders, and therefore defer the taxes payable personally by the shareholders depending on cash flow needs. This deferral is also significant in other ways as it allows for the investment of the retained earnings.
- Professional corporations allow for capital gains exemption on the sale of shares of a qualifying corporation. We will discuss this in more detail in another article.
- Professional corporations allow for the payment of life insurance premiums, where the corporation is the beneficiary, through the corporation with pre-personal tax dollars. This results in a net cash benefit since the premiums are paid with the corporate after tax dollars. The insurance proceeds are paid out tax free using the corporation’s capital dividend account, which ultimately increases the amount to be passed on to the estate.
Although incorporation should be considered based on a variety of different factors, due to the above mentioned reasons, new doctors, solo practitioners and groups of practitioners are advised to set up a professional corporation as early as possible in their practice. This is because new doctors likely do not have many assets or debt to contribute to the corporation. The longer a doctor practices before setting up his/her professional corporation the more assets and debt is created by the practice, thus making it more complicated to incorporate.
I am always happy to discuss and answer any questions you may have with respect to medical professional corporations in more detail.
“This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult the lawyers at Levy Zavet PC.”