September 16, 2019

Is it time to incorporate your professional practice?

Canadian professionals including physicians, lawyers, dentists, and veterinarians choose to create a professional corporation for a wide variety of personal and financial reasons. Is it right for you?

Here are three key reasons why many of your professional colleagues choose incorporation. 

1.       Greater tax efficiency

Professional income earned by a corporation is taxed at a much lower rate than income earned by individuals, especially those in the highest tax brackets. That means a corporation can keep more of the money it makes and use that money for a variety of purposes such as expansion, the repayment of debt or investment for a future venture or retirement. The chart below demonstrates how incorporation lowers taxes on income not needed for personal expenses and increases the amount of money a professional corporation can keep.  

 

You make $200,000 more in Active Business Income (ABI) than you need to cover lifestyle expenses”

Not incorporated

Incorporated

Excess earnings: $200,000

Excess corporate earnings: $200,000

Taxes on excess earnings: $100,000[1]

Corporate tax on excess earnings: $30,000

After-tax income: $100,000

Retained earnings: $170,000

As you can see, incorporation generated an additional $70,000 in cash flow because of the lower tax rate. That money can grow inside the corporation. In the future, you will be able to choose from a variety of tax-effective ways to access those savings. For example, by putting the right corporate structure in place now, you may, at age 65, have an opportunity to pay dividends to a spouse, even if he or she had no direct involvement in your professional practice.

2.       Unique retirement planning opportunities

Incorporating allows you to create an Individual Pension Plan (IPP).  Tax deductible contributions to an IPP increase as you age.  Once you are 40 years of age or older, the maximum contributions to an IPP will exceed the annual limits on RRSPs. That means you can invest more money in a tax-deductible, tax- deferred and creditor-proof plan than you could using RRSPs alone.  To take advantage of the IPP, you must be an employee and therefore your practice must be incorporated. Click here to find out more about IPP.

3.       Greater security

You can hold a wide range of personal and professional insurance policies in your professional corporation, paid for using pre-tax dollars. In addition to risk protection, permanent life insurance can play an important role in your overall estate and retirement plan.  An IG Wealth Consultant can engage one of our insurance experts to help you choose the best and most affordable combination of corporate and personal coverage for your needs.


[1] Assumes business owner is in the top tax bracket of 50% and small business tax rates on ABI of 15%.

Let us show you how

Speak to an IG Consultant to learn more about the advantages of incorporation. We can help you set up and manage your new corporation and provide an objective assessment of how to enhance your overall financial well-being.

Written and published by IG Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances from an IG Wealth Management Consultant.  Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.