For incorporated Ontario physicians, accumulating cash within a professional corporation can eventually raise an important question: should some of those funds be invested?
Investing through a corporation can play a valuable role in a long-term financial plan. However, investments held corporately are taxed differently from investments owned personally. Understanding these distinctions can help physicians make better-informed decisions about how much to retain, invest and ultimately withdraw.
Corporate Investing vs. Personal Investing
When an Ontario physician earns professional income through a corporation, funds left after corporate taxes and business expenses may potentially remain in the corporation for future needs or be invested.
In certain circumstances, retaining those funds can provide a tax-deferral opportunity because the physician may not immediately incur personal tax on money that stays within the corporation.
However, tax deferral is not the same as tax elimination. Investment earnings generated inside the corporation remain subject to Canadian corporate tax rules, and additional tax may arise when funds are eventually distributed to the physician personally.
For this reason, corporate investing should be considered as one component of a broader tax and compensation strategy.
Different Investments Can Produce Different Tax Results
A corporate investment portfolio may generate several forms of income, including:
- Interest, such as income earned from certain savings products, GICs and bonds.
- Dividends, including dividends received from Canadian corporations and foreign investments.
- Capital gains when investments appreciate in value and are sold.
These types of investment income are not necessarily taxed the same way within a private corporation.
For example, Canada’s corporate tax system includes refundable tax mechanisms for certain investment income. Depending on the circumstances, some corporate taxes may become refundable when qualifying taxable dividends are subsequently paid to shareholders.
Capital gains involve additional considerations, including their potential effect on a private corporation’s capital dividend account (CDA). Eligible and non-eligible dividends may also affect its general rate income pool (GRIP), non-eligible refundable dividend tax on hand (NERDTOH) and eligible refundable dividend tax on hand (ERDTOH) balances.
Subject to the applicable rules and elections, a positive CDA balance may potentially allow capital dividends to be paid tax-free to Canadian-resident shareholders.
Because these rules can interact with one another, corporate investment decisions should not be evaluated solely on an investment’s headline rate of return.
Watch the Passive Investment Income Rules
Passive investment income can also influence a corporation’s access to the federal small business deduction.
Under current federal rules, the $500,000 federal small business limit generally begins to decrease when adjusted aggregate investment income of an associated corporate group exceeds $50,000 in the preceding taxation year.
The federal business limit can generally be eliminated once that amount reaches $150,000, assuming no other reductions apply.
For physicians building substantial investment portfolios within a professional corporation—or an associated corporation—these rules can become an important part of tax planning.
Provincial treatment should be reviewed separately rather than assuming that every provincial rule will produce the same outcome as the federal rules.
Your Investment Mix Matters
Tax considerations should not dictate an investment portfolio on their own. Risk tolerance, diversification, investment time horizon and financial objectives remain essential.
At the same time, the tax characteristics of different investments should not be overlooked.
For example, a portfolio that primarily generates interest income may have different corporate tax consequences from one that produces eligible Canadian dividends or capital gains.
As the value of corporate investments increases, physicians may benefit from reviewing both investment performance and after-tax performance.
Invest Corporately or Pay Yourself?
Another key decision is whether excess cash should remain within the corporation or be withdrawn for personal use or investment.
There is no single answer that applies to every physician.
Salary and dividends can create different personal and corporate outcomes. For example, salary can generally generate RRSP contribution room, while dividends generally do not.
On the other hand, withdrawing additional corporate funds solely to invest them personally could result in personal tax being triggered sooner than if those funds remained within the corporation, depending on the circumstances.
The objective is to coordinate your corporate investments, personal cash needs, compensation and long-term savings strategy rather than treating each decision independently.
Keep Enough Cash Available
Investing every available corporate dollar can introduce unnecessary financial risk.
A professional corporation may require cash for taxes, payroll, equipment, insurance, professional fees or unexpected practice expenses.
Before committing significant corporate funds to investments, consider the level of liquidity your practice requires and how quickly those investments could be converted back into cash if needed.
Does a Holding Company Help?
A holding company can be useful in certain situations, but it should not automatically be viewed as a tax-saving solution.
For example, a properly structured holding company may help separate certain investment assets from operating activities. However, corporate association rules, passive investment income and the ongoing costs of maintaining an additional corporation all need to be considered.
Simply moving investments into an associated holding company generally does not cause the federal passive-income rules to disappear.
For Ontario physicians, any structure involving a medical professional corporation must also comply with applicable professional and legal requirements.
Avoid Looking at Corporate Investments in Isolation
Corporate investing is most effective when considered as part of a physician’s complete financial picture.
How much cash does the practice require? How much income does the physician need personally? What are the long-term retirement objectives? How might passive investment income affect corporate taxation? And eventually, how will accumulated corporate wealth be withdrawn?
The answers to these questions may ultimately be more important than simply deciding which investment account to open.
Build a Tax Strategy Around Your Professional Corporation
If your Ontario professional corporation is accumulating cash, this may be an appropriate time to examine how corporate investing fits within your broader tax, wealth and long-term financial strategy.
Visit imperiallife.ca to connect with Imperial Lifestyle Management and explore strategies designed around the financial needs of medical professionals.
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