Strategies to Consider
Many physicians incorporate because they want to pay less tax. As an incorporated physician, you can cut the taxes you’re paying on your practice income by as much as 75%, on up to $500,000. The money you save on tax can be invested through your corporation.
When you leave this money in your corporation, you can invest it in various assets such as stocks, bonds and mutual funds. These assets will generate investment income, typically in the form of interest, dividends and capital gains.
This is called "passive income" to distinguish it from practice income or "active business income."
Here’s the issue: passive income that’s generated in a corporate account is highly taxed. In most provinces, this investment tax is higher than the top personal marginal income tax rate. What’s more, passive income may even reduce your access to the small business tax rate on your practice income.
If you have a corporation, you will need to manage your corporate investments carefully and integrate these with other financial vehicles to grow your assets. The key is figuring out how to optimize the combination of strategies specific to your situation. By putting the right investments in the right accounts, you can maximize your investment results and achieve stronger asset growth.
The Vehicles:
Life insurance: A life insurance policy bought with corporate funds can have several benefits. The lower tax rate applied to those funds makes this a more efficient way to pay for the insurance. If you name the corporation as beneficiary, the death benefit is tax-free to the corporation and could be used to pay your final tax bill, donate to charities, etc. And because corporate-owned permanent life insurance has a tax-sheltered investment component, you can use it to create a tax-efficient retirement income, or transfer excess trapped corporate surplus to your heirs. Access to life insurance depends on your health, with costs increasing as you age, so don’t wait if this strategy applies to you.
Personal Pension Plan™ (PPPs): The Personal Pension Plan™ (PPP®) is a solution for Canadian business owners (including incorporated Canadian doctors) offering the greatest tax deductions available under legislation and the maximum accumulated savings for your retirement—surpassing all other retirement savings methods like TFSAs, RRSPs.
• Materially increase tax deductions over those permitted by RRSP rules;
• Magnify annual pension contributions and
• Enjoy substantially larger (and creditor-protected) retirement assets.
TFSA: One way to reduce the passive income being earned in your corporation is to take funds out of the corporation—and contribute them to your TFSA. Although you will pay tax upfront to distribute the money from your corporation, there is no tax payable on income generated in your TFSA.
RRSP: When you pay yourself a salary (versus dividends) from your corporation, you reduce the amount of active business income in your corporation. This can help mitigate the impact of the passive income changes as you may not need your entire $500,000 small business limit.
With a salary, you create the ability to contribute to an RRSP. You will get a tax deduction on your contributions, and your investments can grow tax-deferred. You can also make contributions to a spousal RRSP, thus splitting income and reducing overall taxes.
