Should I Incorporate?
For Doctors there are generally three key tax reasons to incorporate - income management, retirement savings and tax deferral. A common reason for other professionals to incorporate is to make it easier to self-finance business growth and to reduce liability risk, but given the coverage provided by CMPA, liability risk may not be a strong reason to incorporate as long as your premiums are being paid , you comply with CMPA rules and there are no risks that would not be covered by CMPA.
(Prior to 2018, income splitting with children and spouses was another key reason to incorporate, but as a result of tax changes, this option is gone for most professionals).
Imagine you have a cup with holes at different levels going up the cup. Every inch the hole gets bigger. Now if you poured a big bottle of water in to one cup, you will lose a lot of the liquid as not only will it overflow but the holes take more out as the glass as it fills up (the lost water of course being taxes).
Instead, if you can spread the water among three cups (or three years) opposed to all in one cup, you will lose less to the holes.
This is a key strategy for Doctors whose income will fluctuate significantly each year, often due to a Sabbatical or a Maternity Leave.
Imagine you have a bottle of water and the same cup with holes discussed above. You start pouring the water in to the cup and as it gets close to overflowing you simply stop pouring the water.
The remaining bottle of water is available for your use going forward when your cups are not as full. Now imagine that the water can increase at a rate of 5% a year. Well, that is the advantage. You can have about 500 ml of water in your cup growing at 5% a year or you can have 1L in the bottle growing at 5% a year, guess which will get to 2L first?
Now tax deferral works if you can leave money in the corporation. If you cannot, maybe due to a kid, a home purchase or debt you want to pay off, it may lead you to waiting to incorporate until a few years from now.
Due to changes in the income tax system implemented for 2018, income splitting for professionals was essentially stopped. However, once you hit the age of 65 you will be able to split income with your spouse (like pension splitting). So, if you can keep money in the company (see tax deferral) and let it grow when it comes time to pouring from the bottle again you may be able to fill up two cups each year opposed to just one.
Here are some other areas where incorporation can be advantageous:
Life Insurance can be cheaper to buy
Estate planning can be simplified
Protecting you from liabilities
Building your wealth and investing in various investments
Purchasing properties (maybe even your home)
Simplifying your personal tax return
Better reporting on your business performance
Are you a US Citizen? Do NOT Incorporate without specialized advise.
If you want to take advantage of the above benefits, incorporation may make sense for you, but sometimes it does not, and this depends on your situation and your goals. For you there will most likely be a point where it does make sense, it just may not be now.
If you want to incorporate or want a more detailed discussion, we would be happy to speak to you. We also have a team of advisors (lawyers, insurance advisors and financial planners) who regularly work with doctors on incorporation related matters.