For many new doctors, it might not yet make financial sense to incorporate. Pierre Létourneau, Business Succession Advisor, TD Wealth, joins Kim Parlee to discuss the benefits of incorporating and when it could make sense for you.
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* Today on Ask MoneyTalk, we answer a question we're hearing pertaining to new doctors. Pierre Létourneau is a Business Succession Advisor at TD Wealth, joins me now. Pierre, here is the question: "I recently finished my medical residency. Should I consider incorporating right away?" I think the key there is "right away."
* Right away? It really depends on your own circumstances. But I'd say, for the most part, most doctors, newly minted doctors will probably not want to incorporate right away, or they don't need to. The major benefit of incorporating is, if you're going to save money, and you're going to have excess income, you'd want to keep that inside the corporation. There are tax benefits to that.
- Most new doctors maybe have student debts. They may want to buy a home. And so they have short-term goals that they want to meet. So they'd want to use those funds for those short-term goals and, potentially, incorporate down the road.
* They don't have excess income. They have excess debt, which is what--
* Correct, yes.
* --they have to deal with. OK, so for those that are listening then, again, maybe incorporation isn't good at day one for them, but let's talk about the key benefits of incorporating when it does become something they should look at.
* Right, so excess income, why is that important is because of tax deferral. So generally, corporate tax rates on active business income are much lower than personal tax rates. It depends on the province, but usually, first $500,000 of active business income earned inside the corporation, you'll pay around 12% to 15% in taxes.
- And then, if you're in the highest tax bracket personally, you can pay over 50% So there's an amount of tax savings there if some income is going to stay inside the corporation, and you're not going to pay those personal taxes until you pull that money out. So tax deferral is the major benefit.
- It also can be a great vehicle for retirement planning, as well. If you're a high-income earner, and you're 40 and over, you can maybe use an Individual Pension Plan through your corporation. And the benefit there is it allows you to save more money in a tax-deferred environment than the alternative, which is an RRSP.
- And then, if you have a practice that you could potentially sell down the road, having that practice in a corporation could allow you to access the Lifetime Capital Gains Exemption, which is up to $1.25 million per individual. So that's an exemption on capital gains earned on the sale of shares of a private company.
* OK.
* So not every medical practitioner could sell their practice, but if you're in that group, then a corporation may make sense.
* And in the cost-benefit side, too, just-- it depends because there's a cost, obviously, to set up and maintain that, as well.
* Yeah, there is. There's setup costs. There's ongoing costs. There's an extra tax return that needs to be filed, corporate resolutions that need to be prepared, as well, too. And then there's also more complexity. You're adding an extra entity that that you need to be mindful of. So it just makes things a bit more complex.
* So let's go back to the new doctor who-- maybe they don't need this right away. But what should they do? Maybe if they're just starting off, is it worthwhile to talk to somebody?
* Yeah, absolutely. Talk with an advisor or a financial planner to sort of figure out what your short-term and long-term goals are. And then they can help you in determining whether this makes sense for you, incorporating.
* That's Pierre Létourneau, Business Succession Advisor at TD Wealth. And if you have a question for Ask MoneyTalk, please send it in. It's moneytalk@td.com.
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* Right away? It really depends on your own circumstances. But I'd say, for the most part, most doctors, newly minted doctors will probably not want to incorporate right away, or they don't need to. The major benefit of incorporating is, if you're going to save money, and you're going to have excess income, you'd want to keep that inside the corporation. There are tax benefits to that.
- Most new doctors maybe have student debts. They may want to buy a home. And so they have short-term goals that they want to meet. So they'd want to use those funds for those short-term goals and, potentially, incorporate down the road.
* They don't have excess income. They have excess debt, which is what--
* Correct, yes.
* --they have to deal with. OK, so for those that are listening then, again, maybe incorporation isn't good at day one for them, but let's talk about the key benefits of incorporating when it does become something they should look at.
* Right, so excess income, why is that important is because of tax deferral. So generally, corporate tax rates on active business income are much lower than personal tax rates. It depends on the province, but usually, first $500,000 of active business income earned inside the corporation, you'll pay around 12% to 15% in taxes.
- And then, if you're in the highest tax bracket personally, you can pay over 50% So there's an amount of tax savings there if some income is going to stay inside the corporation, and you're not going to pay those personal taxes until you pull that money out. So tax deferral is the major benefit.
- It also can be a great vehicle for retirement planning, as well. If you're a high-income earner, and you're 40 and over, you can maybe use an Individual Pension Plan through your corporation. And the benefit there is it allows you to save more money in a tax-deferred environment than the alternative, which is an RRSP.
- And then, if you have a practice that you could potentially sell down the road, having that practice in a corporation could allow you to access the Lifetime Capital Gains Exemption, which is up to $1.25 million per individual. So that's an exemption on capital gains earned on the sale of shares of a private company.
* OK.
* So not every medical practitioner could sell their practice, but if you're in that group, then a corporation may make sense.
* And in the cost-benefit side, too, just-- it depends because there's a cost, obviously, to set up and maintain that, as well.
* Yeah, there is. There's setup costs. There's ongoing costs. There's an extra tax return that needs to be filed, corporate resolutions that need to be prepared, as well, too. And then there's also more complexity. You're adding an extra entity that that you need to be mindful of. So it just makes things a bit more complex.
* So let's go back to the new doctor who-- maybe they don't need this right away. But what should they do? Maybe if they're just starting off, is it worthwhile to talk to somebody?
* Yeah, absolutely. Talk with an advisor or a financial planner to sort of figure out what your short-term and long-term goals are. And then they can help you in determining whether this makes sense for you, incorporating.
* That's Pierre Létourneau, Business Succession Advisor at TD Wealth. And if you have a question for Ask MoneyTalk, please send it in. It's moneytalk@td.com.
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