Should a med student incorporate or wait until residency?

[billy55555]

I'm curious if med students or residents incorporate.

Does it help offset stripend income as a med student?

Does it help offset income received as a resident?

 

 

[frenchpress]

2 hours ago, billy55555 said:

I'm curious if med students or residents incorporate.

Does it help offset stripend income as a med student?

Does it help offset income received as a resident?

 

 

No, they don’t. It absolutely wouldn’t make sense from a tax perspective unless you have other (much larger) income sources. And since in both cases you’re being hired as a type of employee, I don’t think you could actually claim that income as business income anyways. Incorporation is something you can do as a small business, but you can’t contract out your services as a medical student / resident. 

Edit: see https://www.google.com/amp/s/www.theglobeandmail.com/amp/investing/personal-finance/taxes/article-beware-the-rules-that-apply-to-incorporated-employees/

And

https://invested.mdm.ca/md-articles/is-incorporation-right-for-you

[shikimate]

Although provincial rules vary, I do not believe you are legally allowed to form a professional corporation, unless you have authorization from the College to practice.

[hopefulcanadian]

On 6/9/2021 at 8:16 PM, shikimate said:

Although provincial rules vary, I do not believe you are legally allowed to form a professional corporation, unless you have authorization from the College to practice.

That is correct.

 

You could hypothetically incorporate a non-medical business though and then convert it into a medical one later, however this is more complicated and costly than its worth.

[bearded frog]

The point of incorporation is to defer income tax if your income is higher than currently needed for expenses (and to pay business expenses instead of having to deduct them from income tax). It's very likely that unless you're already independently wealthy, the substantial fees for incorporating are not worth it until you make staff income (irregardless that as shikimate says you usually can't without going through your college).

I'm not an accountant but this is how it's been explained to me, anyone feel free to correct me if I'm wrong.

For example if you're not incorporated and you make X a year which is a high income in a high income tax bracket. You pay the high tax bracket and you then can get reimbursed on tax deduction for business expenses (say clinic overhead). If you don't need X per year to live (expenses, rent, vacations etc). You can incorporate. The X salary is paid to the corporation, and the corporation can then pay your overhead, and pay you out a salary Y which may be substantially lower with a lower tax bracket. The remainder can be invested by the corporation, and you only have to pay income tax when you withdraw it from the corporation as salary. So if you keep paying yourself Y, X-Y gets invested, and then when you retire you can keep paying yourself a salary from that accrued remainder (And investment income) and only pay income tax when it comes out.

[OldManNearTheSea]

On 7/10/2021 at 5:12 PM, bearded frog said:

The point of incorporation is to defer income tax if your income is higher than currently needed for expenses (and to pay business expenses instead of having to deduct them from income tax). It's very likely that unless you're already independently wealthy, the substantial fees for incorporating are not worth it until you make staff income (irregardless that as shikimate says you usually can't without going through your college).

I'm not an accountant but this is how it's been explained to me, anyone feel free to correct me if I'm wrong.

For example if you're not incorporated and you make X a year which is a high income in a high income tax bracket. You pay the high tax bracket and you then can get reimbursed on tax deduction for business expenses (say clinic overhead). If you don't need X per year to live (expenses, rent, vacations etc). You can incorporate. The X salary is paid to the corporation, and the corporation can then pay your overhead, and pay you out a salary Y which may be substantially lower with a lower tax bracket. The remainder can be invested by the corporation, and you only have to pay income tax when you withdraw it from the corporation as salary. So if you keep paying yourself Y, X-Y gets invested, and then when you retire you can keep paying yourself a salary from that accrued remainder (And investment income) and only pay income tax when it comes out.

I am economist by training, not an accountant, but you should check in with your tax advisor if this describes your situation. There can be implications around passive investment income and/or withdrawing money from corporations when there is no longer business activity which could significantly curtail some of the tax advantages incorporating used to provide.  

The rules changed in 2017 which really took a bite out of corporate structure advantages.

https://kalfalaw.com/small-businesses-tax-changes-mean-more-tax-not-less/

 

[bearded frog]

13 hours ago, OldManNearTheSea said:

I am economist by training, not an accountant, but you should check in with your tax advisor if this describes your situation. There can be implications around passive investment income and/or withdrawing money from corporations when there is no longer business activity which could significantly curtail some of the tax advantages incorporating used to provide.  

The rules changed in 2017 which really took a bite out of corporate structure advantages.

https://kalfalaw.com/small-businesses-tax-changes-mean-more-tax-not-less/

 

100% agree with everyone should discuss their situation with their financial planner/accountant (plus you have to to incorporate I think?)

[OldManNearTheSea]

2 hours ago, bearded frog said:

100% agree with everyone should discuss their situation with their financial planner/accountant (plus you have to to incorporate I think?)

Incorporating is common and that would most likely require a lawyer to go with the accountant. And if you want a financial planner too then that person will need to be familiar with the intricacies of small business ownership. 

[rmorelan]

On 6/9/2021 at 12:30 PM, billy55555 said:

I'm curious if med students or residents incorporate.

Does it help offset stripend income as a med student?

Does it help offset income received as a resident?

 

 

Almost all don't be cause basically as a rule it doesn't help. Almost anything you can think of deducting you can already deduct and you cannot deduct from business income which you don't have yet (stipends for instance are not business income). Plus all this costs money to set up and to maintain yearly

[codebar]

Sorry for hijacking the thread

Would it (the incorporation) be worth it during a fellowship in Canada in which I can bill my assistance (surgery) ?

[bearded frog]

18 hours ago, codebar said:

Sorry for hijacking the thread

Would it (the incorporation) be worth it during a fellowship in Canada in which I can bill my assistance (surgery) ?

It all depends on the numbers and your specific circumstances. It's probably worth talking to an accountant about.

[shikimate]

On 11/17/2021 at 7:34 PM, codebar said:

Sorry for hijacking the thread

Would it (the incorporation) be worth it during a fellowship in Canada in which I can bill my assistance (surgery) ?

Here are some general considerations, by no means comprehensive (you are encouraged to consult a financial planner and tax professional).

a corporation is good if you want to put aside some of your income and pay less tax in the present. For example, say you bill 150K as surgical assistant. You could take that 150K as self employed income now and say theoretically you end up with 100K after tax, expenses etc etc.

Say you have loans and mortgage to pay and really need that 100K to cover all your expenses, then it makes sense to do above.

But say you only need 50K to pay expenses. On the one hand you could just invest the other 50K, which is fine, but remember you've already paid your income tax, and if you make quite a bit of money, the marginal rate can be as high as 53%. On the other hand, if you have a corporation, you could leave some of the money in the corporation, pay a lower corp tax rate (say about 15%), and invest the money through the corp. Say 20 years later you wanna retire, you need that money, then you could take it out of the corp as salary or dividend and pay whatever income tax it is at that time (presumably when you retire you have no other income, hence your marginal tax rate is lower). So having a corp is bit like a saving account for tax deferral in this sense.

It does cost time, money to set up and maintain a corp, so it makes sense to compare how much you'd save via tax deferral vs cost of running the corp, and also how your personal situation may change (eg. you plan to buy a big house? you plan to stay single? you are moving to a big expensive city? etc).

If you want a book to cover this topic PM me.

[a1b1]

I dont think so.... unless im wrong?

I have been a staff physician for 2 years now and have yet to incorporate. Speaking with my account and financial planner, it seems like the best moment to incorporate is after you have paid off any major debts and do not have any foreseeable major expenses upcoming (i.e down payment, car e.t.c). Basically you need to have a good chunk of extra money for it to be worth while.

[OldManNearTheSea]

Also worth considering that tax laws are not static. The more layers between you and your money there are the more ways rules can change and have a big impact on your wealth. 

[LostLamb]

Staff MD in second year of practice and no Corp yet. 

I am still struggling to decide if it’s worth incorporating next year or not because I still owe a lot…but I am leaning to doing it next summer because I will not have any more “big” tax credits left to offset my income taxes going forward. 

I want to pay off debt aggressively, however if I continuously need to borrow (a lot) from my LOC to pay the income taxes I am not really getting ahead as quickly as I wish and my family is still “living like a resident” but with a few perks. Having a pandemic also helps keep costs at bay

so…for the person who is considering fellowship incorporation I’d say probably not worth incorporating for the half year of staff income unless you have few or no tax credits to offset expected income tax.  
 

for residents (and definitely for medical students) there is very little reason to incorporate unless you have a significant additional income stream outside of residency!! As others said—a corporation takes additional time and money to deal with (and this amount will also depend if you’re doing the work versus hiring bookkeeper, accountant, etc to manage it). In training you probably don’t have that extra amount floating around and if you do it’s probably better to put into an rrsp. JMHO…I’m not a finance person so none of this is expert advice!

[Bambi]

I agree with the approach and reasoning of LostLamb entirely. 

[AndrewWithMedTax.ca]

Hi, my name is Andrew. I’m part of the MedTax team here in Canada and can help with your question.

Neither, the best time to incorporate is in your final year of residency, just before you start working full-time. The reason for this is until then, you are in a relatively low tax bracket, and 100% of your income is paid as a salary, which can’t be directed to a company. The company should be set up just before your earnings increase after residency. 

 If you have other questions, just reach out, and I will be happy to help.

[frenchpress]

On 3/8/2022 at 9:24 AM, AndrewWithMedTax.ca said:

 

Hi, my name is Andrew. I’m part of the MedTax team here in Canada and can help with your question.

Neither, the best time to incorporate is in your final year of residency, just before you start working full-time. The reason for this is until then, you are in a relatively low tax bracket, and 100% of your income is paid as a salary, which can’t be directed to a company. The company should be set up just before your earnings increase after residency. 

 If you have other questions, just reach out, and I will be happy to help.

This is not good advice. If you follow the physician financial independence group (or talk to any reasonable fee for service planner) they will tell you that at minimum one should be aiming to maximize their RRSP And TFSA prior to incorporating. In general, you need to look at how much money you need to take in a salary every month in order to cover all your expenses, debt repayment, etc. It is often not advantageous to incorporate right out of residency, and can end up costing more if you ultimately have to withdraw everything you put in. Rather than listening to some rando try to sell general advice that is not one size fits all, people should find a financial planner who is capable of figuring out the optimal time for their own situation.