Tax Planning and Optimization for Incorporated Physicians

Written By David Wiitala

by Dave Wiitala using Chat GPT Deep Research - general information only, not to be used as advice

The report will explain key tax strategies in an easy-to-understand way, including:

  • Salary vs. dividends

  • RRSP vs. corporate investing

  • IPPs and PPPs

  • Passive income rules

  • Family income splitting

  • Estate freezes

  • Use of holding companies

  • Charitable giving

  • Life insurance and CDA

  • Common pitfalls and lesser-known planning opportunities

(A comprehensive guide for Canadian physicians operating through Medical Professional Corporations)

Introduction

Incorporating your medical practice opens the door to significant tax planning opportunities. However, it also introduces complexity that can be daunting for physicians without a tax background. This report demystifies key tax strategies for incorporated physicians across Canada, addressing both early-career doctors and those in mid to late career. We’ll cover optimal compensation (salary vs. dividends), retirement savings options (RRSPs vs. corporate investing, pension plans), handling passive investment income, income splitting under Tax on Split Income (TOSI) rules, succession and estate planning (including estate freezes, holding companies, and winding down your corporation), as well as specialized topics like charitable giving through your corporation, corporate-owned life insurance, and advanced strategies. Provincial differences – particularly in Ontario, Alberta, and British Columbia – are highlighted where relevant. Real-world case studies of physician financial decisions are included to illustrate how these strategies come together in practice. Let’s begin by considering how incorporated physicians can pay themselves and save for the future in a tax-efficient manner.

Compensation Planning: Salary vs. Dividends

A fundamental decision for an incorporated physician is how to draw income from the corporation: as a salary (employment income) or as dividends (shareholder income), or some combination of both. Each approach has distinct implications for taxes, retirement savings, and benefits.

Salary as Compensation

Paying yourself a salary means your medical corporation treats you as an employee. You’ll receive T4 employment income, with tax deductions at source and contributions to programs like the Canada Pension Plan (CPP). Here are key considerations:

In summary, salaries provide RRSP room, CPP accrual, and predictable taxes, at the cost of some administrative overhead and upfront tax withholding. The decision on how much salary to pay often comes down to how much cash you need personally and the value you place on CPP and RRSP room. Many physicians choose to pay themselves at least a “base” salary to cover living needs and maximize RRSP room, especially in early and mid-career (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth).

Dividends as Compensation

Dividends are distributions of after-tax corporate profits to you as a shareholder. Your medical corporation pays tax on its profits (generally at the small business rate up to the $500,000 limit) and can then pay you a dividend from remaining after-tax income. Considerations with a dividend strategy include:

  • Tax Rates and Integration: Dividends in Canada receive dividend tax credits to prevent double taxation, since the corporation already paid tax on those earnings. Non-eligible dividends (from income taxed at the small business rate) are taxed at a lower personal rate than salary of the same amount. However, the corporation paid tax first. When combined, the total tax on income via dividend or salary should be roughly equivalent due to tax integration, especially at higher income levels – with differences often within a few percentage points (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax) (How to pay yourself from your practice | MNP). For example, an Alberta physician with $200,000 in corporate pre-tax income in 2024 would end up with a similar overall tax burden whether taking it entirely as salary or as dividends (in one scenario they’d pay more personal tax, in the other the corporation pays more) (How to pay yourself from your practice | MNP) (How to pay yourself from your practice | MNP). In that Alberta example, paying dividends yielded about $3,980 more cash in hand, but also about $4,132 more in combined tax when considering both corporate and personal levels (How to pay yourself from your practice | MNP). The slight short-term cash advantage of dividends (from not paying CPP) must be weighed against the lost CPP benefits and RRSP room.

  • No CPP or EI Payable: Dividends are not subject to CPP or Employment Insurance. This saves the corporation and you the CPP contributions (as noted earlier) (How to pay yourself from your practice | MNP). Some physicians prefer dividends specifically to avoid CPP premiums, aiming to invest those funds privately instead. Be aware that skipping CPP means relying solely on your own investments for that portion of retirement income, which requires discipline.

  • Flexibility: Dividends can be declared at any time and in any amount (provided the corporation has after-tax profits or retained earnings to distribute). This offers flexibility to smooth your income. For instance, you could take minimal dividends in a year you have other income or maximize dividends in a sabbatical year. Salaries, on the other hand, are ideally set and paid regularly (though you can adjust salary year to year). The flexibility of dividends is a major draw for those whose income needs fluctuate (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax).

  • No Personal “Earned Income”: As mentioned, dividends do not count as earned income, so they generate no RRSP room (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax). If you rely exclusively on dividends for many years, you could miss out on substantial RRSP contributions that would have grown tax-free. Dividends also do not allow contributions to CPP or IPPs, and you can’t claim certain deductions like childcare expenses against dividend income (How to pay yourself from your practice | MNP).

  • Accounting Simplicity: With dividends, there is no need for a payroll account or monthly remittances (How to pay yourself from your practice | MNP). Many small corporations find it simpler to just declare a dividend at year-end. Just remember to budget for the personal tax bill; typically, you’ll pay personal tax at your marginal dividend rate by April of the following year unless you’re making instalments (How to pay yourself from your practice | MNP).

  • TOSI and Split Income: Paying dividends to family shareholders (e.g. a spouse) can invoke the Tax on Split Income (TOSI) rules (discussed later). If you are the only shareholder, this is not an issue – but if family members own non-voting shares of your medical corporation, dividends to them must meet TOSI exceptions or they’ll be taxed at top rates (How to pay yourself from your practice | MNP). Salary paid to a family member for actual work is generally safer from a TOSI perspective (must be reasonable compensation for actual duties).

Bottom line: There is no one-size-fits-all answer – many physicians use a mix of salary and dividends. A common approach is to pay enough salary to maximize RRSP contributions and cover CPP, then use dividends for any additional cash needs (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). Others might take a salary up to the CPP maximum (around $66,000) and dividends beyond that, balancing CPP benefits with higher immediate cash flow. A few incorporate physicians opt for all dividends, but this is now rarer due to the missed RRSP and CPP and the relatively small tax rate advantage (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax) (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax). On the flip side, some tax advisors (e.g., MedTax) advocate for an “all-salary” approach, citing the long-term value of CPP and RRSP room, and only using dividends for occasional top-ups if needed (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax).

Example: Dr. Chen, an Ontario family physician, needs about $120,000 after-tax to support her lifestyle. She decides to pay herself a salary of $150,000 from her corporation. This generates roughly $27,000 of RRSP room (18% of $150k) for next year and maxes her CPP contributions. The salary incurs personal tax (withheld by her corporation) but leaves her corporation with little taxable income (since salary is a deductible expense). Any additional corporate profits she retains for now, paying only the low small-business corporate tax (~12%). By contrast, her colleague Dr. Singh opts to take only dividends. Dr. Singh’s corporation earns $150,000, pays ~12% corporate tax, and he withdraws the rest as dividends. He avoids CPP contributions and nets slightly more cash today than Dr. Chen might, but Dr. Singh foregoes CPP and RRSP room and must remember to set aside funds for his tax bill. Over time, Dr. Chen will have a growing RRSP and eventual CPP pension, whereas Dr. Singh will rely solely on his corporation’s investments for retirement. The best approach depends on one’s personal preferences and spending needs – plan your compensation with both current lifestyle and future retirement in mind (How to pay yourself from your practice | MNP) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth).

(Key takeaway: Salaries provide retirement savings opportunities and stable planning, while dividends offer flexibility and upfront cash flow. Most incorporated physicians blend the two to get the best of both worlds, aligning with their financial goals.)

Retirement Saving Strategies: RRSPs, Corporate Investing, and Pensions

Incorporation allows you to defer tax by leaving income inside the corporation at a low tax rate. But how should those retained earnings be invested for retirement? Physicians must choose between personal retirement accounts like RRSPs/TFSAs versus simply investing through their corporation’s taxable account. Additionally, special retirement plans like Individual Pension Plans (IPPs) or Personal Pension Plans (PPPs) can be set up by your corporation to enhance your savings. This section explores these options and how they interact.

RRSP vs. Corporate Investment

For an incorporated doctor, a crucial question is: should I withdraw more income to maximize RRSPs, or leave money invested inside my corporation? The answer often involves comparing tax rates now versus later:

  • Tax Deferral Inside the Corporation: Income left in a corporation is taxed at the small business rate (approximately 11%–12% in most provinces for the first $500,000) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). This is much lower than top personal rates (~48%–54% depending on province). By retaining earnings in the corp, you defer the personal tax until you eventually withdraw the funds (e.g. as dividends in retirement). The deferral is significant – for example, in Alberta 2023, each $100 left in the corp instead of paid out could defer ~$37 of tax (48% personal minus 11% corp rate) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). That $37 can stay invested and grow.

  • RRSP Contributions and Deductions: If you take additional salary out to contribute to an RRSP, the corporation loses the deferral on that money (since salary is deductible, corporate taxable income goes down). Instead, you pay personal tax on the salary, then get an RRSP deduction personally. Essentially, you’re moving money from the low-tax corporate environment to a tax-sheltered personal environment (the RRSP). Which is better? An RRSP grows tax-free, whereas corporate investments are taxed annually (at corporate passive investment rates, typically ~50% on interest and foreign income, ~25% on eligible Canadian dividends, and ~25% on half of capital gains – more on this in the passive income section). Because of that yearly tax drag on corporate investments, an RRSP’s tax shelter can be powerful. The RRSP also effectively enjoys a tax deferral until withdrawal, similar to the corporation. In retirement, RRSP withdrawals (as RRIF income) will be taxed, but possibly at a lower rate if your income drops.

  • Comparing Outcomes: Generally, maximizing RRSP and TFSA room is recommended even for incorporated professionals, because of the tax-free investment growth those accounts provide. Studies have shown that $1 left in a corp and invested, versus $1 put into an RRSP (after paying salary tax), often end up very similar after all taxes – but the RRSP slightly edges out in many cases due to the compounding without annual taxation (To CORP or not to CORP: Strategic tax considerations for investing). The corporation route can leave you with more flexibility (no withdrawal minimums, etc.), but you must manage the passive investment tax each year. If you are in a very high bracket now and expect to be in a much lower bracket in retirement, paying yourself salary to max out an RRSP could yield a future tax rate arbitrage (deduct at ~50% now, withdraw at maybe ~30% later).

  • Use of TFSA: Don’t forget TFSAs. Even though TFSAs are personal accounts, you fund them from after-tax dollars. If you have excess salary or dividends taken out, putting $6,000 (now $6,500 for 2023–2025) annually into a TFSA is wise. TFSAs grow completely tax-free and withdrawals are tax-free. Some physicians use corporate dividends to fund their TFSAs each year.

  • Corporate Investing Advantages: Investing through the corporation can make sense if you’ve already maxed RRSP/TFSAs or if withdrawing more salary would push you into a very high personal tax bracket unnecessarily. Inside the corporation, you have more dollars to invest upfront (since only ~11% tax was taken) – but remember, investment income in the corp will be taxed (the next section covers passive income rules). There is also creditor protection to consider: RRSPs (in many provinces) and insurance-based investments have some creditor protection, whereas corporate assets could be exposed to potential creditors of the corporation (though professional malpractice liabilities generally cannot be avoided via corporation – those follow the physician personally).

In practice, many incorporated doctors follow this approach: pay yourself enough salary/dividend to max out RRSP and TFSA contributions each year, and keep any further surplus profits invested inside the corporation. This way, you benefit from both worlds – you utilize RRSP/TFSA room fully, and still retain earnings beyond that in the corp for additional tax-deferred growth (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). If your corporation’s passive investments become very large, you might then look to alternative structures like an IPP or holding company, as discussed below.

Individual Pension Plans (IPPs) and Personal Pension Plans (PPPs)

Once physicians hit their 40s or 50s, RRSP limits may start to constrain their retirement saving capacity. An Individual Pension Plan (IPP) is a pension plan created for one person (you, and potentially your spouse) that can allow substantially higher contributions than an RRSP, especially for those over age 40 (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). A Personal Pension Plan (PPP) is a newer, hybrid plan (trademarked by Integris) that combines features of an IPP with added flexibility. Here’s what to know:

IPP/PPP Example: Dr. Ahmed, 50, has an incorporated practice in Alberta and consistently earns more than he spends. He’s maxed his RRSP annually. At 50, the maximum RRSP contribution is around $30,000, but an IPP could allow, say, $40,000–$50,000 per year. He sets up an IPP through his corporation. In the first year, the actuary calculates he can contribute $200,000 for past service (a huge deduction reducing his corporate taxable income) plus $45,000 for the current year. His corporation uses excess cash to make these contributions – effectively moving a large sum into his own pension. This reduces the corporation’s passive investments (helping keep its passive income under $50k threshold) and secures Dr. Ahmed’s retirement. He will have to continue funding the IPP each year, but come retirement, he can draw a defined pension and even split it with his spouse. Another physician, Dr. Brown, uses a PPP instead. She likes the PPP’s flexibility: in high-income years she contributes the full defined benefit amount; in a lean year, she switches to the defined contribution mode to reduce mandatory outlay (Complicated but good: Why this ‘mind-boggling’ personal pension is gaining ground with doctors | Canadian Healthcare Network). Both doctors have leveraged their corporations to build a larger, more secure retirement fund than they could with RRSPs alone (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Complicated but good: Why this ‘mind-boggling’ personal pension is gaining ground with doctors | Canadian Healthcare Network).

Corporate Investment Accounts vs RRSP: The Trade-off

To crystallize the trade-off, consider the effective tax rate on investment income in each environment:

  • Inside an RRSP, the effective tax on investment income is 0% while funds remain in the plan. When withdrawn, the entire amount (principal + growth) is taxed as ordinary income at your rate at that time. If you retire in a lower bracket, that can be advantageous. Even if not, the RRSP at least defers tax for many years. Crucially, the compounding was untaxed, which often leads to a larger net nest egg than if the investments were taxed along the way.

  • Inside a corporation, investment income is taxed in the year it’s earned (with some ability to refund part of it when paying dividends, under the RDTOH system). For instance, interest income in a CCPC might face ~50% tax immediately (with about 30% refundable when you pay out dividends). Eligible dividends received in the corp are taxed ~38% with a portion refundable. Capital gains incur ~25% tax immediately (since half is taxed at ~50%) and the other half goes to the Capital Dividend Account (which can be paid out tax-free). We will discuss the passive investment rules next, but note that even without those rules, there is an inherent drag from annual taxation in the corporation.

One physician-focused analysis summarized: “The main advantage of the RRSP and TFSA over the corporation is that unlike a corporation, growth in the account is not taxed” (Ep 10 & 11 Case Conference: Corporate Investing Puzzles). Over decades, that benefit is substantial. Thus, while keeping money in the corporation is useful for deferral, you should still take full advantage of RRSPs and TFSAs as tax shelters for long-term investments. The corporation can then serve as an overflow vehicle for additional savings once those are maxed.

HOOPP and Other Pension Integration

Some physicians, particularly in Ontario, may have access to pension plans like HOOPP (Healthcare of Ontario Pension Plan) or other hospital/university pension plans if they are employees in certain roles. How does this interact with an incorporated practice?

  • HOOPP Membership: If you have a position that provides HOOPP (or a university/hospital defined benefit pension), those earnings are T4 income and not part of your corporation. HOOPP will provide you with a lifetime pension based on that employment. However, the pension adjustments (PAs) from HOOPP will significantly reduce your RRSP contribution room each year. For example, a full-time HOOPP member might have little to no RRSP room because the PA consumes the allowed limit. If you also have an incorporated practice on the side, you could pay yourself salary there, but note that your RRSP room is still limited by the PA – you cannot exceed the overall 18% of earned income minus PA formula.

  • No Double-Dipping on IPP: If you’re already accruing a defined benefit pension like HOOPP, you generally wouldn’t set up a separate IPP for the same years of service. IPPs work best for those with no other pension. You could theoretically create an IPP for your private practice income (since HOOPP only covers your hospital job), but careful consultation with an actuary would be needed to see if it’s permitted or beneficial. Often, doctors with HOOPP simply use the corporation to invest any surplus income that can’t go into RRSP (due to reduced room) or TFSA.

  • Retirement Planning with Multiple Pensions: If you will receive HOOPP at retirement (which is indexed and relatively generous after a long career), you may not need to accumulate as large a nest egg in your corporation. This might affect your draw strategy: you could, for instance, rely on HOOPP for base income and then strategically withdraw dividends from your corporation to top-up your retirement income to the desired level (perhaps keeping yourself in a moderate tax bracket). Also, HOOPP at age 65 can be split with a spouse (like any pension, up to 50% for tax splitting), whereas dividends from your corp cannot be split until you’re 65 and even then only if you utilize the TOSI age 65 exception (discussed later).

In short, having HOOPP or another pension reduces the need for an IPP/PPP. It also means RRSP isn’t as big a factor (since your PA eats it up). So incorporated physicians with HOOPP often focus on TFSA and corporate investing for additional retirement savings, and consider using their corporation for things like additional spousal income (after 65) or life insurance strategies for estate planning, since the basic retirement income will be covered by the pension.

(Provincial note: HOOPP is Ontario-specific, but other provinces have similar pensions for certain physician roles – e.g., some BC physicians might be part of the Municipal Pension Plan if they are on salary. The integration concepts are analogous.)

Passive Investment Income and the Small Business Deduction

One of the major tax changes affecting incorporated professionals in recent years is the limitation on the Small Business Deduction (SBD) when a corporation earns significant passive investment income. This is often called the “passive income grind-down” rule. Here’s what it means and how to navigate it:

  • Small Business Deduction (SBD): The SBD is what allows the first $500,000 of active business income of a Canadian-controlled private corporation (CCPC) to be taxed at the low small-business rate (~11–12% combined federal-provincial). Incorporated physicians almost always qualify as CCPCs (and are not “personal services businesses”), so they enjoy this low rate on their practice income (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). The tax savings from the SBD deferral are a key benefit of incorporation (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth).

  • Passive Investment Income Threshold: Since 2019, if a CCPC (including associated corporations) earns more than $50,000 in passive investment income in a year, its available SBD limit is reduced in the following year. Specifically, for every $1 of passive investment income above $50k, the federal small business limit is reduced by $5 (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). By the time passive income hits $150,000, the corporation loses the SBD entirely – meaning all its active income is taxed at the higher general rate (roughly 26%–27% instead of ~12%). In other words, at $150k passive, the small business limit is ground down to zero (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning Q&A for Canadian Physicians - Dr.Bill).

  • What Counts as Passive Investment Income? Generally, interest, rent, royalties, taxable capital gains, and portfolio dividends earned by the corporation count. Importantly, only the taxable half of capital gains counts, and gains from selling active business assets or shares of an active subsidiary might be excluded. But typical portfolio earnings (interest, dividends, etc.) contribute to this “Adjusted Aggregate Investment Income” measure. If your corporation has, say, a $1.5 million investment portfolio earning ~4% interest and 2% dividends, it could generate ~$90,000 of passive income annually – pushing you over the threshold.

  • Impact of Losing SBD: If you lose some or all of the SBD, your practice income over the $500k (or reduced limit) will be taxed at the general corporate rate (~26%). This doesn’t create extra tax per se, but it means less deferral. For instance, in Alberta, losing the SBD on $500k means paying 23% instead of 11% – a difference of 12% more tax upfront (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). In Ontario, losing the SBD would mean 26.5% instead of ~12.2%. So the deferral of personal tax shrinks. BMO Private Wealth calculated that an Alberta physician who loses the SBD on the full $500k would see a reduced deferral of up to $60,000 in tax per year (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). Over time, that can be significant.

  • Provincial Variations: Not all provinces mirrored this federal rule exactly. The federal SBD limit is reduced, and most provinces follow the federal limit. However, some provinces (like Ontario) did not fully adopt a parallel grind on their portion of the small business credit (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). The practical result is complex, but effectively in Ontario even if you lose the federal SBD on a portion of income, you might still get the provincial small business rate on that portion (resulting in a blended tax rate). The key message is: check your province’s specific application. For most doctors, the combined effect is still worth avoiding – losing SBD increases corporate tax and diminishes the benefit of keeping income in the corporation.

  • Avoiding the Passive Income Grind: There are strategies to manage this issue:

    • Keep passive income under $50k: If your corporate investments aren’t too large, you may choose investments that yield lower annual taxable income. For example, growth-oriented equities that mainly generate unrealized gains (which don’t count until sold) can keep annual income low. Or investments like corporate class funds that defer distributions. However, be mindful of risk and diversification; don’t let the tax tail wholly wag the portfolio dog.

    • Use a Holding Company (Holdco): In some cases, a physician can establish a separate holding company for investments, and “purify” the medical corporation by moving excess cash to the holdco. If the holdco is not associated, the passive income there might not grind the Opco’s SBD. But caution: Generally, if one person owns both companies, they are associated for tax (meaning passive income in holdco still impacts the other). There are complex structuring possibilities (like having a family trust own one and you own another) but professional advice is essential to ensure compliance.

    • Invest through an IPP/PPP or Insurance: Contributing to an IPP/PPP (as discussed) takes money out of the corp and into a pension – investment returns in the pension do not count toward corporate passive income. Similarly, corporate-owned exempt life insurance policies accumulate cash value without annual taxable investment income (the growth is sheltered within the policy). Some physicians redirect a portion of their surplus into whole life or universal life policies in the corporation as a tax-free growth vehicle. We’ll elaborate on insurance later, but one advantage is that the growth doesn’t hit the passive income test, and later the proceeds can be accessed via the Capital Dividend Account.

    • “Walk into the Grind”: Despite the above, some advisors say that if you’re in Ontario (which didn’t fully mirror the grind provincially) or if avoiding the grind is too cumbersome, it might be acceptable to just let the passive income accumulate and forego some SBD (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). Essentially, you accept paying a bit more corporate tax in exchange for the simplicity of keeping all investments in one place. This might be reasonable if your practice income is comfortably under $500k such that even a reduced SBD covers it, or if the hassle of complex planning outweighs the benefit. For example, an Ontario doctor might decide that a partial grind (federal only) is not devastating and continue investing within the corp normally – particularly if they plan to eventually withdraw or post-mortem pipeline the funds in a way that recovers some integration.

  • Track Associated Corporations: If you have multiple corporations (e.g., a medical corp and a separate real estate corp, or your spouse has a corporation), be aware of association rules. Generally, corporations controlled by the same person (or by related persons) are associated and share the same $50k passive income limit and $500k business limit. You can’t dodge the grind by spreading investments across companies you ultimately control.

In practice: Many mid-career physicians find themselves with growing corporate investment portfolios. As you approach the $50k passive income zone, it’s time to engage in planning. Suppose Dr. Li’s corporation has amassed about $1 million invested in a mix of bonds and dividend stocks, generating ~$60,000 passive income. He notices his small business limit got reduced to $450,000 this year. To address this, Dr. Li might shift some assets to growth stocks that pay minimal dividends, or use corporate funds to top up his IPP (reducing the invested assets). Alternatively, he could transfer some investments to a separate holding corporation owned by his spouse (making sure it’s structured so as not to be associated – a tricky task). Each option has costs and benefits, so getting advice is wise. The goal is to preserve that valuable low corporate tax rate on active income, which is a cornerstone of the incorporation advantage (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning Q&A for Canadian Physicians - Dr.Bill).

(Remember: The passive income rule doesn’t directly tax you extra; it just takes away some of the tax deferral on the practice income. Even if you trigger it, incorporation still defers the remainder of income up to the reduced limit. But optimal tax planning tries to keep full SBD if possible.)

Income Splitting with Family Members

One attractive benefit historically enjoyed by incorporated professionals was income splitting – paying dividends to family members (spouse, adult children, etc.) who are in lower tax brackets, to reduce the overall family tax burden. However, since 2018 the Tax on Split Income (TOSI) rules have severely limited this strategy for most business owners, including physicians. Let’s break down the current state and what opportunities remain for income splitting:

  • TOSI Overview: The TOSI rules tax certain dividends (and other forms of private company income) received by a family member at the top marginal rate, unless an exclusion applies (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). This essentially nullifies the benefit of giving dividends to someone in a lower bracket if they don’t meet the criteria. It also denies those recipients the use of personal credits on that income (Tax Planning Q&A for Canadian Physicians - Dr.Bill). TOSI primarily targets payments to spouses and children (or other relatives) who did not meaningfully contribute to the business.

  • Excluded Individuals and Exclusions: There are several important exclusions to TOSI:

    • Age 18 to 24 – “reasonable return on contributed capital”: For young adult children 18–24, a very strict rule allows only a very limited “reasonable” return on any capital they contributed (basically, if they invested their own money). In practice, it’s rare for this to apply in a physician context (since kids typically didn’t contribute capital to a parent’s practice).

    • Age 25+ – “Excluded Business”: If the adult family member actively works in the business (at least an average of 20 hours/week during the year or any 5 prior years), then dividends to them are excluded from TOSI (Tax Planning Q&A for Canadian Physicians - Dr.Bill). For example, if your spouse works full-time as your office manager, you can pay them dividends (or other split income) and not worry about TOSI, because it’s an excluded business for them by virtue of labor contributions.

    • Age 25+ – “Excluded Shares”: If the family member (age 25+) owns at least 10% of the votes and value of the corporation, and the corporation earns less than 90% of its income from providing services and is not a professional corporation, dividends on those shares can be excluded. However, for most physicians, this exclusion is off the table: the law explicitly disqualifies professional corporations from the excluded shares rule, and service businesses tied to one person’s skills often don’t meet it either (Tax Planning Q&A for Canadian Physicians - Dr.Bill). So you generally cannot rely on “excluded shares” in a medical corporation (the professional corp status and service nature fail the test).

    • Spouse 65+ – “Retirement carve-out”: If the business owner is 65 or older, any split income (like dividends) to their spouse is excluded from TOSI (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). This rule effectively allows income splitting for seniors in line with pension income splitting. For incorporated physicians, this is a key planning point: once you (the physician-shareholder) turn 65, you can freely pay dividends to your spouse and have them taxed in your spouse’s hands at their rate (often lower if the spouse had little income). This is especially useful if the corporation is being used like a retirement vehicle at that stage.

    • Reasonable Remuneration for Contributions: If none of the above bright-line exclusions apply, one last resort is that the income could avoid TOSI to the extent it reflects a “reasonable return” on the family member’s contributions (labour or capital) to the business. This is subjective and risky to rely on, except in clear cases. For example, if your spouse did work part-time for the corporation (but not a full 20 hours/week), you might argue part of a dividend represents a reasonable return for that work – but it’s hard to measure and support if challenged. Generally, if a spouse is working in the business, it’s cleaner to just pay them a salary for those duties (salaries are not subject to TOSI, they just must be reasonable) (Tax Planning Q&A for Canadian Physicians - Dr.Bill).

  • Practical Impact: For most incorporated physicians:

    • Minor children (under 18) are basically off-limits for dividends altogether (they were even before TOSI, via the old “kiddie tax” rules which TOSI expanded).

    • Adult children in university or not involved in the practice will get hit by TOSI on any dividends, so splitting income with them isn’t feasible until perhaps they meet some test at 25 or later.

    • Spouses who are not employed in the practice similarly can’t receive dividends without TOSI, until you reach age 65. Prior to age 65, if your spouse meaningfully helps run the practice (bookkeeping, administrative tasks, etc.), consider putting them on payroll for a fair wage – that is allowed (as long as you’d pay an unrelated person similarly for the same work) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). This gets money out to the spouse in a deductible manner without invoking TOSI (TOSI doesn’t apply to actual salaries).

    • Many provinces allow family members to own non-voting shares in medical corporations (e.g., Ontario allows physician’s spouse and children to hold non-voting shares). Prior to 2018, those shares were a common income-splitting tool. Now, those shares are essentially dormant for tax purposes until the physician reaches 65. At that point, dividends to the spouse can flow. Planning note: It may still be useful to have your spouse as a shareholder (if permitted) so that you have the mechanism in place to split income after 65. Also, if you ever sell shares of the corporation (perhaps to another doctor or to your children if they become doctors), having spouse/kids as shareholders could allow multiplying the Lifetime Capital Gains Exemption – but that’s advanced planning that must be weighed against TOSI issues in the interim.

  • Post-65 Strategy: When an incorporated physician (let’s say Dr. Green) turns 65 and is winding down practice, she can start paying large dividends to her spouse who is, say, 63 (or older). Those dividends are now excluded from TOSI (because Dr. Green is 65+) and taxed at the spouse’s rate, effectively like splitting a pension (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). This can significantly reduce the couple’s tax burden on withdrawing corporate savings. If Dr. Green’s spouse has little other income, dividends could be taken to fully utilize their lower tax brackets.

  • Income Splitting via Loans: Another method sometimes used is the prescribed rate loan to a spouse or family trust. The physician can pay themselves dividends, then lend those funds at the CRA’s prescribed interest rate to a spouse who invests them. All investment income above the interest paid would then be taxed to the spouse. However, since this involves taking dividends out (which if before 65 would be TOSI’d if paid to a spouse directly), one would first have to take it personally (taxed at the physician’s rate) then loan – not very beneficial unless the physician can bear the personal tax hit upfront. This method is more commonly used by non-TOSI-affected business owners.

Summary: Due to TOSI, typical income splitting is largely curtailed for incorporated physicians under 65, unless the family members actively work in the business. Focus on paying reasonable salaries for actual work (e.g., spouse or adult child genuinely helping in the clinic) rather than dividends, until you reach the age where the rules relax. Keep corporate structure flexible (e.g., have family members as shareholders where allowed by provincial regulations) so that you can take advantage of splitting opportunities as they become available (such as the over-65 rule).

(Real-world illustration: Dr. and Mrs. Patel set up Dr. Patel’s corporation with Mrs. Patel owning 30% non-voting shares. Prior to 2018, they paid dividends to Mrs. Patel, who has a lower income, saving taxes. After TOSI, they halted those dividends to avoid punitive tax. Mrs. Patel started assisting with clinic bookkeeping for 10 hours a week, for which the corp now pays her a modest salary – giving some income splitting benefit in a TOSI-safe way. When Dr. Patel turns 65, the corporation plans to start dividends to Mrs. Patel again under the age-65 exclusion. Their two university-age kids, listed as minor shareholders, won’t receive any dividends at least until they are well past 25 and perhaps involved in a planned future family holding company. This case underscores how tax changes forced a shift from dividend sprinkling to other tactics, with a long-term eye on eventual retirement splitting.) (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill).

Succession Planning and Estate Considerations

Incorporated physicians need to think about long-term succession: what happens to the corporation when you retire or pass away? Unlike some businesses, a medical practice often can’t be simply sold on the open market (patients aren’t “owned”, and professional rules restrict transfers). However, your corporation might have significant retained earnings or other assets (like a building, equipment, or investments). Key strategies in this realm include estate freezes, use of holding companies or family trusts, planning for the Lifetime Capital Gains Exemption (LCGE), and post-mortem techniques (pipeline planning or redemption) to avoid double tax on death. We’ll also discuss dual wills to save probate tax, which is a consideration particularly in Ontario.

Estate Freezes and Family Succession

An estate freeze is a reorganization that “freezes” the value of your shares at current value and transfers future growth to someone else (often your children or a family trust). The idea is to cap the eventual tax liability on your own holdings and push the growth (and corresponding tax) to the next generation:

  • When to Consider a Freeze: If your medical corporation has accumulated a large surplus (say investments or retained earnings that could grow significantly more), and you have children or other successors you’d like to benefit, a freeze may be useful. For example, if your corp is worth $2 million now and you anticipate it could be $4 million by retirement, you might freeze at $2M. This typically involves you exchanging your common shares for fixed-value preferred shares worth $2M, and issuing new common shares to your children (or a trust for them). The future growth from $2M to $4M accrues to the new shareholders. When you eventually pass away, you’re only taxed on the $2M (the “frozen” value) – not the growth.

  • Qualified Small Business Shares and LCGE: If there is a possibility to sell shares of your corporation (perhaps to another physician, such as a child who is also a doctor, or a partner), an estate freeze could also facilitate using the Lifetime Capital Gains Exemption (LCGE) on a future sale. The LCGE for qualified small business corporation shares is indexed (about $971,190 in 2023) (What Happens to Your Medical Practice Corporation After You Retire?). If your corporation qualifies (90%+ of assets used in active business at time of sale, etc. (What Happens to Your Medical Practice Corporation After You Retire?)), you could sell shares tax-free up to that limit. However, many medical corporations fail the “qualified small business” tests if they have too much in passive investments (not actively used in the practice) (What Happens to Your Medical Practice Corporation After You Retire?) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). An estate freeze can be coupled with steps to “purify” the corporation of excess passive assets (perhaps moving them to a holding company) so that the shares become eligible for LCGE. This is complex planning but relevant if, say, your child is taking over your practice or you have an associate willing to buy your corporation (which in medicine usually means buying your patient list and goodwill through share sale). Note: Many physicians won’t sell their practice – often they just wind it down – but a minority do plan transfers (especially if a child or spouse is also a physician). In such cases, leveraging the LCGE is attractive – tax-free sale up to nearly $1M (What Happens to Your Medical Practice Corporation After You Retire?).

  • Family Trusts: A trust can be used in a freeze to hold the new growth shares. This gives flexibility – you might not know which of your kids will become a physician or how to split things. The trust can allocate dividends or eventual shares later. Trusts also used to multiply LCGE by allocating gains to multiple beneficiaries (each can use their LCGE), though with new rules around “21-year rule” and TOSI, careful handling is needed.

  • Professional Restrictions: Always remember that medical professional corporations have shareholding restrictions. In many provinces, only the physician (and possibly immediate family) can own shares. Non-physician children can only hold non-voting shares in some jurisdictions. For example, in BC a holding company owned by a physician can hold voting shares (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?), but in Ontario, only the physician themselves can hold voting shares (family can hold non-voting). This means any freeze giving equity to children who are not doctors would involve non-voting growth shares. That’s fine for economic purposes, but control must remain with licensed physicians. If your child is a medical student or resident, you might freeze and issue them shares in anticipation of them becoming a physician and thus an eligible shareholder.

In summary, an estate freeze can minimize future tax and help in intergenerational transfer, but it requires professional guidance. It’s typically more useful if you have heirs who may take over or if you have a very large accrual in the corporation you want to cap for yourself.

Holding Company Strategies (Pre- and Post-Retirement)

We’ve touched on holding companies (holdcos) a few times. A holding company is a separate corporation that can hold investments or even shares of your professional corporation (if allowed).

  • Pre-Retirement Use: During your practicing years, a holdco could be used to receive dividends from your medical corporation. For example, your MPC could pay a dividend to your holdco (if your holdco is a shareholder). If structured correctly, this might move passive assets to the holdco. However, because you control both, the tax association means passive income in holdco can still grind the MPC’s SBD in many cases. One clear restriction: not all provinces permit a corporation (holdco) to be a shareholder of a medical professional corporation. British Columbia does (a physician can own a holdco which in turn holds shares of the MPC) (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?). Other provinces like Ontario do not allow non-individual shareholders (Ontario only allows people – doctor or family – as shareholders). Alberta historically only allowed physicians and family members as individual shareholders too. So the feasibility of a holdco owning your practice varies.

    Even without owning shares of the MPC, a holdco could be used in another way: The physician could withdraw surplus funds from the MPC (pay the small business tax and then a dividend to themselves personally, paying personal tax) and then invest those personally-taxed funds in a separate corporation (holdco). This usually isn’t efficient due to the personal tax hit when extracting, unless you have a specific reason (like creditor protection or a different tax treatment in holdco). Some physicians use holdcos to hold real estate or other investments separate from the MPC for liability segregation – e.g., if you buy a medical office building, you might have a holdco own it and lease to your MPC.

  • Post-Retirement Conversion: A very common strategy is converting your MPC into a regular holding/investment company when you retire. Once you stop practicing medicine, you might not need the professional corporation status. You can notify the College and essentially remove the professional designation, turning it into a normal corporation (subject to regular corporate rules rather than professional ones) (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?). The benefits of doing this:

    RBC outlines that converting to a holdco lets you “draw from [corporate assets] as needed during retirement in a more tax-efficient way”, such as capital dividends that are tax-free (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?). It also notes the reduction in compliance burden once the corporation is not an active MPC (What Happens to Your Medical Practice Corporation After You Retire?).

  • Asset Stripping Before Sale (Advanced): If you did plan to sell the shares of your MPC to another physician (e.g., your child or another doctor), you might use a holdco or freeze strategy beforehand to strip out passive assets. This process, sometimes called “purifying” for LCGE, might involve paying a tax-free inter-corporate dividend from the MPC to a newly created holdco (possible if structured under the affiliated rules), removing excess cash so the MPC’s assets are >90% active (What Happens to Your Medical Practice Corporation After You Retire?).

  • Caution – Losing SBD in Multi-Corp Setup: If you have an active MPC and an investment holdco that are associated, note that even if the MPC has no passive income itself, the holdco’s passive income could grind the MPC’s SBD (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). Association is a tricky subject – professional advice is needed to see if any structure can legitimately avoid association.

To summarize, holdcos are mainly useful at retirement or for specific asset segregation. During practice years, their benefit to physicians is limited by professional rules and association rules. But as you retire, simplifying your MPC into a plain holdco and perhaps doing an estate freeze at that point (issuing shares to kids) can form part of a solid succession plan. Many doctors simply continue with their MPC as an investment company after retirement – which is fine, as long as you inform the College or change its status as required (some provinces require dissolution or permit surrender if no longer practicing). In others, you might maintain it but drop the professional aspects by bringing in an active physician shareholder (if you wanted to keep it as an MPC, which is uncommon if you stop practicing entirely) (What Happens to Your Medical Practice Corporation After You Retire?).

(Case in point: Dr. Wong, at 70, has been retired for 5 years. She converted her MPC to a holding company when she stopped practicing. Now it’s just “Wong Investments Inc.” holding her portfolio. Each year, she pays herself dividends up to about the middle tax bracket, and occasionally she’ll pay out a tax-free capital dividend when her advisor sells some stocks for gains (utilizing the CDA). Her company no longer has to file the extra professional corp paperwork. Dr. Wong also added her two adult children as shareholders after retirement, so they can receive dividends now that TOSI isn’t an issue (Dr. Wong is over 65, and also the corp is no longer a professional corp so excluded shares test could apply if needed). This will also make it easier to wind up after her passing, as they effectively own portions of it already. This scenario illustrates the flexibility gained by converting the corporation for retirement (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?).)

Winding Down the Corporation and Post-Mortem Tax Strategies

Eventually, an incorporated physician (or their estate) will face the question: how to wind up the corporation’s affairs? There are two scenarios – you wind it up while alive (e.g., at retirement or later in life), or it remains until you pass away and your estate winds it up. Each requires planning to avoid unnecessary tax:

  • Dissolving the Corporation During Lifetime: If the corporation’s assets are relatively small and you don’t need the structure, you might simply dissolve it when you retire. To do this tax-efficiently, typically one would pay out all retained earnings as dividends (paying personal tax on them) and distribute any remaining assets, then legal dissolution. If the amounts are small, the tax hit may be manageable (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?). But if the corporation is large, cashing it out all at once could push you into the top bracket and incur a big tax bill. That’s why many opt for the holding company approach to bleed it out gradually. Nonetheless, if you choose dissolution, ensure all liabilities are settled, and follow your provincial corporate law procedure (some provinces require notifying the medical college and surrendering the permit before dissolution – e.g., BC requires an “Inactive” notice before winding up an MPC) (What Happens to Your Medical Practice Corporation After You Retire?).

  • Death of the Shareholder – Double Tax Problem: When you die owning shares of a corporation, two levels of tax can apply:

    1. On your final personal tax return, you are deemed to have disposed of your shares at fair market value. If your corporation has lots of retained earnings or assets, those shares likely have a high value, resulting in a capital gain on which your estate pays tax (50% of gain is taxable).

    2. Later, when the corporation’s assets are distributed to your heirs (as dividends or liquidation proceeds), those could be taxed again as dividends in the hands of the estate or heirs.

    Without planning, the same underlying corporate value can thus be taxed twice – once as a capital gain on shares, once as dividend out of the corporation. This is often referred to as double taxation on death.

  • Post-Mortem Planning: Tax professionals have two main strategies to mitigate this:

    • Redemption and “Loss Carryback”: The estate can have the corporation redeem some of the shares. This triggers a dividend (taxable) to the estate, but also the shares redeemed trigger a capital loss in the estate (because the shares’ value goes down). Using special provisions (section 164(6) of the Income Tax Act), the estate can carry back that capital loss to the deceased’s final tax return to offset the capital gain that was reported on death. The result is effectively you erase the capital gain tax and end up just paying the dividend tax on the redemption (which might be higher or lower depending on circumstances). This method often leaves some residual tax cost, particularly if the dividend tax exceeds the capital gain tax that was saved.

    • Pipeline Planning: The pipeline technique aims to avoid the dividend tax entirely. It’s a bit complex: the estate incorporates a new company and transfers the shares of the medical corporation to the newco in exchange for a promissory note (valued at the stepped-up ACB, which is the value at death) – often done under section 85 rollover. Then over time (usually over a year or more to avoid anti-avoidance concerns), the old corporation’s assets are extracted by repaying the note. If done correctly, the estate gets the money tax-free as return of capital on the note, and the prior capital gain tax on death is the only tax that applied. This is colloquially known as a “pipeline” (the note provides a pipeline to move funds out). Canada Revenue Agency generally accepts pipeline post-mortem plans if certain conditions are met (e.g., waiting period, genuine intention to not immediately liquidate etc.).

    In deciding between these, factors include the amounts, the province, and what the estate plans to do. A pipeline might save more tax, but it requires professional guidance and time to implement. The redemption method is more straightforward but can incur more tax overall. Sometimes a combination is used (redeem some, pipeline some).

  • Life Insurance to the Rescue: A properly structured life insurance policy can fund these strategies. For instance, life insurance proceeds can inject cash that allows the pipeline to be executed smoothly (by paying off shareholders or equalizing among heirs, etc.), or it can simply provide a pool of tax-free money via the CDA to pay out to heirs offsetting the taxes. Insurance plus CDA (discussed next) is effectively another post-mortem plan: the corp receives insurance proceeds, credits the CDA, and pays a tax-free dividend to the estate/heirs up to that CDA credit. This can eliminate double tax by providing a tax-free way to get value out.

In the context of a medical corporation, not many sell their shares to third parties, so most either wind down or face the post-mortem scenario. Advance planning is critical: ensure your will and executors know about the corporation and engage tax advisors quickly after death to implement the chosen strategy within deadlines (the loss carryback must be done within the first year after death).

Dual Wills for Probate: In Ontario (and some other jurisdictions), probate (estate administration tax) can be costly (Ontario charges ~1.5% of estate value). Corporate shares are considered assets of the estate that would attract probate fees if the will used to be probated includes them. A common strategy is to have dual wills: one will (the “Primary Will”) covers assets that require probate (like real estate, bank accounts), and another will (the “Secondary Will”) covers assets like private corporation shares that can be transferred without probate. Ontario courts accept this as a way to bypass probate on those shares (the executor can administer the private company shares under the secondary will privately) (Complicated but good: Why this 'mind-boggling' personal pension is ...). So, if you have a corporation worth $5 million, using dual wills could save ~$75,000 in probate tax. Alberta, by contrast, has minimal probate fees (capped at around $525), so this isn’t a concern there. BC has probate fees (~1.4%) and dual wills are used by some there too, though the legal environment for dual wills is most established in Ontario. Action point: If you’re an Ontario physician with a valuable corporation, consult an estates lawyer about dual wills to potentially save that 1.5% at death – it’s a straightforward but effective planning tool (commonly used for business owners). Ensure the corporate minute book and share registers are up-to-date to facilitate a smooth transition without probate.

(Concluding thought: Succession planning for an incorporated physician might not involve “selling the practice” in the traditional sense, but it absolutely involves tax planning to extract the wealth accumulated in the corporation in a tax-efficient way, whether during retirement or at death. Tools like estate freezes, holdco conversion, insurance, and post-mortem pipelines are all aimed at preventing the worst-case scenario of paying unnecessary layers of tax. Incorporation defers tax – good planning makes sure that deferred tax doesn’t all come crashing down at the end!)*

Charitable Giving: Corporate vs. Personal Donations

Physicians are often charitably inclined, and giving can be done either personally or via the corporation. There are tax advantages to each approach, and some special opportunities when donating through a corporation:

  • Personal Donation Tax Credit: When you donate personally to a registered charity, you get a non-refundable tax credit. The credit is at a low rate on the first $200 (roughly 15% federal + provincial), and a high rate (~50% combined in top bracket) on amounts above $200. In essence, if you’re in the top bracket, a personal donation’s credit is worth about the same as if that amount were taxed – e.g., a $1,000 donation might yield ~$500 in tax reduction ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). Donation credits can reduce up to 75% of your net income (100% in the year of death) ( Charitable Donations Through Your Corporation - RBC Wealth Management ).

  • Corporate Donation Deduction: Corporations don’t get a “credit”; instead, they get a deduction from taxable income for charitable gifts ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). The deduction is equal to the donation amount, and similarly capped at 75% of net income (carryforward 5 years for unused). A deduction reduces corporate taxes by the corporation’s tax rate. For a small business income taxed at 12%, a $1,000 donation saves $120 of corporate tax (if within the 75% limit). If the corporation is taxed at the general rate (~26%), it saves $260 on $1,000 donated ( Charitable Donations Through Your Corporation - RBC Wealth Management ).

  • Donation from Corp vs Personal – Which is better? If you’re in a high personal bracket, donating personally gives ~50% credit; donating via corp saves maybe 12–26%. However, remember if money is inside your corporation, to donate personally you’d first need to pay it out (salary or dividend) and incur personal tax, then donate and get credit. Oftentimes, there’s little difference at the margin: “If you have cash in both personal and corporate accounts, there is generally not a significant tax difference between donating personally or through your corporation” ( Charitable Donations Through Your Corporation - RBC Wealth Management ). This is because the personal donation credit (~50%) roughly equals the sum of corporate deduction plus dividend tax that would have been paid to get it out. So it usually comes down to convenience and other factors.

  • Advantage of Corporate Donations – Funding with Pre-tax Dollars: One scenario where corporate giving shines is if you plan to donate money that’s currently in the corporation and you don’t need to withdraw it otherwise. By donating directly from the corporation, you use corporate pre-tax dollars. If you instead took it out to donate personally, you’d pay dividend tax then get a credit – potentially a wash. If you’re at top bracket either way, indeed it nets out similarly ( Charitable Donations Through Your Corporation - RBC Wealth Management ). But if you can donate from the corp and avoid paying yourself that amount, you keep your personal income lower.

  • Donating Appreciated Securities – “Triple Benefit” corporately: Both individuals and corporations get special treatment when donating publicly traded securities (like stocks, ETFs, mutual funds) with accrued gains. If done personally, you get the donation tax credit for the fair market value and you pay no capital gains tax on the disposition (normally donating eliminates the capital gains tax). If done by a corporation, the corporation gets a deduction for fair market value, and no tax on the capital gain, and in addition the full capital gain amount is added to the Capital Dividend Account (CDA) – meaning that portion can be paid out to shareholders tax-free ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). This is often called a “triple benefit” ( Charitable Donations Through Your Corporation - RBC Wealth Management ): (1) corporation saves tax via deduction, (2) corporation doesn’t pay capital gains tax, (3) shareholders get an increased CDA (tax-free dividend potential). For example, if your corporation owns shares worth $100k that cost $40k (so $60k gain), donating them yields a $100k deduction (saving maybe $12k–$26k tax) and no $15k tax on the $60k gain that would have been due, plus $60k goes to CDA so you could later pay yourself $60k tax-free ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). This strategy can be very powerful for a charitably-minded physician with large corporate investments. Essentially, the government is subsidizing a big chunk of the donation via forgone capital gains tax and allowing a future tax-free payout.

  • Charitable Foundations and Legacy Planning: If you plan on significant giving, you might set up a private foundation or use a donor-advised fund (like the “charitable gift fund” programs many banks offer) ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). Your corporation can donate to that fund and get deductions, and you or family can advise grants over time. This is more about philanthropic planning than tax, but from a tax perspective corporate vs personal contributions to such a fund follow the same rules as above.

Practical tip: If you have a year of unusually high corporate income (e.g., you sold a property or had an extraordinary clinic revenue) and want to give back, donating through the corporation could reduce your corporate tax and also use up that income (staying within 75% of net income limit). If you have investments in the corp with large gains and you already intend to donate to charity, consider donating those securities directly from the corporation for maximum tax efficiency ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ).

(Example: Dr. Stevens’ corporation has $50,000 of publicly traded stock that doubled in value (cost $25k, now $50k). He wants to donate to his local hospital foundation. If the corporation sells the stock and donates cash, it would pay ~$6k tax on the $25k gain (assuming 24% effective on gain) and then get a $50k deduction. If instead the corporation directly donates the stock, it pays zero tax on the $25k gain and still gets the $50k deduction, plus $25k (the gain) goes into CDA. Down the road, Dr. Stevens can pay himself that $25k from CDA tax-free ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ). He essentially turned a taxable gain into a future tax-free withdrawal while fulfilling his charitable goal. The charity gets the same $50k either way, but the donate securities strategy saved taxes and created a tax-free distribution for the shareholder. That’s a win-win for Dr. Stevens and the charity.)

Corporate-Owned Life Insurance and the Capital Dividend Account

Life insurance can play a unique role in incorporated physicians’ financial planning. When your corporation owns a life insurance policy on your (the shareholder’s) life, it pays the premiums (with after-tax dollars, as premiums generally aren’t deductible), but the death benefit it eventually receives is tax-free. Importantly, a large portion of that death benefit can be paid out to shareholders or heirs tax-free via the Capital Dividend Account (CDA). Let’s unpack this:

  • Capital Dividend Account (CDA): The CDA is a notional account that tracks certain tax-free surpluses inside a corporation. Two key things credit the CDA: (1) the non-taxable half of any capital gains the corporation realizes (What's A Capital Dividend Account In Life Insurance?), and (2) life insurance proceeds received by the corporation, minus the policy’s adjusted cost basis (ACB) (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). When there’s a positive CDA balance, the corporation can elect to pay a capital dividend to shareholders which is tax-free to them (though it must be carefully elected and documented).

  • How Life Insurance Creates CDA: Suppose your corporation owns a life insurance policy on you with a $1 million death benefit. At your death, the corporation receives $1,000,000 tax-free. If the ACB of the policy (basically the sum of premiums less certain adjustments) was, say, $200,000, then $800,000 would be credited to the CDA (the death benefit minus ACB) (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). That $800k can then be paid out as a capital dividend to your estate/heirs with no tax (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). The remaining $200k (the ACB portion) would if paid out be a taxable dividend, but often the CDA covers the bulk.

  • Benefit for Estate Planning: This mechanism means that much of the growth/value from a life insurance policy exits the corporation without triggering the usual dividend tax. It’s a way to convert corporate dollars (which have only paid small business tax on being earned, then were used to pay premiums) into a tax-free payout to your family (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). Many high-income professionals use insurance as an estate planning tool for this reason: it avoids the double tax problem by delivering funds via CDA.

  • Tax-Exempt Growth: Certain types of life insurance (whole life, universal life) accumulate cash value. If it’s an “exempt” policy (meeting CRA criteria), that growth is not taxed inside the policy. So your corporation might invest in an insurance policy’s cash account rather than in a taxable portfolio. Over time, the cash value grows tax-free. This can be seen as a secondary investment account that also provides a death benefit. Some view it as a “corporate Roth IRA” equivalent: pay tax on the money now (since premiums aren’t deductible), then get tax-free growth and payout. It also does not produce passive investment income that could grind your SBD, which is a nice side-benefit.

  • Accessing Cash Value: One drawback – accessing the cash value while alive can be complicated. You can borrow against the policy or do a partial surrender (which could trigger some tax). A common strategy for retirement is an “insured retirement strategy”: borrow from a bank using the policy as collateral to get tax-free loans, then repay from the death benefit later. But that’s beyond scope – suffice to say, the main guaranteed tax benefit is at death via the CDA.

  • Costs: Whole life or UL policies require substantial premium payments. You need to have excess corporate cash and a long time horizon. It’s usually considered by physicians who are in their 50s or early 60s with strong cash flow or already sizeable corporate portfolios, who want to efficiently pass wealth to heirs or fund buyouts, etc. Younger doctors typically prioritize debt repayment, RRSP/TFSA, and simpler investments before considering big insurance strategies.

In short, corporate-owned life insurance can serve as a tax-sheltered investment and estate transfer vehicle. The CDA mechanism ensures that the value passes out without personal tax (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). This pairs nicely with post-mortem planning: you can use the life insurance CDA payout to provide liquidity to your heirs or cover taxes on other assets, etc., without adding to their tax burden. It’s like creating a pool of tax-free money inside your corporation that springs free upon death.

*(Illustration: Dr. Rivera has $2M sitting in his corporation which he doesn’t expect to need in his lifetime. Investing that in a conservative portfolio will yield taxable income and potentially face double-tax when he’s gone. Instead, at 60, he directs some of that to a whole life insurance policy with a $2M death benefit. When he dies at 85, the policy pays, say, $2M to the corporation. The CDA credit is perhaps $2M minus the small ACB (because over 25 years, he paid a lot in premiums). The corporation can then pay his children $2M as a tax-free capital dividend (What's A Capital Dividend Account In Life Insurance?). Had he just left $2M invested, the corp might have $4M by then but paying it out could incur $1M+ in taxes. The insurance strategy essentially capped and prepaid some tax (the premiums paid with after-tax dollars) to ensure a smooth, tax-free transfer later (What's A Capital Dividend Account In Life Insurance?) (What's A Capital Dividend Account In Life Insurance?). This appeals to those who prioritize estate maximization and certainty.)

In conclusion, life insurance within a corporation is an advanced strategy that can yield significant tax advantages for estate planning. It should be evaluated with a financial advisor considering the costs, your health, and your family’s needs, but it’s a tool that many physician-focused planners will discuss once basic needs are covered.

Advanced Strategies and Common Tax Traps

Beyond the mainstream topics above, there are a few additional strategies and pitfalls worth mentioning for incorporated physicians:

  • Prescribed Rate Loans to Family: Although TOSI closed many doors, one remaining avenue is the prescribed rate loan to a spouse or to a family trust for children. The idea is the corporation pays you (the physician) a dividend or bonus which you then loan to a lower-income spouse at CRA’s prescribed interest rate (e.g., 4% or 5%). The spouse invests the money and earns, say, 8%. The spouse deducts the 5% interest paid to you and pays tax on the net 3% investment income at their low rate. You declare the 5% interest at your high rate. The result is the bulk of investment growth is taxed in the spouse’s hands. However, because the money must come out of the corporation first (triggering potentially dividend tax to you), this may only be efficient if you had planned to take that money out anyway or if perhaps you pay it out as a bonus to keep corp income under $500k or something. Also, current prescribed rates are higher than they were (it was 1% for years, now it’s higher due to interest rates). This strategy is more often used by high net worth individuals who have large personal portfolios. For doctors, its applicability is case-by-case. If you already have personal savings (from before incorporation or from an inheritance) you could use prescribed loans to split income from those personal investments with family. Just remember not to try to do a prescribed loan directly from the corporation to your spouse – that would be a shareholder loan and not allowed in the same way.

  • Registered Disability Savings Plan (RDSP): If you or a family member (under 49) has a severe disability, an RDSP is a government-assisted savings plan that offers grants and bonds. While this isn’t specific to incorporation, an incorporated physician should be aware of it as a tool. For example, if you have a disabled child, you can funnel some of your corporate withdrawals (salary/dividends) into an RDSP. The contributions aren’t deductible, but growth is tax-deferred and government grants can be very large (up to $70,000 over time). It’s a powerful program often overlooked. Ensure your financial plan considers any RDSP eligibility in the family.

  • Avoiding Shareholder Benefit Issues: A common tax trap is inadvertently using corporate funds for personal benefit without proper accounting. Examples: using corporate dollars to buy a personal car or pay personal expenses. If not structured as a taxable benefit or reimbursed, CRA can assess it as a “shareholder benefit”, which is basically treated as income to you (and not deductible to the corp). Always run personal expenses separately or have formal plans (e.g., if the corp owns a car you use, keep mileage logs and include a taxable standby charge on your T4 or reimburse the corp for personal use). Another example: taking money out as a “loan” to yourself from the corporation – if not repaid by the next fiscal year-end or fitting an exception, it will be treated as income to you (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). So don’t treat the corporation like a personal piggy bank; follow proper methods (salary, dividends, documented loans with interest, etc.).

  • Over-contributing to RRSP due to low salary: If you switch from salary to dividends and forget that last year’s RRSP room came from a high salary, be careful not to over-contribute. For instance, in 2023 you paid a large salary creating RRSP room of $30k for 2024. If in 2024 you decide to only pay dividends, you still have that $30k room from the prior year – you could contribute in 2024. But in 2025 you won’t have new room if 2024 had no salary. Some doctors accidentally contribute thinking it’s an automatic annual amount. Always verify your notice of assessment for RRSP room if you change compensation style.

  • Not Updating Shareholder Structure After Divorce or Death: Life events can change who is eligible to be a shareholder (e.g., an ex-spouse likely can no longer own those non-voting shares as a “family member” in some provinces; or if a family shareholder dies, their estate may not be an eligible holder). Failing to update can cause issues with college rules or tax status. Review your corporation’s share ownership and directors whenever major personal events happen.

  • Payroll Remittance and Instalment Pitfalls: As noted, if you pay a salary, you must remit payroll taxes on time. The penalties for late payroll remittances are quite stiff (How to pay yourself from your practice | MNP). Similarly, if you receive dividends and owe more than $3,000 in personal tax at filing, CRA expects quarterly instalments – missing those can lead to interest. New incorporated doctors sometimes get caught off-guard by instalment requirements and face interest charges. Tip: set aside a portion of each dividend for taxes or pay yourself “withholding” even on dividends by transferring a fraction to a savings for the CRA.

  • Professional Corp Compliance: Ensure you renew your annual registration of the professional corporation with your College (if required) and file any special corporate returns (some provinces require an annual declaration that you’re still practicing and following ownership rules). Neglecting these could jeopardize the corporation’s status.

  • Failing to Plan for Capital Gains Exemption: If there is a chance you could sell shares of your practice (e.g., to a physician child or partner), not planning ahead could forfeit the LCGE. For example, if over years you’ve accumulated a lot of passive assets in the corp, the shares might not qualify as a “small business corporation” at time of sale (What Happens to Your Medical Practice Corporation After You Retire?) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). Starting to purify the corporation a couple years in advance (perhaps moving investments out or into a new subsidiary) can be necessary. Many doctors never sell, but if you intend to, talk to a tax advisor a few years ahead.

  • Ignoring Provincial Nuances: As we’ve touched on, provinces differ in taxes and rules. A trap would be assuming something allowed in one province is allowed in another. For instance, a BC doctor friend might have a holdco shareholder – if you incorporate in Ontario and try the same, you’d be offside the rules. Always confirm for your province (CPSO vs CPSBC, etc., each has specific policy on professional corps).

  • Too Much Passive in MPC: Even aside from the SBD grind, having lots of passive assets in the professional corporation can cause other issues: it could disqualify use of LCGE, it might complicate eventual winding up (large tax bill), and it might tempt you to make investments that are not ideal for a professional corp (some exotic investments could jeopardize liability protection if they are outside the scope of a holding passive assets – albeit that’s more legal theory).

  • Loss of Small Business Deduction by Association Unawareness: If your spouse incorporates a business or you have another business on the side and they are associated (even by majority ownership overlap), you might inadvertently have to share the $500k SBD or lose it. Keep your accountant informed of all corporations you and immediate family control to structure share ownership in a way to avoid unintended association (for example, if your spouse runs a non-medical business, perhaps they should own it independently rather than you owning shares, to possibly avoid association – although if you reside in same province and are married, the rules may deem association if there’s cross control or influence).

In sum, common mistakes often arise from either not following formalities or not adjusting one’s plan in light of tax rule changes. Staying educated (like reading guides such as this!) and working with a qualified accountant or financial planner can help avoid these pitfalls. The tax landscape can change, so what was a great strategy five years ago (e.g., dividend sprinkling) might now be obsolete or even harmful. Regularly reviewing your corporation’s tax plan is part of keeping it optimized.

Provincial Considerations: Ontario, Alberta, and BC

Tax planning for incorporated physicians largely falls under federal rules (which apply country-wide), but there are noteworthy provincial differences in taxation and other regulations. Let’s highlight considerations for the three provinces specifically mentioned:

  • Ontario:

    • Tax Rates: Ontario’s top personal tax rate is approximately 53.5%. The small business corporate tax rate is about 12.2%, and general corporate rate ~26.5%. Ontario did not mirror the federal passive income grind on the provincial tax side (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). That means even if your federal SBD is reduced, Ontario may still give you the small business rate provincially on income above the reduced federal limit. Practically, your effective rate on that portion might be between small and general rate. Some accountants in Ontario suggest that because of this, the passive income grind is slightly less painful – one might not go to extreme lengths to avoid it (the phrase “walking into the grind” was referenced for Ontario) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). Still, the federal portion lost is significant.

    • HOOPP: Many Ontario doctors in hospitals contribute to HOOPP. As discussed, that reduces RRSP room and provides a strong pension, altering one’s strategy (more focus on corporate investing vs IPP in such cases).

    • Dual Wills: Ontario is famous for the dual will strategy to save probate on private corporation shares. If you have a sizeable corporation, it’s almost standard practice in estate planning to have a secondary will for those shares. This can save 1.5% of the share value in estate admin tax.

    • Shareholding Rules: The CPSO allows family (spouse, children, parents) to own non-voting shares of a medical corporation. But only physicians (licensees) can own voting shares. No corporation (holdco) or trust can own shares except perhaps a trust for minor children might hold their non-voting. This means Ontario doctors often include their spouse on incorporation to potentially split income or capital gains – even though TOSI curbed dividends, that spouse could use LCGE if the practice were sold, or receive dividends after age 65 without TOSI. Ontario also has stringent rules about notifying the CPSO of any change in shareholders.

    • Healthcare Premium: Ontario has the OHIP premium (a tax added for high-income individuals). Incorporation doesn’t avoid that since it’s based on personal income, but careful planning to keep personal income below certain thresholds could marginally save on the health premium.

  • Alberta:

    • Tax Rates: Alberta’s top personal tax rate is about 48% (significantly lower than Ontario/BC). Its small business corporate tax is 11% (8% provincial + 3% fed, though fed is 9% now – check, actually 9% fed + 2% AB = 11% for AB, yes) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). General corporate is 23% in AB (one of the lowest). This means the deferral advantage in Alberta, while still there, is slightly smaller in absolute terms (deferring from 48% to 11% saves 37%, versus in Ontario deferring 53.5% to 12.2% saves ~41%). But it’s still huge.

    • Probate: Alberta’s probate fee is negligible (capped a few hundred dollars). Thus, fancy probate avoidance like dual wills aren’t necessary. The hassle likely outweighs any savings. Estate planning in AB focuses more on tax (capital gains, etc.) and less on probate costs.

    • Shareholders: Like Ontario, only physicians and their immediate family (and in AB’s case, only adult family) can be shareholders. Alberta explicitly requires non-physician shareholders to be spouse or children (18+). So you can’t split with minors except through a trust (and minors would fall under TOSI anyway).

    • Pension Plans: Alberta had been a leader in removing red tape for IPPs/PPPs (the 2020 article mentioned provinces like AB eliminating pension commission oversight for individual pensions) (Complicated but good: Why this ‘mind-boggling’ personal pension is gaining ground with doctors | Canadian Healthcare Network). So an AB doc setting up a PPP might have fewer administrative hurdles than, say, in a province that still treats it like a regular pension requiring locking-in.

    • No Provincial Passive Grind: Need to verify – likely Alberta followed the federal passive grind (they tend to follow federal definitions and limits). Actually, since AB’s small biz limit is tied to fed, if fed limit reduces, AB’s lower rate applies only up to that fed limit. So effectively, AB small rate is lost simultaneously with fed for passive income – unlike Ontario which decoupled. Thus AB doctors should be more cautious about passive income to keep that full $500k small rate.

  • British Columbia:

    • Tax Rates: BC’s top personal rate ~53.5% (similar to Ontario), small biz corporate ~11% (2% provincial + 9% fed), general ~27%. Deferral ~42%. BC follows the federal passive income grind (most likely), meaning >$50k passive reduces the whole $500k combined fed+BC.

    • Holdco Allowance: BC’s College does allow a holding company to hold voting shares of an MPC provided that holdco is entirely owned by one or more licensed physicians (What Happens to Your Medical Practice Corporation After You Retire?). This is somewhat unique and can facilitate planning – e.g., Dr. Lee in BC could have “Lee Holdings Inc.” own the shares of “Lee Medical Inc.”. Why do this? Perhaps to allow adding family shareholders at the holdco level (if those family are physicians or if non-voting shares can be issued at holdco). Or simpler administrative reasons. One scenario: Dr. A and Dr. B (spouses, both physicians in BC) could have a single holdco that owns both of their MPCs – possibly simplifying investment management. However, tax-wise they’d be associated anyway, so it might not change much. Regardless, BC’s rule provides an extra planning layer that Ontario doesn’t.

    • Dual Wills: BC has probate fees ~1.4%, and dual wills are used by some high-net-worth individuals. There hasn’t been a landmark case like Ontario’s Granovsky that explicitly blessed them, but estate lawyers in BC do draft multiple wills to carve out private company shares. So BC docs with large corporations might consider this approach with specialized advice.

    • Family Ownership: BC permits family members (spouse, children, siblings, parents) to own non-voting shares of an MPC (with College approval). It’s slightly broader than some provinces. Still, TOSI is the federal law, so those non-voting shares for siblings or parents can’t really get dividends without TOSI unless they worked in the business or the 65 rule (parents likely retired). Perhaps adding a parent who helped finance your education, etc., might allow some dividends under the reasonable return or excluded business (if they worked in it) – but that’s niche.

    • PST vs HST: Not a tax planning item per se, but note BC has 7% PST, Ontario has HST. As an incorporated physician, many of your expenses (medical equipment, etc.) might be PST-exempt or not, which affects costs. For example, in Ontario, most supplies have 13% HST but you can’t claim it back (physicians are HST exempt but also can’t recover input tax). In BC, you might pay PST on some items. These consumption tax differences can add cost but are not usually planning points, just cost of practicing differences.

Overall, the province you practice in can influence the nuances of your tax plan – from tax rates (impacting the value of deferral and income splitting), to allowable corporate structures, to estate and probate issues. Ontario and BC docs face higher personal tax rates, making deferral and splitting slightly more valuable than for Alberta docs. Alberta docs benefit from the lowest taxes but still should optimize within those parameters. All need to follow their College’s rules on incorporation to the letter.

If you move provinces, remember you might need to change your corporation (professional corps are provincial creatures). For instance, if an Ontario physician moves to Alberta, they’d have to incorporate anew in Alberta (cannot carry Ontario MPC status to AB) (Incorporate your Medical Practice - College of Physicians ... - CPSA). Planning should be revisited with any relocation as well (Moving Your Medical Professional Corporation to Another Province).

Physician Case Studies: Putting It All Together

Let’s look at a few hypothetical (but realistic) case studies of incorporated physicians at different career stages, to illustrate how the strategies above might be applied in practice:

Case Study 1: Early-Career Incorporated Physician (Dr. Early in Ontario)

Profile: Dr. Early is 35, a family physician in Ontario who incorporated right after finishing residency. She has significant student debt and a mortgage. Her practice earns $300,000 before her salary. She needs about $100,000 gross to live on and wants to pay down debt aggressively and start saving for retirement.

Strategies and Decisions:

  • Salary vs. Dividends: Dr. Early chooses to pay herself a salary of $120,000. This covers her needs and generates RRSP room (around $21,600) (Salary vs Dividends: What Canadian Medical Professionals Need to Know | MedTax). She’ll use that RRSP room to start investing for retirement (and possibly for a down payment on a bigger home via the RRSP Home Buyers’ Plan). With $120k salary, she also maximizes CPP contribution, which she views as forced savings for retirement (How to pay yourself from your practice | MNP) (How to pay yourself from your practice | MNP). The remaining $180k in the corporation is taxed at 12.2%, leaving about $158k after corporate tax. She uses a chunk of that to make an extra student loan payment. Effectively, she’s using the corporation to defer tax on money she doesn’t currently need and to pay off high-interest debt faster.

  • RRSP vs. Corp Investing: Given her debt, Dr. Early is not investing a lot in a corporate portfolio yet. But she does contribute to a TFSA each year (with money from her salary after tax). She understands that once her loans are gone, she will face the question of investing via RRSP or corp. For now, she’s doing RRSP up to what she can, for the immediate tax deduction which helps free cash for loan payments.

  • No Family Shareholders Yet: Dr. Early is married, but her spouse works full-time elsewhere with a good income. Adding the spouse as a shareholder wouldn’t help now (TOSI would apply). Instead, she might consider paying her spouse a salary of perhaps $10,000 for managing her clinic’s bookkeeping a few hours a week (if the spouse has time). That would effectively shift a small amount of income to a lower bracket (assuming spouse is lower, if not, maybe not useful). This salary must be reasonable for work done (Tax Planning Q&A for Canadian Physicians - Dr.Bill).

  • Avoiding Pitfalls: Being new to business, Dr. Early set up an accountant to handle payroll remittances so she doesn’t miss deadlines (How to pay yourself from your practice | MNP). She also opened a separate business bank account and credit card to clearly segregate expenses. Her accountant advised her not to expense any personal items through the corp, except things like cell phone where there’s a business use portion (which they prorate).

  • Result: By incorporating early, Dr. Early isn’t saving a ton on taxes immediately (because she’s mostly pulling out what she earns to live and pay debt). However, she’s established good habits and infrastructure. In a few years when her loans are gone, she can start leaving a larger portion of earnings in the corporation for investment. At that point, she might re-evaluate the salary/dividend mix – possibly continuing salary to maximize RRSP (since she values the discipline of RRSP contributions) (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). If she has children, she may also consider paying dividends after age 65 to assist in her spouse’s retirement (long way off, but her corp is set up to allow spousal shares if rules ever permit beneficial use).

Case Study 2: Mid-Career Specialist Balancing Tax and Retirement (Dr. Mid in Alberta)

Profile: Dr. Mid is 50, an orthopedic surgeon in Alberta. She has been incorporated for 15 years. Her corporation’s practice income is $600,000/year. She typically only needs $200k for personal spending because she lives somewhat frugally. By now, she has built up about $2 million in retained earnings invested inside the corporation. She has a spouse who doesn’t work (caring for elderly parents) and two kids in university (ages 19 and 21).

Strategies and Decisions:

  • Compensation: Dr. Mid has historically paid herself a combo of salary and dividends. She pays herself a salary of $180,000 to maximize RRSP contributions (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (and to fund an Individual Pension Plan which she set up at 45). Beyond that, she has paid some dividends. Given Alberta’s lower tax, she sometimes wonders if she should cut salary and do more dividend; however, she likes contributing to her IPP. Indeed, she started an IPP at 45 which now allows her corporation to contribute about $40,000/year (on top of her RRSP). This effectively shelters more of her income. The IPP contributions are deductible to her corp and not taxable to her personally (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). Her spouse will be a beneficiary of the IPP so they can split pension income later.

  • Passive Investments and SBD: With $2 million invested, her corporation’s passive income is roughly $80,000/year. This exceeds the $50k threshold. As a result, her eligible small business limit for active income has been reduced from $500k to about $300k (because $80k-50k=30k, times 5 = $150k reduction). So of her $600k practice income, $300k gets the small rate and $300k is taxed at general rate. This upset her when the rules changed, because she lost some deferral. She consulted with her accountant on options:

    • They decided not to do anything too drastic like creating a second corporation (which would be associated anyway). Instead, they are considering an insurance policy strategy. She takes $500k of those investments and buys a whole life policy. This will reduce future passive income (since that $500k goes into the policy rather than generating interest/dividends). Also, upon her passing, it will create a CDA credit for her kids (What's A Capital Dividend Account In Life Insurance?). It aligns with her estate goal to leave something tax-efficiently. In the meantime, it might also help if any of her investments are high-growth stocks – they decided to start donating some securities to charity each year from the corporation to also trim the passive assets and get the tax benefits ( Charitable Donations Through Your Corporation - RBC Wealth Management ) ( Charitable Donations Through Your Corporation - RBC Wealth Management ).

    • Given Alberta didn’t have a provincial grind separate from federal, the impact is straightforward (she pays 23% on that extra $300k instead of 11%). Her accountant calculates she’s paying about $36k more in corporate tax due to the grind. The whole life policy won’t change it immediately (premium itself isn’t deductible), but it’s part of a long game to prevent the passive portfolio from growing and grinding even more.

    • She also could consider taking slightly more out as dividends now (since her spouse could use money). But pre-65, TOSI prevents paying spouse dividends. Instead, she loans her spouse $100k at prescribed rate 5% from her personal funds (which are partly from previous dividends she took). The spouse invests that, earning say 7%. They arbitrage a little income that way – not huge, but some.

  • Income Splitting: With kids 19 and 21, she had hoped to pay them some dividends to help with tuition. But TOSI disallows that since the kids don’t work in her practice. Instead, she does what many do: She employs her kids in the summers in the clinic for genuine work (filing, research assistance, etc.) and pays them a reasonable wage of $10,000 each. That’s deductible to the corp and tax-free to the kids (under basic personal amount). They use that money for tuition. It’s not big relative to her income, but it’s a modest legitimate split.

    • She knows once she’s 65 (in 15 years), she can start paying her spouse large dividends. In anticipation, her corporation has her spouse as a non-voting shareholder (allowed in AB). For now, no dividends are paid there due to TOSI (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). But the structure is ready for age 65.

    • Also, she’s considering an estate freeze soon. Her corp is worth maybe $3M now (practice goodwill plus investments). If she freezes and issues new growth shares to a trust for her kids, any further growth might accrue to them. It could also allow utilizing their LCGE if they eventually sell investments or if the practice goodwill is sold. It’s a complex step – she’s discussing it with an estate planner, but she might wait until closer to retirement.

  • Results: Dr. Mid’s planning is about balancing current tax savings with long-term preparation. She enjoys a low Alberta tax environment but still must navigate federal rules. By using an IPP, she’s saving considerably more for retirement than RRSP alone (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth). She is paying some extra corporate tax due to passive income, but she’s addressing that through charitable giving and insurance. She has not dissolved the corp or anything drastic; she likes the control and deferral it still affords. When retirement comes (maybe at 60), she may convert the MPC to a holdco, let the investments support her, and start paying dividends to her spouse freely to minimize taxes. She has also updated her will to dual wills, although in Alberta the probate savings is minor – her main reason was clarity in business succession.

Case Study 3: Late-Career / Retiring Physician (Dr. Late in BC)

Profile: Dr. Late is 68, a gastroenterologist in B.C., planning to fully retire at 70. He has a professional corp with significant assets: about $800,000 in retained cash and a portfolio of $1.5 million, plus his practice’s equipment. He also owns his clinic condo through the corporation, worth $500k. No children are doctors, but one of his two children is interested in the investment company aspect and possibly taking over managing those assets.

Strategies and Decisions:

  • Retirement Transition: Dr. Late is winding down practice. At 65, he converted his MPC into a holding company (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?). He stopped practicing and thus informed the BC College, surrendering his permit as an active professional corp. It’s now “Late Holdings Ltd.” which just holds his investments and clinic property. By doing this, he also freed up who can be shareholders – he issued shares to both of his adult children (10% each) and to his spouse (30%), while he retains 50%. Now that he’s over 65, any dividends he pays to his spouse are excluded from TOSI (Tax Planning Q&A for Canadian Physicians - Dr.Bill) (Tax Planning Q&A for Canadian Physicians - Dr.Bill). So he has been splitting investment income by paying his spouse dividends for the last 3 years, keeping both of them in lower tax brackets. The kids’ dividends still would fall under TOSI (they are not actively involved and under 65), so he hasn’t paid them dividends yet; their shares are more for eventual inheritance.

  • Estate Freeze: Effectively, when he added the kids as shareholders, he did an estate freeze at the same time. He froze his value at, say, $2 million (taking back preferred shares or tracking shares for that value) and gave the kids new common shares for future growth. If the $1.5M portfolio grows to $3M by the time he passes, that extra $1.5M will belong to the kids’ shares. The preferred can potentially be redeemed slowly or remain until death (where the deemed disposition will only hit that frozen value).

  • Capital Gains Exemption Planning: If Dr. Late finds a buyer for his clinic condo or any part of the business, he might try to take advantage of the LCGE. But since he stopped the medical practice, likely no sale of goodwill. The clinic condo could be sold by the corporation; that wouldn’t qualify for LCGE (since it’s a passive asset, not shares sale). Instead, he plans to eventually just sell the property and have the corporation pay out the proceeds.

  • Use of CDA: Dr. Late had decades of investments – the corporation has a healthy CDA from some past stock sales (non-taxable gains portion). Also, he purchased a corporate-owned life insurance policy 10 years ago. Its death benefit is $1M with an expected CDA credit of ~$1M (as the ACB is now low). His plan in his will is for the corporation to pay that $1M out as a capital dividend to his heirs (What's A Capital Dividend Account In Life Insurance?). Additionally, prior to that, he’s considering triggering some capital gains on purpose while he’s in a low bracket (between retirement and age 71 when RRIFs start). Those gains will generate CDA room he can use to pay some tax-free dividends to his kids even while alive. For example, he might sell some stocks with $100k gains this year – he’ll pay 26% corporate tax on $50k taxable portion, but then credit $50k to CDA. He can then elect a $50k capital dividend to go to his kids (or a family trust) tax-free. This way he slowly moves money out to kids with minimal tax. This is an advanced move requiring careful filing of the T2054 election and ensuring not to overshoot CDA (What's A Capital Dividend Account In Life Insurance?).

  • Post-Mortem Plan: He has worked with his accountant and lawyer on a post-mortem “pipeline”. They plan that when he dies, his estate will carry on the holdco and not immediately pay out everything as dividends (to avoid double tax). Instead, they will likely use the pipeline method to distribute the remaining assets to the heirs over time using the cost base step-up. The life insurance proceeds (with CDA) will allow immediate tax-free cash to the family (What's A Capital Dividend Account In Life Insurance?), so they aren’t forced to rush withdrawals from the corp and can let the pipeline play out.

  • Dual Wills: Dr. Late has dual wills in place (legal in BC via practice, though not legislated). The secondary will covers his holdco shares, aiming to avoid probate on them (~$3M worth, saving about $42k fee). His executor (one of his children) can transfer those shares per the secondary will without going through courts.

  • Outcome: By proactively converting to a holdco and bringing his family into the ownership structure, Dr. Late has set the stage for a smooth transition. He’s enjoying tax savings now (splitting with spouse) (What Happens to Your Medical Practice Corporation After You Retire?) (What Happens to Your Medical Practice Corporation After You Retire?) and has minimized the future taxes via CDA and pipeline planning. His heirs will inherit the corporation which essentially acts like a family investment company now, with far less red tape than when it was an MPC. His story highlights the full cycle: using incorporation not just for early tax deferral, but also for controlled retirement income and a tax-efficient legacy.

Conclusion: Tax planning for incorporated physicians is a multi-faceted endeavor that evolves over one’s career. Early on, the focus may be on deciding how to pay yourself (salary/dividend), managing debt and starting retirement savings. In mid-career, it shifts to optimizing deferral (using the corporation to invest), navigating new rules like TOSI and passive income limits, and possibly enhancing retirement funds with IPPs or CPP optimization. Later, attention turns to succession – extracting the wealth with minimal tax via holding companies, estate freezes, insurance, and careful post-mortem planning. Throughout, one must stay mindful of both tax efficiency and practical needs (like ensuring you have enough cash flow, complying with professional regulations, and not over-complicating beyond what your situation warrants).

By understanding and leveraging these strategies, an incorporated physician can potentially save hundreds of thousands of dollars over a career (Tax Planning for Physicians - Professional Corporations - BMO Private Wealth) (How to pay yourself from your practice | MNP), fund their retirement more robustly, and provide for their family in a tax-efficient way. It’s highly recommended to work with qualified financial advisors and accountants who understand physician issues, as the laws do change and individual circumstances vary. This guide provides a comprehensive framework and should empower physicians to engage in more informed discussions with their advisors about tax planning. Ultimately, the goal is to let you focus on your practice and patients, knowing your financial structure is optimized and future-ready.

David Wiitala
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