These publications are relevant to you if you are a physician, chiropractor, optometrist or veterinarian who operates their own practice or is practicing as an associate. KCPA is committed to helping you increase the efficiency of your accounting and tax affairs, saving you time and money.
Incorporating your practice is the first step in reducing your taxes and increasing the cash flow available to you personally, and to your practice for expansion. The primary tax benefits of a professional corporation (PC) that can be accessed are, the small business deduction, and the deferral of income tax until amounts are paid out to the professional.
There is a significant advantage of incorporating your practice depending upon your circumstances:
A tax deferral opportunity presents itself from the fact that a PC is treated as any other small business corporation carrying on active business in Canada – it will pay income tax in Alberta at the rate of 11% (2019 rate) on its first $500,000 of active business income. The highest personal marginal tax rate in Alberta is 48% and that applies to income in excess of $314,928 (as of 2019). That is a difference of 37 percent. This means for every dollar of taxable income you earn and leave in the corporation, there is a tax deferral of $0.37, assuming you are in the 48% tax bracket. To put it simply, if you can leave $100,000 taxable income in the corporation each year (and not draw it out for lifestyle or other purposes), you can realize a yearly tax deferral of $37,000.
See how a professional corporation can result in an annual tax deferral of over $30,000 for a physician.
Dr. Dennis Parsons (the real name has been changed for confidentiality purposes) and I were chatting at the wedding reception of a mutual friend. Dr.Parsons is a family physician and has been running his own practice for the past 15 years. He is married to Dr. Nikki Parsons (the real name has been changed for confidentiality purposes), an optometrist with her own practice. As a professional couple with one teenage son and another pre-teen son, they are an extremely busy, but committed couple. “Between work and getting the boys to all of their extra-curricular activities, I barely have time to figure out what’s going on with my taxes”, he told me. “I’d like to shave down my tax bill, but a friend of mine said that incorporation will not benefit me”. I was surprised that Dr. Parsons had not been informed of the benefits of incorporation. This is where KCPA was able to offer some meaningful recommendations to improve his tax situation.
The Issue
Dr. Parsons was aware of professional corporations, but had not been informed on how effective they could be at reducing his tax bill and creating future tax planning opportunities. It is important to note that tax planning is a process that not only provides cash flow benefits in the present, but continuing into your future. A professional corporation is the vehicle for those future tax benefits. Whether you are an associate or have your own practice, incorporation can provide benefits at any stage of your career; as long as you don’t require all the income you earn to meet your lifestyle.
The Solution
In this case, Dennis did not require all of his professional income to meet his lifestyle, therefore he could immediately benefit from the tax deferral opportunity of keeping profits within the company. The top marginal tax rate for a person in Alberta is 48%, but profits within a professional corporation are taxed at a much lower rate of 11% (for taxable active business income under $500,000). The chart below illustrates how this strategy would work.
Tax Situation currently as a Sole Proprietorship
Tax Situation with a Professional Corporation
When we compare the situation of operating through a professional corporation versus a sole proprietorship, Dr. Dennis Parsons realizes the following benefits:
- Dr. Parsons would pay $90,900 in taxes (a) as a sole proprietor, whereas with incorporation he would have to pay only $60,650 (b+c), an annual benefit of approximately $30,250.
- How can this $30,250 tax deferral benefit Dr. Parsons’ future? Well, if this annual deferral is simply kept in the corporation as cash, in 20 years it will accumulate to $605,000. Dr. Parsons would able to generate $605,000 more for his retirement by simply incorporating.
- Alternatively, if the $30,250 tax deferral was to be invested annually for 20 years, assuming a 5% annual growth rate, and a 51% tax on investment income, it could grow to $768,000.
The Results
It's clear that incorporating delivers significant and meaningful results when used for practical purposes in your life. In sum, the cash flow benefits of Dr. Dennis Parsons incorporating are:
Cash Flow Benefits of Incorporating
1
This option assumes the following: $30,250 of cash is kept in the professional corporation every year for 20 years without being invested.
2
This option assumes the following: $30,250 is invested every year (held by the professional corporation,) for 20 years, at a 5%annual growth rate, and a 51% tax on investment income.
"This is fantastic! I never knew the opportunity that was available to me through a professional corporation."
— Dr. Parsons
This material is provided for general information only and is subject to change without notice. While every effort has been made to compile this information from reliable sources, no warranty can be made as to its accuracy or completeness. As it is impossible to include all situations, circumstances and exceptions in an article such as this, a further review should be done by a qualified professional within the context of your circumstances. KCPA, or any organization, or any individual involved in the preparation or distribution of this article accept no contractual, tortuous, or any other form of liability for its contents or for any consequences arising from its use.