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As a physician, you have a unique opportunity to shape your financial future by making the decision to incorporate your medical practice. Although many physicians in Canada opt to incorporate, that doesn't mean it's a must for you. This guide outlines the considerations you may want to take into account.

What is physician incorporation?

If you incorporate, you will be creating a separate legal entity — your medical corporation — that owns your medical practice. As you continue to practice, the payments for your medical services will be made to the corporation.

To meet your day-to-day spending needs, you can then withdraw funds from your corporation in the form of salary, dividends, or bonuses; depending on whether you are acting as an employee, shareholder, or owner of the corporation.

Can the costs of incorporation outweigh the benefits?

The costs to get started and maintain your corporation will vary depending on your circumstances.

If you decide to incorporate, you’ll likely need to get professional legal and accounting advice to help you get started and to ensure your corporation meets all of its legal, tax, and reporting obligations each year.

If your situation is straightforward, the start-up costs may only be a few thousand dollars. On the other hand, costs can rise significantly if your situation is more complex, such as if you have multiple shareholders or if you are subject to U.S. taxation, for example.

Then, once you have incorporated, ongoing professional legal and accounting advice may be an important part of helping you ensure you meet tax filing and other annual reporting requirements, such as keeping a corporate minute book and ensuring it is up to date.

What are the tax implications of incorporating?

One key reason physicians incorporate in Canada is for the associated tax benefits. However, those benefits are only helpful to physicians who can make use of them. Thus before making the decision to incorporate, it’s good to understand how incorporating your medical practice will affect your taxes.

If you are an incorporated physician, payments for your services are made to your corporation. Then, after you’ve paid any eligible expenses, your net earnings in the corporation are taxed at a rate between 8% and 16%, depending on your province. (Net corporate earnings over $500,000 may be taxed at a higher rate.)

This is a much lower tax rate than if you’d earned the same income personally, and paid tax at your personal tax rate — which might be as high as 50% or more.

However, you can only benefit from the lower tax on earnings in your corporation if you are able to leave some of your earnings in the corporation, rather than drawing them out to cover your living expenses. If you need most or even all of your earnings to meet your day-to-day living expenses — which is not uncommon for physicians in the early years of practicing — then you may not be able to benefit from the tax rates on earnings in the corporation.

Eventually, you will withdraw the funds in the corporation, such as during retirement. At that time, the withdrawn funds will be taxable at your personal rate. During all of the years the funds were in the corporation, however, they were taxed at lower rates — meaning your savings might grow more quickly than if they were subject to higher personal tax as you earned them.

That’s why an important question in determining whether you should incorporate or not is whether you are able to put aside income and save it in the corporation. Early-stage physicians may have higher expenses — such as repaying medical-school debt, establishing their practice in a new community, or saving for a down payment — which means there’s not as much to set aside to meet future needs. As you get established, however, incorporation may become an option you should consider.

If you have questions about financial planning or whether incorporation is right for you, talk to one of our dedicated RBC Healthcare Specialists and see how they can help.

Read related story: Starting Your Own Practice: 5 Questions to ask yourself