Incorporation For Physicians and Dentists
January 1st, 2006 was a very important day in the financial lives of physicians and dentists… Here is what happened on that auspicious day: Brain drain should have officially ended with a new law that took effect that day with respect to the tax treatment of professional corporations set up by doctors and dentists.
Doctors and Dentists have been able to incorporate themselves since 2001 - but not many did - because unless they had a habit of saving, there was no real point. The corporate entity did not afford you any creditor protection, or release you from any professional liability - all it did was provide you with the ability to pay 18% tax on corporate income up to $400,000 per year instead of paying about 45% tax on personal income.
Since most doctors and dentists spend more than what they make for the first 10 years - it didn’t really do what it was intended to: make it more attractive to stay in Canada by substantially lowering the taxes these professionals have to pay.
BUT in January of 2006 some enhancements were added that now make it, quite frankly, a NO-BRAINER to incorporate. You now have the ability to issue non-voting shares of the corporation to your spouse, children and direct parents. They do not have to be part of the business in any way - but now you can issue them dividends from the corporation. Why is this advantageous? If they don’t have an earned income then they can effectively get $36,000 in dividends without having to pay any tax.
Still don’t know what the ramifications could be? Let me draw out a sample of BEFORE incorporation and AFTER:
So in this rudimentary example, this doctor/dentist would realize a tax savings of $57,255. In both cases, the actual amount of money that was spent by the household was the exact same at $232,193, but with the incorporation the doctor/dentist was able to retain $57,255.
After 10 years that’s almost $600,000 not even factoring in growth on the money.
In other words, if you are a doctor or dentist, you need to incorporate. I know that for physicians, incorporation should cost you no more than $2500 through a lawyer, or if you can muddle through the process yourself with the College of Physicians and Surgeons in your own province it should run about $1500. Annual costs to keep up your incorporation should be no more than $250.
