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Real Beef

Can salaried MDs incorporate

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Sorry for jumping the gun by 7 years before becoming a practising MD but I am a bit curious.

 

I know of a social worker who worked for a family health team in Ontario who got hired by the health team and during his negotiation he stated that he did not wish to be an employee of the health team but rather wished to be a consultant and thus his income ran through his consulting business.

 

Since then I have been wondering if MDs who work in hospitals, i.e. Emergency Physicians who generally get a salary and are employed by the hospital could do a similar arrangement and funnel the money through their corporation for significant tax savings. I suspect as a locum you could do this but wondered about other arrangements.

 

Because of the arrangement the social worker friend did not get any vacation, sick days and so on but was able to 'buy back' time off in other ways when he needed time off.

 

In Ontario a person would be taxed at 46.7% which is a HUGE financial hit but incorporated you would be closer to 20% ... any thoughts on arrangements for salaried employees besides the usual 'pay into RRSPs, charitable donations, RESPs for your children thing.

 

Again I understand the tax laws WILL change by then but as a 'thought experiment' I am curious.

 

Beef

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I think people do not understand what this incorporate tax rate really mean...

20% is the amount of tax immediately taken by the government when the hospital/ministry of health pays the MD via his corporation.

THEN, when this MD wants to use that money stored in his corporation, the corporation has to do a transaction to transfer the money to the doc. This transaction is either in the form of a salary or a dividend, and the MD ultimately get taxed when he received his salary from his company.

 

When you are incorporated, you get taxed twice; when you are not you are only taxed once.

 

The biggest advantage of being incorporated is for what's called taxes deferral. By being taxed the first time with a low rate if you are incorporated, you can invest a bigger amount of money and make it grow faster (because of a higher starting fund) than if you are not incorporated. There are plenty other fiscal advantages (buying a "company" car, giving your family a salary/dividend...) and a fiscalist would be the right person to ask these questions. Be cautious and do not solely think that corporate people are solely taxed a 20% marginal rate, this is false, they are taxed twice.

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Well said MD0123! I just want to add that you also have to pay twice the CPP (one as an employer, and one as an employee) for the salary you pay out, if you use a corporation. On the other hand, you can claim a bit more deductions if you own a corporation. All in all, after the corporate tax and then personal tax (for dividends, the calculation is even more complicated), you might still be better off by a few % if you use a corporation.

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The biggest advantage of being incorporated is for what's called taxes deferral. By being taxed the first time with a low rate if you are incorporated, you can invest a bigger amount of money and make it grow faster (because of a higher starting fund) than if you are not incorporated. There are plenty other fiscal advantages (buying a "company" car, giving your family a salary/dividend...) and a fiscalist would be the right person to ask these questions. Be cautious and do not solely think that corporate people are solely taxed a 20% marginal rate, this is false, they are taxed twice.

 

Yes, and much can be done with family depending upon size of family and their tax brackets.

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although I should also mention that amount of tax you pay on dividends is actually less than salary income - the government has a system in place to PREVENT the effect of double taxation when you use dividends :) Yes the corporation gets taxed and then you do get taxed again when you receive the dividend but you also get an offsetting dividend tax credit.

 

This allows for proper tax deferral actually without a serious downside.

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Well said MD0123! I just want to add that you also have to pay twice the CPP (one as an employer, and one as an employee) for the salary you pay out, if you use a corporation. On the other hand, you can claim a bit more deductions if you own a corporation. All in all, after the corporate tax and then personal tax (for dividends, the calculation is even more complicated), you might still be better off by a few % if you use a corporation.

 

I would say quite a bit better off when you factor in the saving for retirement aspect. It would be rare to actually want to take out all the money you earned in a single year as a practising doctor. That tax deferral aspect is pretty huge - and there are a lot of tricks to avoid paying even more tax with that money.

 

There is tons of time to go over this in medical school. Let's just say you have access to pretty much top of the line financial advise - we are swarmed with companies looking to all help manage the very large savings we will hold in our corporations.

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Oh guys one more winkle for why dividends are a big asset - no one said you had to give the dividend to yourself solely. You have kids, parents or a spouse - you can send them a dividend as well. By spreading the amount around you can overall reduce the amount of tax you collectively have to pay by pushing everything into lower tax brackets etc.

 

You cannot just give your family members a salary though - they actually have to do work for the company that is appropriate for the income for that or the government takes a dim view on things. Sometimes that is possible but often it is still very much so less flexible.

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Oh guys one more winkle for why dividends are a big asset - no one said you had to give the dividend to yourself solely. You have kids, parents or a spouse - you can send them a dividend as well. By spreading the amount around you can overall reduce the amount of tax you collectively have to pay by pushing everything into lower tax brackets etc.

 

You cannot just give your family members a salary though - they actually have to do work for the company that is appropriate for the income for that or the government takes a dim view on things. Sometimes that is possible but often it is still very much so less flexible.

 

This is key. I know of a case where there are 10 children! And the doctor's wife has an MBA. So, she manages the practice (from home) and takes an appropriate salary. His parents are directors of the comapny, each drawing a director's fee. The kids all get dividends! And those age appropriate are doing things for the company and earning an arm's length salary during summer break.

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This is key. I know of a case where there are 10 children! And the doctor's wife has an MBA. So, she manages the practice (from home) and takes an appropriate salary. His parents are directors of the comapny, each drawing a director's fee. The kids all get dividends! And those age appropriate are doing things for the company and earning an arm's length salary during summer break.

 

Yup - common approach

 

There is so much more you can do as a company to adjust things - salaries are boring :)

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then why post anything?

 

comedic relief. :)

 

All in all it sounds like there are options. I do like the investing option. Investing has always interested me, besides maxing out my pension contributions I did some of my own personal retirement investing and found it very interesting but was only able to dabble in it before getting into medicine so I had to switch gears and save up for tuition instead.

 

Beef

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Or just transfer the money from your corporate bank account to an offshore account. Problem solved.

 

Just kidding, I don't know anything about this.

 

LOL. I was waiting for someone to ban you. I don't even know why you like to be a **** all the time. You need serious help dude.

 

btw, Messing with a moderator is like asking to be banned :D

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good discussion on benefits of dividends here. i must add though that a more realistic approach is usually a combo of salary and dividends as opposed to paying yourself only in dividends..often, to be eligible for things such as mortgage, lease, line of credits e.t.c you need to have active income (aka salary)...also need to consider factors such as insurance..if God forbid, you get injured, and are unable to work, you wont qualify for wage replacement unless you have a wage to show.

 

there are also limitations on rrsp and ccp if you are not salaried so thats also important to consider.

 

best to talk to a good tax accountant to sort out these things when the time comes..im sure though that plenty of advice will be available as these people are hunting for medical professionals :)

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An orthopod told me once to incorporate immediately after residency. Because if you incorporate before marriage your business cannot be touched by your divorcee. He's on divorce #2 right now. lol :rolleyes:

 

Lol, with equalization of assets the amount of money/assets each partner entered the relationship with is considered in deciding how to divide everything up. So that's probably why he said that... :P

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Kids only help after 18 years of age: before that, their income is subject to "kiddie tax" and is taxed at the highest marginal rate.

 

I'm not too sure I follow what you mean by "kiddie tax". All individual filing a T1 personal tax return is entitled to a basic personal exemption of over $9000 to $11000 depending on the province you live in. So if your kid, at 16, helps at your office, you can legally pay him/her a reasonable pay. If the amount is under the basic personal exemption, your kid does not need to pay a penny of tax. Furthermore, if your kid is a shareholder of the corporation, you can pay him/her upto approx $40,000 in dividends without incurring any tax, provided your kid does not have any other income.

 

One side note, making any family member to be your corporation's shareholder do require a lot of trusts. Since they ARE shareholders of your corporations, all money coming out as dividends will have to be distributed according to their shares. Therefore, they are entitled to your hard earned money even if one day you decided you don't want to have your money gone through their hands.

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Dividends are determined by the Board of Directors and are discretionary, so there is no entitlement per se. By having different classes of shares, with voting shares and non-voting shares, you maintain effect control and can decide to give them nothing and they have no recourse. :P Just make sure you hold aanother class of shares. :) As always, the devil is in the details. Be careful who you put on as Directors and ensure that they have no vote. ;)

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Kids only help after 18 years of age: before that, their income is subject to "kiddie tax" and is taxed at the highest marginal rate.

 

I thought that was more the US? I never paid any additional tax as a child (I worked a lot as a teenager and was filing taxes since 15). I had both wage and dividend earnings during that time.

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Kiddie tax has been in place since 2000 in Canada, and applies to dividends to children from private corporations (like medical professional corporations), even if the shares are held via family trust (see section 120.4 of the Canadian Income Tax Act). It also applies to other forms of investment income.

 

See here for more information. Your lawyer and accountant will make all this clear to you once you set up your corporation.

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Kiddie tax has been in place since 2000 in Canada, and applies to dividends to children from private corporations (like medical professional corporations), even if the shares are held via family trust (see section 120.4 of the Canadian Income Tax Act). It also applies to other forms of investment income.

 

See here for more information. Your lawyer and accountant will make all this clear to you once you set up your corporation.

 

ahhh it is the private company thing that I missed :) That explains why I didn't have to pay it before. Ok!

 

With that tax rate being applied then there is virtually no way to send dividends to children under 18. It makes some sense but seem a bit over the top I guess. Still I guess you can give to children over 18? Perhaps for university education? Still useful to a lessor degree.

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You can still dividend out to children over 18, or pay a salary to children under 18 (but they have to provide actual services to the corp commensurate with that salary).

 

and they certainly do watch those salaries pretty closely it seems - you really have to have them doing something reasonable.

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Kiddie tax has been in place since 2000 in Canada, and applies to dividends to children from private corporations (like medical professional corporations), even if the shares are held via family trust (see section 120.4 of the Canadian Income Tax Act). It also applies to other forms of investment income.

 

See here for more information. Your lawyer and accountant will make all this clear to you once you set up your corporation.

 

Thanks for the info. :)

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