Private corporations and tax planning under review: What you need to know

November 29, 2017

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

A couple of months ago, I wrote about the federal government’s new tax rules for professionals in complex corporate and partnership structures. Specifically, I looked at what the rules could mean for incorporated physicians.

The government has said that it wants to bring greater fairness to the tax system and close what it considers to be tax loopholes for private corporations.

On July 18, the government followed up with further proposed legislative changes and it has invited public input until October 2, 2017 (“Tax planning using private corporations”).

These proposed changes have elicited questions from my physician clients. With the help of my MD colleagues who specialize in taxation and incorporation, I’ve provided answers to some of the most common questions here.

In a nutshell, what are the proposed changes about?

The government wants to ensure that corporate tax advantages exist to help Canadian businesses reinvest and grow without providing personal tax advantages to shareholders. The government also believes that when wealthy Canadians use private corporations to gain unfair tax advantages, it comes at the expense of other Canadians.

The three proposed changes would either eliminate certain tax strategies or reduce their effectiveness, which could ultimately result in incorporated physicians paying more tax.

The proposed changes target three areas:

  • income splitting
  • accumulating investments in a corporation
  • converting regular income into capital gains

Income splitting

Many incorporated physicians pay dividends to their spouse and/or adult children. These family-member shareholders would now be subject to a new “reasonableness” test that would consider their actual financial contribution to, or time spent working for, the corporation.

If the reasonableness test is not met, the family member may be taxed on their dividend income at the highest marginal tax rates. In this scenario, income splitting in many family situations would no longer be advantageous and ultimately incorporated physicians could pay higher rates of tax on dividend income.

Accumulating investments in a corporation

The government is exploring a new concept of taxation on the income earned on investments held in a private corporation (called passive income). This new concept would effectively eliminate the tax deferral benefit presently available when physicians invest through their corporation.

Converting regular income into capital gains

Certain tax strategies in use today convert what would be regular income, such as dividends, into capital gains income, which is taxed at a lower rate. The government’s proposed changes would eliminate this kind of conversion.

I’m an incorporated physician.
What could these proposed changes mean for my financial well-being?

If the proposed changes become law, you may be left with less after-tax money in your corporation and in your pocket, which could affect your financial planning strategies. Your financial advisor can help analyze your situation and discuss the potential implications of these proposed changes.

If I am not yet incorporated, is incorporation off the table for me?

This is a personal decision, as it depends on each physician’s circumstances and their objectives in incorporating. It may make sense to delay the decision until it is clear whether the tax benefits of incorporation will be available in the future.

I’ve been paying my spouse a salary for services performed for my practice. Do these proposed changes impact me?

Paying a spouse or adult family member a salary for services performed has always been subject to an assessment of reasonableness. Unreasonable amounts paid by a corporation for services are not deductible by the corporation and can result in application of other punitive tax rules. These proposed changes do not impact or change the payment of a reasonable salary in any respect.

Read a summary of the issues on MD's website and details about the Canadian Medical Association’s advocacy efforts.

Please remember that these are only proposals and public consultations at present, so no tax laws have changed yet. These proposals are complex, so we recommend that our clients speak with their tax advisors before implementing any changes to their current financial planning or corporate structures in response to these proposals and consultations.

Christina Kuruliak is a Senior Financial Consultant with MD Management Limited in Calgary. Contact Christiana at christina.kuruliak@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.

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