Whether you’re already operating your practice as a professional corporation or you’re still weighing the decision, it’s worth taking a closer look at the benefits – and how to make them work for you.
What is a professional corporation?
When you incorporate, you create a separate legal entity – your professional corporation – that owns your practice. Instead of being paid directly, your earnings go to the corporation, which then pays you through salary, dividends or bonuses.
When should you consider incorporating?
The short answer is: you can incorporate at any time. But whether it makes sense depends on your financial situation and future plans:
1. Can you leave excess income in the corporation?
One of the biggest advantages of incorporation is the ability to leave excess income in the corporation and defer personal taxes.
If you need most or all of your income for living expenses, incorporation may not be beneficial just yet, which is most often the case for physicians in the early stages of their career, who are:
- Paying off student loans
- Setting up a new practice
- Saving for a first home
2. Consider the start-up costs
If your situation is straightforward, the start-up costs may only be a few thousand dollars. This will likely include professional legal and accounting advice to get things set up properly. Legal fees typically cover the incorporation process, drafting essential documents, and ensuring you comply with provincial regulations. On the accounting side, you’ll need help setting up a business bank account, registering for taxes, and putting basic bookkeeping systems in place.
Your costs can increase if your situation is more complex, such as if:
- You have multiple shareholders
- You are subject to U.S. taxation or cross-border planning
3. Ongoing legal and accounting needs
Once you’ve incorporated, will you have the funds you’ll need to stay on top of certain responsibilities? Examples could include:
- Filing annual tax returns for the corporation
- Maintaining a corporate minute book
- Working with legal and accounting professionals to keep everything compliant and up to date
What are the tax benefits of incorporating?
The major benefit of incorporating is for the tax deferral and savings. When you earn income inside a corporation, it’s taxed at flat corporate rates, which are much lower than personal rates. If your net professional income is under $500,000, you’ll likely qualify for the small business rate, which ranges from about 9% to 12.2%, depending on your province. Income above that is taxed at the general corporate rate,
typically 23% to 31%.
Compare that to personal tax rates, which are graduated. That is, the more you earn, the higher the rate. At the top end, personal rates can hit 45% to 55% depending on where you live. So, keeping income in the corporation can mean significant savings.
There are also other benefits, such as:
- Income splitting: You may be able to pay a reasonable salary or dividends to a spouse or adult children involved in the business –especially useful later in life when you’re 65 or older and can split retirement income more easily.
- Lifetime Capital Gains Exemption: If you sell your practice one day, a significant portion of the capital gains may be tax-free – a valuable benefit for those who qualify.
- RRSP contributions: If you pay yourself a salary (vs. dividends), you can contribute to an RRSP, which helps reduce current taxes and grow retirement savings tax-deferred.
It’s worth getting advice from a professional to help you determine how to make the tax advantages work for you.
The bottom line
Incorporation is a powerful tool, and when used thoughtfully, it can bring real peace of mind and long-term financial benefits. The value it offers depends on your personal goals, your financial circumstances, and where you are in your career. Whether you’re exploring the idea or already incorporated, taking the time to understand the tax landscape and how to maximize the benefits can make a meaningful difference now, and in the years ahead.
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Speak with your financial professional or an RBC Healthcare Specialist.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
