How salary and dividends differ as an incorporated physician
During your working years, your earnings need to cover both your current financial needs as well as establishing savings to finance your future.
Depending on your situation, taking your compensation as either salary, dividends, or some of each, may be an effective way to meet your goals.
- Salary income: When you draw a salary in Canada, you’re able to make RRSP contributions. Any RRSP contributions will reduce your income tax payable today, and the RRSP will also create tax-deferred investments for the future. However, you will need to pay Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) premiums on your salary earnings (up to a yearly maximum).
- Dividend income: Dividend income is paid from the corporation’s retained earnings. When you are paid by dividends, you won’t be able to make any RRSP contributions based on that income, and you also don’t have to pay CPP or QPP premiums. Opting for dividend income may also lower your overall tax bill, compared to taking compensation in the form of salary. The outcome is usually only possible when your corporate earnings are greater than your operating costs and the remaining earnings are retained and invested in your corporation.
How your compensation choices may change over time
For many incorporated physicians, how they take compensation is influenced by their life stage. Here’s how that might look in practice:
- New in practice and early-career physicians: Early in an incorporated physician’s career, many opt to take a salary. That’s so they can make RRSP contributions. Depending on your circumstances — including the province you live in — using RRSP contributions to lower your tax bill can give you a bigger tax advantage than building up savings in a corporation.
- Mid-career physicians: In the mid-career stage, many physicians opt for a mix of salary and dividends. This allows them to benefit from two different tax advantages: (1) tax deferral on RRSP savings made from salary income, and (2) tax deferral on savings in the corporation. Tax deferral in the corporation is then optimized when dividends are paid from retained earnings and high-rate tax paid on investment income in the corporation is refunded.
- Late-career physicians: Later in their practice years, many physicians transition to using dividends, and not salary, as their principal compensation. This is usually because practice earnings rise over time and exceed spending needs, so retained earnings in the corporation rise. The small business tax rate will allow an incorporated physician to save much faster in the corporation. In most provinces, however, passive (investment) income can be very highly taxed. Paying that income out in the form of dividends may allow the corporation to recover some of the tax paid on passive income.
- Retired physicians: For the retired physician, salary isn’t an option, meaning that compensation from their incorporated medical practice will likely be in dividends. In retirement, dividend income may be supplemented with RRSP and RRIF income, drawn from contributions made earlier in your career.
Finding the balance among your financial goals
When you’re making a decision about your compensation, you’re likely balancing a number of different factors, including:
- How much your practice earns, and how much of your practice earnings you’re able to leave in the corporation
- How much is needed to meet your day-to-day personal spending needs
- How far along you are in your career
- How close you are to retirement
Other factors that may affect your decisions include:
- The current federal tax rate
- A spouse or common-law partner who is a shareholder in your professional medical corporation
For incorporated physicians at all practice stages, making a decision about your compensation may seem overwhelming — as there’s a lot to consider, and it’s important that your choice reflects your personal circumstances and needs.
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.