How much tax does incorporating save a veterinarian
Key takeaways
- A veterinary corporation pays about 11 percent on the first $500,000 of active income, compared to a top personal rate above 50 percent.
- Income above $500,000 in a corporation is taxed at about 27 percent.
- The savings come from deferral, you leave money in the corporation and it grows at the corporate rate instead of your personal rate.
- Passive investment income between $50,000 and $150,000 a year shrinks the $500,000 small business limit.
The 11 percent number
A Canadian-controlled private corporation pays about 11 percent on active income up to $500,000. That is 9 percent federal plus 2 percent in BC. Above $500,000 the rate climbs to about 27 percent, or 15 percent federal plus 12 percent BC.
The table below shows what a veterinarian earning $200,000 in corporate income would keep in the corporation versus taking it all personally.
| Scenario | Tax rate | Tax on $200,000 | Kept in the business |
|---|---|---|---|
| Corporate (11%) | 11% | $22,000 | $178,000 |
| Personal (top bracket) | about 50% | about $100,000 | about $100,000 |
The difference of roughly $78,000 stays in the corporation to invest or fund growth.
It is deferral, not avoidance
The 11 percent rate is a deferral. When you eventually take money out of the corporation as a salary or dividend, you pay personal tax on top of what the corporation already paid. The corporation’s earnings are effectively prepaid at the corporate rate, and the personal tax you pay when you withdraw is reduced by that amount.
The benefit is time. Money that would have gone to the taxman this year stays in your practice earning returns.
Pro tip: the deferral works best when you can leave meaningful income in the corporation year after year. A veterinarian drawing only enough to cover personal living expenses and leaving the rest inside the corporation compounds the saving.
When the small business limit shrinks
The $500,000 small business limit is not guaranteed. If the corporation earns more than $50,000 in passive investment income in a year, the limit starts to shrink. At $150,000 of passive income, the limit is gone entirely and all active income is taxed at the higher 27 percent rate.
Passive income includes interest, dividends, rental income, and capital gains from investments the corporation holds. Active fee-for-service income from your veterinary practice does not count toward this threshold.
Is incorporating right for every veterinarian?
If your practice earns $100,000 a year after expenses, the corporate deferral is roughly $39,000 per year compared to taking that as personal income. Over five years, that grows to roughly $195,000 plus any investment returns inside the corporation.
If your practice earns $30,000 a year after expenses, the corporate deferral is smaller and the ongoing compliance costs of running a corporation, tax returns, minutes book, filings, may outweigh the benefit.
Frequently asked questions
Is the 11 percent rate permanent?
No. It only applies to the first $500,000 of active income each year. Any active income above $500,000 is taxed at about 27 percent.
Does the 11 percent rate apply to investment income?
No. Investment income like interest and dividends is taxed at higher rates inside a corporation. The 11 percent rate applies only to active business income.
Do I have to pay myself a salary from the corporation?
No, but paying a salary creates RRSP room and CPP contributions. Dividends do not. If you want RRSP room, you need a T4 salary.
Can I save more than 11 percent by using a different corporate structure?
The 11 percent is the small business deduction rate for a BC CCPC. There is no lower rate available for active income through restructuring.
What happens to deferred tax when I sell the corporation?
When you sell shares of a qualifying corporation, you may be able to use the lifetime capital gains exemption to reduce the tax on the gain. This does not eliminate the deferred tax on retained earnings, which is still paid when the earnings are distributed.
Full breakdown on the veterinary tax page at ghumans.ca/veterinary.
General information only. Talk to us about your situation.