WHAT DO YOU MEAN BY ‘INCORPORATION’?

Incorporation is simply the process of forming a business entity duly authorized by the jurisdiction in which the entity is located. The entity in British Columbia through which BC doctors operate is simply known as a BC medical corporation. It is entirely distinct from the physician that controls his or her medical corporation. As a result, it can hold its own assets, debt, revenues, and expenses. It can take on debt, pledge its credit and buy assets, all independent of the underlying physician that controls the corporation.

WHAT A MEDICAL CORPORATION CANNOT DO

While a BC medical corporation is just like any other BC corporation, it cannot be the shelter behind which the physician seeks refuge if a professional negligence claim is brought. Physicians operating through medical corporations can and will be sued but they also have malpractice insurance to offset and defend any claims.

WHERE DO MY BILLINGS GO?

For many physician corporations, the MSP patient earnings they receive will be paid into their medical corporation and they draw a salary from either this corporation, a holding corporation, or else they take dividends in accordance with recommendations received by an accountant. By comparison, an unincorporated physician would receive all MSP billings in his or her name. What is earned is considered income of the physician in a given year which is all subject to tax. By comparison, the physician who operates through a medical corporation gets to choose how much salary or draw they need so that the rest of his or her income can be paid to a holding or management corporation with a view to keeping retained earnings so as to grow a nest egg. Monies retained may be invested directly or indirectly into other ventures in order to compound growth.

WHAT TAX SAVINGS CAN BE ACHIEVED BY INCORPORATING?



At the moment, income in a BC corporation is taxed at the small business low rate which is approximately 12% on the first $500,000 of business income. By comparison, a physician who prefers to not incorporate will pay tax at the same rates as all Canadians, namely, close to 30% on the first $144,489 of income and 43.7% on any additional income up to $150,000 which is taxed at nearly 50%. As one can tell, there is a large difference in tax rates on a corporate level and on a personal level.

Of course, it must be noted that funds withdrawn from the corporation by the shareholder would still incur tax on a personal level; tax deferral only works if funds are earned by the corporation and not immediately withdrawn by the shareholder. As such, the deferral strategy is ideal for professionals whose earnings exceed their personal expenditures.

The low corporate tax rate leaves more funds for the corporation to invest. Although investment earnings within a corporation are not eligible for the low corporate tax rate, this is offset by the fact that there are more funds to invest at the start. The tax on investment earnings is reduced when earnings are paid out to the shareholders but certain life insurance products can be introduced to offset some of the tax payable.

CAN I SPLIT INCOME WITH A SPOUSE?

Yes, currently income can be split with a spouse by employing the spouse to work in the physician’s practice but the work and salary must be reasonable and the same as found in the market without any special or unusual salary offered to the spouse. As many health care professionals prefer not to work directly with their spouse, they may also pay the spouse for remote work by way of a reasonable dividend for tasks such as marketing, administrative services or billing support. The work must be verifiable if challenged. Children under 18 should not be used to split income because the government has introduced a tax, commonly known as the ‘kiddie tax’ that results in any benefit attributed by you to the income being split to your child with the result being it is as no splitting occurred. 



IS THERE ANY DOWNSIDE TO INCORPORATING? 



The two main downsides to anyone incorporating including physician’s is paperwork and new costs. The paperwork involved is both at the outset when a new corporation is formed as well as each year as certain filings are required by the Corporate Registry. Using a law firm to incorporate and to file the annual consent resolutions for the medical corporation is common as lawyer’s are effective at ensuring the documents are drawn accurately and on time. In terms of additional costs, the two main costs are the incorporation itself which is approximately $2,000.00 plus there is ongoing costs of around $400-500 per year to maintain a company. In addition, an accountant will charge a medical corporation to prepare annual financial statements. This cost can vary and is estimated to be anywhere from $750.00 to $1,500.00 per annum depending on which accountant is engaged as this could be higher or lower.

 I GET IT, BUT I STILL NEED MORE INFORMATION TO DECIDE ON INCORPORATING

The decision as to whether or not to incorporate a medical corporation is personal as it fundamentally comes down to the physician’s unique circumstances such as debt repayment, spending requirements, income levels, and investment prowess. The best thing to do is to work with a capable accountant to help flesh out whether by the numbers, it makes sense to incorporate. Having said that, given that is quite common for physicians to make a salary of around $250,000 or more when working full time, it is likely that not all those funds for most physicians will be necessary and the benefits derived from incorporation may be multipliable if the incorporation process is entertained at an early stage in the physician’s career.