This article was originally posted on Dr.Bill
Michael Kutner, partner at Kutner Law LLP, answers some common questions physicians have about incorporation:
- What is a medical corporation?
- Why would I want an MPC (Medical Professional Corporation)?
- What are the pros and cons of incorporating?
- What is the medical corporation tax rate in Ontario?
- What are the costs associated with incorporating a medical practice?
- At what lifestyle stage would incorporation be recommended?
Deciding whether to incorporate your practice to create a Medical Professional Corporation (MPC) is an important consideration. Especially for new physicians, the choice between sole proprietorship and incorporation is not always straightforward.
What is a medical corporation?
Physicians who incorporate create a “Medical Professional Corporation” (also known as a “Medicine Professional Corporation” or “MPC”). Incorporating separates the physician’s personal identity, income and property from the MPC.
Essentially, once incorporated, physicians run their medical practice through a separate name and all revenues, expenses, debts, and assets are generated and recorded through that name.
Incorporating a medical practice involves several steps, including choosing a business name, registering the corporation, obtaining necessary authorizations and setting up the corporate structure. Physicians incorporate with the support of both an accountant and lawyer, which makes this process a lot more painless than it sounds.
The pros and cons of incorporating for physicians
The following are key advantages and potential drawbacks when considering medical practice incorporation for the first time. Bear in mind that incorporation can continue to deliver further benefits beyond those listed here depending on the nuances of a physician’s practice, life stage and financial goals.
MPC ProsMPC ConsTax deferral and savingsOngoing cost Limited liability to creditorsAdministrative burdenIncome splitting (limited)Must keep money in the corporation to benefitLifetime Capital Gains Exemption (LCGE)
PRO: Tax deferral and savings
By leaving funds within the corporation, physicians can take advantage of corporate tax rates, which are significantly lower than personal tax rates . Currently, the combined federal and provincial corporate tax rate in Ontario is 12.2% (2023) whereas the combined personal tax rate can creep up beyond 50% for a good portion of a physician’s income as a sole proprietor. While tax rates vary in other provinces and territories, the disparities are similar.
Keep in mind that corporate tax rates apply only to money physicians are able to keep in the Medical Professional Corporation (funds not needed for day-to-day living expenses). By deferring personal taxes and waiting to withdraw this money from the corporation, physicians can often realize permanent tax savings by doing so during lower tax bracket years (E.G. during a leave or retirement).
As an additional benefit, the money in the MPC not spent unnecessarily in taxes can be invested, creating further opportunities for overall financial growth.
PRO: Limited Liability to Creditors
Medical Professional Corporations are somewhat unique in that incorporating does not shield physicians from liability related to patient complaints or malpractice. However, MPCs can provide some protection against creditors . In the event of creditor claims, the scope may be limited to assets held within the corporation (rather than risking the exposure of personal assets).
PRO: Income Splitting
Limited income splitting advantages exist most often when a physician’s spouse works an average of 20 hours or more per week for the practice (commonly in an administration role). By paying wages to a lower income spouse, doctors save by:
- Keeping money in the household that would have been spent outsourcing
- Paying less tax on that money as a household due to the lower tax rate of the lower income spouse
Keep in mind that what you pay your spouse must align with the going rate for services rendered. However, once your spouse is 65, you can split income without the requirement for the spouse to work for the business.
PRO: Lifetime Capital Gains Exemption
While this benefit only applies to a small percentage of physicians, it is a big one for those who can take advantage (often but not always upon retirement). Up to $971,190 in capital gains may be exempt from tax in the event that you sell your practice (2023 tax year).
CON: Costs of Incorporation
Incorporating comes with greater costs than sole proprietorship, both upfront and annually, in the form of:
- Accounting expenses
- Legal fees
- Certificate of Authorization from your province’s College of Physicians and Surgeons
The costs to maintain an MPC will total several thousand dollars annually; however, for physicians who can keep a reasonable amount of income in the corporation each year, the benefits of incorporating tend to far outweigh the costs.
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The administration requirements of a Medical Professional Corporation are more significant than a sole proprietorship. Incorporated physicians will have separate personal and corporate bookkeeping obligations and have more paperwork requirements overall. While initially overwhelming, most of this admin burden will be managed by an accountant, bookkeeper and lawyer.
CON: Must Keep Money in the Corporation
In order to take advantage of incorporation’s benefits, physicians must keep a portion of their money in their Medical Professional Corporation. Because this money is not liquid, this can be challenging for physicians with higher spending needs. In such cases, incorporation may not be the optimal choice.
When Should I incorporate?
Incorporation ultimately becomes advantageous for most doctors, if not at the outset of independent practice, then as their career progresses.
Once physicians can comfortably keep a substantial amount of money in the corporation each year (EG: $60-$100,000), incorporation becomes a fairly easy choice. However, all physicians should meet with an accountant seasoned in MPCs to evaluate spending, debts, liabilities and financial goals before making a decision.
Physicians may want to delay incorporation when they:
- Have a lot of debt to pay off (E.G. med school loans)
- Are saving for a home down payment or other large imminent purchase
- Need most of their income to support their current lifestyle
- Work part time (income may not be high enough to benefit
It should also be noted that only self-employed, not salaried physicians are eligible for incorporation.
MPC Advice for New Physicians
Medical school doesn’t teach financial literacy, but it should. New doctors very suddenly become high earners who want to make the right financial choices for their lives following a long upfront investment in their career. Choosing advisors who have proven experience working with medical professionals is key. The best advisors will explain all the options and help physicians tailor choices to their individual needs and goals.
Kutner Law has more than a decade of experience in medical practice incorporation in Ontario and does not charge for an initial consultation with a physician regarding the potential incorporation of an MPC.
New physicians can improve their financial literacy by educating themselves over time through a combination of books, professional and physician-authored blogs, speaking with colleagues and formal courses. “Nobody cares more about your money than you do” and with a little self-education, physicians can empower themselves to make financial decisions with confidence.