What new tax rules could mean for incorporated physicians

July 28, 2017

Christina Kuruliak, CFP® | Senior Financial Consultant, MD Financial Management LTD, Calgary

Contributed by: Christina Kuruliak, CFP® | Senior Financial Consultant, MD Financial Management LTD, Calgary

Editor's note: On July 18 the federal government announced it is considering further changes affecting incorporated small businesses – including those run by physicians. Visit Tax Planning Using Private Corporations, What's Next: A Summary of Finance Announcements to learn more.

Recently, the federal government’s changes to tax rules for professionals (including physicians) who practice in some complex corporate and partnership structures became law.

As a financial consultant with MD Financial Management Limited, I work with incorporated physicians, many of whom are in group practices. The new rules can affect their eligibility for the small-business tax deduction and many of my clients have questions about this.

Here are the answers to some of the most common questions I’ve been receiving.

What are the new tax rules?

Under the previous legislation, each incorporated physician in a group structure could claim the small-business deduction on up to $500,000 in active business income. Now that the new tax rules are in place, incorporated physicians in a group structure may need to share this $500,000 small-business deduction among them. If these changes apply to your medical practice, your corporate taxes could increase and you may need to adjust your financial plan.

Will these new rules affect me?

About 20% of incorporated physicians will be affected.

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Incorporated physician income that is channelled through an affected structure (a partnership or certain group corporations) could now be subject to the general corporate tax rate, since access to the small-business deduction must now be shared.

Depending on your province of residence and other factors, including your method of compensation, this could more than double your corporate taxes. However, the corporate tax increase might be offset by reduced personal taxes.

Ultimately, the combined changes to your personal and corporate tax rates will depend on your situation.

What will these changes mean for my financial plan?

If you are affected by the changes, in essence this means you will not be able to defer as much tax. You will be left with less after-tax money in your corporation, which can affect your financial planning strategies. Some financial tools and strategies will become more attractive, and others less so. Your MD advisor can help you determine what effect losing the small-business tax rates might have on your financial plan.

I think these changes will affect me. What should I do?

Start by doing these three things:

1. Speak with your physician group. Determining what, if anything, your physician group will do in response to the legislation should be your priority. Be aware that changes to the group structure might impact your income as well as your corporate tax.

2. Meet with your lawyer and tax advisor. They can help analyze your situation, determine the potential impact and make recommendations. For example, you may be able to eliminate the tax consequences by adjusting only a portion of your income.

3. Meet with your MD advisor. He or she may be able to help reduce the effects of these changes and can offer insight into how your retirement goals may be affected.

If you’re an incorporated physician, getting the right advice tailored to your particular situation is critical.

Christina Kuruliak is a Senior Financial Consultant with MD Management Limited in Calgary. Contact Christina at christina.kuruliak@cma.ca.
MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. For a detailed list of these companies, visit md.cma.ca.
The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.cma.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies. MD Financial Management Inc. is owned by the Canadian Medical Association.

The Alberta Medical Association stands as an advocate for its physician members, providing leadership & support for their role in the provision of quality health care.