Once you incorporate your practice as a physician, dentist, lawyer or other professional, tax planning changes. Income can now be earned inside a corporation, held there, invested there and paid out to you in different ways. Each of those choices has tax consequences, both for the corporation and for you personally.
Corporate tax planning means making those choices on purpose. Done well, it connects how your corporation earns, saves and pays out money with your personal goals, such as retirement, supporting your family and building long-term wealth.
At Access Private Wealth Corp. (APW), we support incorporated professionals by helping them use the advantages of incorporation, particularly where business and personal finances meet. This article explains the main areas of tax planning for professionals and why they work best as part of a wider financial plan.
What does it mean to be an incorporated professional?
An incorporated professional runs their practice through a corporation rather than earning income personally. The practice earns the income, pays corporate tax on it and can then pay you a salary, dividends or a mix of both.
This creates more planning flexibility than earning all your income personally. It also creates more decisions to get right, and more ways for your corporate and personal finances to drift out of step.
Incorporation adds to the workload as well. Many professionals have little time to manage these details themselves, so APW looks at the whole picture first and coordinates with the accountant, lawyer and other advisors you already work with.
Why tax planning looks different once you incorporate
A Canadian-controlled private corporation (CCPC) may be able to claim the small business deduction on active business income. According to the Canada Revenue Agency, the federal net tax rate on income eligible for the small business deduction is 9%, compared with a general federal net rate of 15% (CRA). Provinces add their own corporate tax on top of the federal rate.
The business limit for the small business deduction is $500,000 for a corporation that is not associated with any other corporation (CRA).
Because active business income eligible for the small business deduction is taxed at a lower corporate rate, leaving some income inside the corporation can create planning opportunities. Whether it results in less tax overall depends on your province and personal tax bracket, and those opportunities come with rules that are worth understanding before you build a strategy around them.
How business and personal finances overlap
For incorporated professionals, the line between the practice and the household is rarely clean. Common overlaps include:
- How much to pay yourself, and whether to take salary, dividends or both
- Whether to leave surplus income in the corporation or take it out
- How investments held inside the corporation fit with your personal RRSP, TFSA and non-registered accounts
- How family members may or may not receive income from the corporation
- How the corporation fits into your retirement and estate plans
Each of these affects the others. A decision that looks efficient for the corporation can create a less efficient result personally, which is why they should be looked at together.
Key planning decisions professionals face
“For incorporated professionals like doctors, dentists and lawyers, the biggest opportunities are often in how the corporation and personal planning work together. It starts with the Access Formula: understanding the professional, their family, their practice and their goals. From there, we typically work through the right mix of salary and dividends, how to invest money kept in the corporation without running into the passive income rules, whether an Individual Pension Plan (IPP) makes sense, and how corporate-owned insurance can support their estate plan. Importantly, we don’t do this in isolation. We work directly with each client’s accountant so the investment, tax and corporate strategies are coordinated, and the client gets one clear plan instead of separate pieces of advice.”
Jonathan Mullett, Director of Risk Management
Salary, dividends or a mix
How you pay yourself affects more than this year’s tax bill. For example, the CRA calculates earned income for RRSP purposes from employment earnings, self-employment earnings and certain other types of income (CRA). That means the way you draw income from your corporation may affect how much RRSP room you build. The right mix depends on your cash flow needs, retirement plans and overall tax position.
Investing inside your corporation
If you save and invest inside your corporation, the passive investment income rules are worth understanding. The CRA notes that a CCPC’s small business deduction limit is reduced when the corporation, together with any associated corporations, earns between $50,000 and $150,000 of passive investment income. The limit is nil once that income is more than $150,000 (CRA).
For professionals with growing corporate portfolios, how those investments are managed is part of the same plan. Through Discretionary Investment Management offered by Access Family Office Corp. (AFO), investment decisions are made in the context of your wider financial picture, including tax planning.
Individual Pension Plans
An IPP can be an effective retirement planning tool for certain incorporated business owners, offering defined-benefit pension features within a structured, tax-efficient framework. Whether an IPP makes sense depends on your situation. APW can help assess this as part of your plan, working with your accountant.
Paying income to family members
Dividends paid to family members may be subject to the tax on split income (TOSI) rules. The CRA explains that split income generally includes dividends or interest, but not salary, paid by a private corporation to an individual from a related business, as well as certain capital gains, unless an exclusion applies. The CRA’s examples describe this income as taxed at the top marginal rate (CRA). Any income-splitting strategy should be reviewed carefully with your advisors and accountant.
Retirement and estate planning
Your corporation is likely to play a role in how you fund retirement and what you leave behind. Planning ahead helps you decide how and when to draw money from the corporation, how corporate assets fit with your will and estate plan, and whether corporate-owned insurance has a role to play.
Why tax planning works best inside a broader financial plan
Tax planning is a critical part of long-term wealth management, but it should not be done in isolation. Lowering tax this year is only useful if it supports where you want to be in 10, 20 or 30 years.
Through APW’s Integrated Tax & Financial Planning service, we look at tax efficiency across registered and non-registered accounts, investment income and cash flow, and connect it with your retirement, estate and family priorities. Our article on financial planning for families explains how these pieces fit together, and our case study on a physician’s generational wealth strategy shows how corporate and personal tax planning can be part of a wider family plan.
Getting the right tax advice
Tax rules for corporations change, and the right strategy depends on your province, your practice and your personal situation. APW provides high-level tax guidance as part of planning and has a CPA on the team. For specific tax advice, filings or implementation, we coordinate with your accountant or other tax professionals.
If you would like help connecting your corporation to a clear long-term plan, connect with our team.
FAQs
What is corporate tax planning for incorporated professionals?
Corporate tax planning helps incorporated professionals decide how their corporation earns, keeps, invests and pays out income. It looks at salary and dividends, corporate investments, family income and retirement, and connects them to the professional’s personal financial plan.
What is the small business tax rate in Canada?
According to the CRA, the federal net tax rate on income eligible for the small business deduction is 9%. Provinces add their own corporate tax on top. The business limit is $500,000 for a corporation that is not associated with another corporation.
Does investment income inside my corporation affect my small business tax rate?
It can. The CRA explains that a CCPC’s small business deduction limit is reduced when it and any associated corporations earn between $50,000 and $150,000 of passive investment income, and is nil above $150,000.
Can I pay dividends to my spouse or children from my professional corporation?
Dividends paid to related family members may be subject to the tax on split income (TOSI) rules unless an exclusion applies. The CRA’s examples describe income caught by these rules as taxed at the top marginal rate. Review any plan to pay income to family members with your advisors and accountant first.
What is tax-efficient financial planning?
Tax-efficient financial planning looks at how taxes affect your whole financial picture, including registered and non-registered accounts, investment income, cash flow, retirement and estate goals. The aim is to improve after-tax outcomes over the long term, not just this year.
Does Access Private Wealth Corp. provide tax advice?
APW provides high-level tax guidance as part of planning and has a CPA on the team. For specific tax advice, filings or implementation, APW coordinates with your accountant or other tax professionals.
This article provides general information only and does not constitute personal financial, investment, insurance, tax or legal advice. Financial circumstances differ and laws, tax rules and government programs may change. Speak with qualified professionals about your individual circumstances.