How much tax does incorporating save a doctor
Key takeaways
- A medical corporation pays about 11 percent on the first $500,000 of active income, compared to a top personal rate above 50 percent.
- The saving is roughly 39 points of tax on income left in the corporation versus taking it as personal income.
- The benefit is deferral, taxed at the corporate rate now, personal rate later on withdrawal.
- Passive investment income between $50,000 and $150,000 a year shrinks the $500,000 small business limit.
The gap between corporate and personal rates
A Canadian-controlled private corporation pays about 11 percent on active income up to $500,000. That is 9 percent federal and 2 percent in BC. Above $500,000 the rate is about 27 percent, or 15 percent federal plus 12 percent BC.
The top personal rate in BC is above 50 percent. The difference between 11 percent and roughly 50 percent is about 39 points. That is the annual saving on every dollar of income you leave in the corporation instead of drawing personally.
| Income scenario | Corporate tax (approx) | Personal tax at top rate (approx) | Annual deferral |
|---|---|---|---|
| $100,000 in corp | $11,000 | roughly $50,000 | about $39,000 |
| $200,000 in corp | $22,000 | roughly $100,000 | about $78,000 |
| $400,000 in corp | $44,000 | roughly $200,000 | about $156,000 |
It is deferral, not avoidance
The 11 percent rate is not a permanent saving. When you eventually take money out of the corporation as salary or dividends, personal tax applies. But the corporation’s earnings have already been taxed at the corporate rate, and the personal tax you pay on withdrawal is reduced by that amount through the dividend tax credit or salary deduction.
The real benefit is time. Money that would have been paid to the government this year stays in your medical corporation, earning investment returns, until you need it.
Pro tip: the deferral compounds over a career. A physician who incorporates at 35 and leaves $100,000 in the corporation each year would have roughly $5 million in corporate savings by age 65, assuming modest investment growth inside the corporation.
The small business limit and passive income
The $500,000 small business limit is not automatic. 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 zero and all active income is taxed at about 27 percent.
Passive income includes interest, dividends, rental income, and capital gains from investments the corporation holds. Your medical fee income does not count toward the passive-income threshold.
Does incorporation make sense for every doctor
If your practice bills $300,000 a year after expenses, the corporate deferral is roughly $117,000 per year compared to taking that as personal income. Over ten years, that is roughly $1.17 million plus investment returns inside the corporation.
If your practice bills $60,000 a year after expenses, the deferral is about $23,000. The annual compliance costs of a corporation, tax return, minute book, legal filings, may eat into that benefit.
Frequently asked questions
Is the 11 percent rate guaranteed every year?
No, it applies to each year’s active income up to the small business limit. If the limit shrinks due to passive income, or if provincial rates change, the calculation changes.
Does the 11 percent rate apply to all my corporation’s income?
No. Only active business income qualifies. Investment income like interest and dividends is taxed at higher rates inside the corporation.
Do I have to pay myself a salary to get the corporate rate?
No. The corporate rate applies whether you pay yourself or not. But paying yourself a salary reduces corporate income and creates RRSP room. Dividends do not create RRSP room.
What tax happens when I sell the medical corporation?
The lifetime capital gains exemption may apply to a qualifying share sale. Retained earnings inside the corporation are still taxed when distributed to you personally.
Is the deferral lost if I move provinces?
Yes and no. If you move your practice to another province, the provincial rate changes. The federal portion stays the same. The deferral amount would change based on the new province’s corporate and personal rates.
Full breakdown on the doctors page at ghumans.ca/doctors.
General information only. Talk to us about your situation.