As a physician, you are subject to higher taxation rates, which can make it difficult to maximize your wealth and reach your long-term financial goals. The main reasons why physicians incorporate are to benefit from the tax savings, which in turn will help build savings faster, as well as give you greater access to capital, at lower rates.

Tax Deferral

The biggest advantage of incorporation is the ability to defer taxes.  When you incorporate, you have the flexibility to defer personal taxation on the after-tax professional income retained in the corporation until the time you withdraw it. Generally, the longer you can leave the funds in your corporation, the greater the deferral advantage will be.

Lower Corporate Taxes

Since incorporated medical practices are taxed separately from their owners, the corporate tax rate is generally lower than the income tax rate on income earned by the physician while operating as a sole proprietor, where the income would be taxed at the individual marginal tax rate. These lower corporate tax rates allow for more after-tax professional income, which can be used to invest within the corporation.

Income Splitting

Incorporating your practice gives you the opportunity to add a lower income spouse as a shareholder, so the practice can pay them dividends, allowing them to take advantage of their lower individual tax rate, thus reducing taxes. Alternatively, you can pay them salaries for services provided without having to add them as shareholders, in which they would also benefit from generating RRSP contribution room.

Lifetime Capital Gains Exemption (LCGE)

In Canada, each resident is entitled to a cumulative lifetime capital gains exemption (LCGE) on net gains realized on the disposition of qualified small business corporation (QSBC) shares.  Incorporating your practice may enable you to sell your practice and shelter the growth from tax, up to the LCGE limit. The amount of the exemption is based on the gross capital gain from the sale, and the exemption is a lifetime cumulative exemption meaning that the entire amount does not need to be claimed all at once. Additionally, if your family members are shareholders of the corporation, you may be able to multiply the LCGE available to increase the total sheltered amount of capital gains.

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