Incorporation: Understand the disadvantages before you incorporate your medical practice

Have you considered incorporating your medical practice to save or defer taxes? Often, in the rush to incorporate, I find the downside of medical incorporation can either be glossed over by advisors, not well understood by physicians, or both. If you are considering incorporating your medical practice, you have to weigh the pros and cons of this complicated and costly undertaking carefully. To be clear: incorporation is not the financial advantage it once was for the majority of physicians. Here is why: 1. The 2018 federal budget essentially eliminated income splitting for family members for many physicians. This is referred to as “Tax On Split Incomes,” or TOSI for short. In addition, the feds reduced the tax deferral small business deduction investment advantage by capping the allowable passive (investment) income that can be earned within a medical corporation to $50,000 per year. The bottom line: Taxes, both corporate and personal, increased significantly for many incorporated physicians. Read: Why doctors need to learn about money 2. Debt levels for newer physicians continue to rise. For example, the price of housing has increased sharply in recent years, causing overall borrowing levels to rise. This is especially pronounced in urban areas. According to the latest National Bank Housing Affordability Monitor, “over the last 12 months, (housing) affordability has worsened the most in a decade.” For example, in Vancouver, the average price of a house (non-condo) is $1,558,535. Household annual income needed to be able to pay for an average house in Vancouver is $267,641, according to National Bank. The more debt a physician has, the less money there is for corporate tax deferred investments. 3. In my experience accounting and legal fees continue to increase, especially in urban centres. I find there is a shortage of accountants. The law of supply and demand dictates that when a shortage exists, even if demand remains stable, prices increase. The more you pay in accounting and legal fees, the less money there is for corporate tax deferred investments. 4. The 2016 federal budget changed the rules for physicians in partnerships. Deemed “associated partnerships,” these associated partners now have to share the $500,000 tax deferral small business deduction investment advantage. This reduces the amount a physician can invest at the lowest corporate tax rate, thus reducing the tax deferral effect. For example, if a physician has 10 deemed associates, then the small business deduction decreases from $500,000 to $50,000, decreasing the tax deferral small business deduction investment advantage by a factor of 10. Read: Home office tax deductions 5. There is potential for a massive corporate estate tax liability when you die. This is because of the possible “double whammy” tax liability on your corporate holdings: Taxation of your corporate holdings invested in your medical corporation, and taxation of the actual medical corporation shares you hold personally. This resultant tax liability might be as high as 70%. See my previous article, Portfolio optimization after the 2018 budget: corporations, investments, taxes oh my! (Part 2) published on May 29, 2018, for more detailed information on this topic. If you considered incorporating your medical practice it is best to examine all the benefits and the drawbacks before taking the plunge. While incorporation can work well for some, it is not the panacea it once was. It is best to perform a financial analysis comparing incorporation with not incorporating, and see what works best for your situation. Alan Acton is an Ottawa-based portfolio manager with Polaris Wealth, a division of Polaris Financial Inc. Conclusions and opinions in this article are his own and do not necessarily represent those of Polaris Financial Inc.

Incorporation: Understand the disadvantages before you incorporate your medical practice

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