A corp
oration is the most common business structure in Canada. There are many benefits to incorporating your business, including income tax, legal and funding considerations.
To fully understand the advantages of incorporation, it is helpful to possess a basic understanding of the other business structures available to entrepreneurs, these being sole proprietorships and partnerships. Continue reading
Income tax time is here. I’ll be posting some articles soon on income tax for professionals. In the meantime, here is a related article I wrote for medical residents and their first income tax return after residency.
Transitioning to medical practice from residency is a big step.
Completing the requirements of the program, writing certification exams, finding work, getting licensed, applying for hospital privileges, setting up CMPA coverage, etc. There is so much to be done before you can start practicing.
Some things get pushed aside until it’s time to deal with them.
Income tax is often one of those things. And with April 30 approaching, it’s now time.
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The deadline to make an RRSP contribution for a deduction on your 2013 personal income tax return is March 3, 2014. However, the deadline to submit your claim for a CPRSP benefit payment to be deposited to your RRSP by March 3 is Monday, January 20, 2014. The BCMA will still review and process claims received after January 20, but cannot guarantee that the CPRSP basic and length of service benefit payment will be available as an RRSP deduction on your tax return for 2013. Continue reading
Like the TFSA and RRSP, the professional corporation is an important tool for investing and saving. By incorporating your practice or business and investing unused funds within the corporation, you will end up with significantly more money in the future than if you did all your investing personally.
Advocates of incorporation always cite the tax deferral resulting from the difference in the small business rate on active income within a professional corporation compared to the personal tax rates on the same income as being one of the primary reasons to incorporate.
You will often read or hear:
You can keep more after tax money in the company to invest than if you earned it personally.
This sounds great. Buy why? Don’t you have to take the money out of the company and pay tax on it at some point? How does keeping more money in the corporation for investing help when you still have to pay the tax when you take it out? Continue reading
There are several income tax advantaged investment vehicles in Canada, the best known being the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).
Using these tools for investing gives you more funds in the future compared to investing without them.
Add the professional corporation to this list. Continue reading
The aim of this blog is to provide accounting, tax and financial information for various professionals. However, much of the information has been geared towards physicians. While a lawyer or dentist will be interested in articles on tax planning and incorporation, they won`t care much for articles on the Contributory Professional Retirement Savings Plan for physicians.
Although professions have many income tax, accounting, and financial planning similarities, there are also many issues specific to a particular profession. I am going to continue with general information in The Professional Edge, but I will be developing separate blogs for some of the professions.
The first of these new blogs is The Medical Accountant. It`s a work in progress, but I hope to fill it with useful information specific to BC physicians including BCMA negotiated benefits, GST in clinics, transitioning into practice, BCMA health insurance, and much more.
Please take a look, and let me know of any topics that you would like to see covered.
Because a company is taxed at a much lower rate on business income than an individual, there is the potential for a large tax deferral.
Consider a professional who earns $300,000, but only needs $200,000 before tax for personal use. If earned personally in BC, the remaining $100,000 would attract $44,000 of tax, leaving $56,000. If earned by the company, and not taken out, the tax will only be $13,500, leaving $86,500.
By leaving surplus funds in the company, income tax has been reduced by $30,000. Continue reading
Income splitting with wages can save you thousands of dollars. Income splitting with dividends from a professional corporation can save you tens, even hundreds, of thousands of dollars.
My last post explained how income splitting works. In this post, I am going to provide examples of the benefits of income splitting.
The deadline to make an RRSP contribution for a deduction on your 2012 personal income tax return is March 1, 2013. However, the deadline to submit your claim for a CPRSP payment to be deposited to your RRSP by March 1 is January 21, 2013. The BCMA will still review and process claims received after January 21, but cannot guarantee that the CPRSP payment will be available as an RRSP deduction for 2012. Continue reading
I just conducted a workshop for the Professional Association of Residents of British Columbia (PAR-BC) on transitioning to practice for medical residents.
We covered a range of topics including:
I have included a link to the detailed notes from the workshop: Continue reading
In my ongoing series on professional incorporation, I’ve discussed what a professional corporation is (a distinct legal entity) and which professions allow incorporation (doctors, dentists, lawyers and realtors among many others).
I’ve shown how the lower corporate tax rates can assist a professional in a practice or equipment acquisition and help retire business debt faster.
And I’ve shown how salary and dividends paid by a company, although treated differently for income tax purposes, combine to put a professional in the same position as if they had earned the income directly themselves.
But if that’s the case, unless you have large non-deductible expenditures, incorporation doesn’t appear very helpful.
Income Splitting
Income splitting is the shifting of income from a high income person to a lower income person to reduce overall income taxes. Because income is taxed progressively, a lower income person has unused tax brackets if their income is below the highest tax threshold of $132,000. Income splitting utilizes these unused tax brackets. Continue reading
In my last post, I discussed the lower tax rates on professional income earned in a corporation.
In BC, any professional income that you earn personally in excess of $132,000 is taxed at 43.7%. In a professional corporation, the first $500,000 of that income is only taxed at 13.5%. That’s a difference of over 30%.
Sounds pretty good to me. Lower tax rate means less tax. Less tax means more money. More money means….
If only it were that simple.
That money belongs to the company, not you. Somehow you have to get it out of your corporation so that you can use it. Continue reading
The British Columbia Medical Association (BCMA) has recently released the 2012 entitlement amounts for the Contributory Professional Retirement Savings Plan (CPRSP). If you are an eligible physician in British Columbia, you should have received notification of your entitlement.
The BCMA will have emailed your notification if it has an email address on file. Otherwise, you should have received the information in the mail. If you haven’t received anything, you should check your online account with the BCMA or contact the BCMA directly. Continue reading
As I noted previously, there are several benefits to incorporating your practice.
One of the greatest advantages of a professional corporation is access to lower income tax rates.
In Canada, we have a progressive tax system. As you earn more personally, your income is taxed at progressively higher rates. Only income within each tax bracket is taxed at the applicable rate.
The tax rates and brackets for British Columbia are as follows:
As you can see, various types of income are taxed at different rates. For the time being, I am only concerned with the basic tax rates for “regular income” such as employment and business/professional income. I’ll discuss the tax advantaged rates on the other forms of income in later posts.
In my last post, I discussed which professions can incorporate in British Columbia.
But why would you want to incorporate your practice?
Because the other doctors or dentists in your clinic have incorporated, or the other lawyers in your office have their own professional corporations? Because your accountant / lawyer / investment advisor / golf buddy told you to?
I hate to admit it, but when dealing with my kids I’ve often pulled out my parents’ (and everyone else’s) standard saying:
“If your friend jumped off a cliff, would you do it too?”
And the infuriating response I usually get (in addition to my wife’s roll of her eyes) is:
“Maybe – it depends.”
But they’re right. You should understand why you are doing something before actually undertaking it.
The Professional Edge 