7 Financial Strategies Doctors Must Do.

• Incorporate yourself (Dr. Inc.)
• Write of Medical Expenses
• Trim Your Tax Bill
• Risk Management
• Cash Flow & Debt Management
• Wealth Management
• Tax Planning

Strategy #1 - Incorporate yourself (Dr. Inc.)

• Be a pauper personally. With corporate tax rates dropping to 15 or 16% in 2008 for most provinces, there has never been a greater incentive to retain as much of the practice cash flow as possible in the corporation. $100 retained in the company means you have now $85 left to invest. To take advantage of this splendid savings vehicle, live like a pauper by taking out funds for personal and living expenses only, and keeping the surplus in the corporation.
• Convert practice income into capital gains. If you need to draw large amounts from the corporation, consider converting dividends into capital gains. On a $200,000 draw, for instance, you save about $15,000 of personal taxes.
• Deduct your home mortgage interest. There are a number of strategies that use the corporation to make your mortgage tax-deductible. For example, your corporation borrows funds to purchase your personal investments, e.g. stocks, real estate. You use the proceeds to pay off your home mortgage. You have now converted the non-deductible personal mortgage into a tax-deductible corporate loan.

Utilize Fringe Benefits

• Combine business with vacation travel. If you go on a business trip, such as a course, or conference, you can add some vacation time and still make it tax-deductible. In order to deduct the total travel cost, the main purpose of the trip must be for the practice and not personal. How much vacation time can you add to the trip? Travel days count as business days, as do weekends and holidays, if they fall between the business days. If you can prove to CRA that staying a few extra days reduced the airfare costs, for instance, then your accommodation and meals cost would be tax deductible up to the amount of the airfare saved. Remember, meals and beverages are subject to the 50% limitation.
• Have the Corporation pay for medical expenses. By setting up a private health plan you can make your medical/dental expenses a deductible practice expense.
• Maximize practice expenses with a personal component. With respect to automobile expenses, as a self-employed physician you can deduct your vehicles operating expenses, including gas and insurance, as well as depreciation or lease expense subject to a dollar limit. If your corporation does not own a car, then you can receive a tax-free mileage reimbursement in the amount of $0.52 for the first 5000 km and $0.46 thereafter. If you are a locum providing services to different practices, or you don't have an office to go to because you work in a hospital, then your travel from home to the practice location is tax-deductible. You can also deduct home office expenses. You do not have to see patients in your home, as long as the space is used for patient phone calls and consultations.
• Consider a pension plan if you are age 50 older. Have your corporation set up an Individual Pension Plan (IPP) which allows tax-deductible corporate contributions to fund a pension plan for yourself and your spouse, retroactive to the date of incorporation, from 1991 on. While the maximum RRSP contribution for 2007 was $19,000, a 50-year-old physician can make a maximum annual contribution of $25,034. If he also purchases the past service contributions back to 1991 to a maximum of $112,135, then the total contribution is $137,169. The total contribution for a 60-year-old is $222,005.

This is just a selection from the smorgasbord of many great tax-planning opportunities. With the help of my tax teams we can implement sound financial tax plan that answers your income taxes and finances, you too can drastically reduce your income tax bill.

Incorporation Benefits: An Update

The two most important tax benefits you can enjoy in setting up a medical corporation are tax deferral and income splitting. However, if you cannot retain practice income in the company thereby avoiding personal tax, or if you are not able to shift practice income to family members in a lower tax bracket, then incorporating your medical practice is probably not worthwhile.

Tax Deferral.

Income in the corporation is taxed at 18%, and $82 out of every $100 of practice income is retained in the corporation to be used for investment or repayment of debt. To illustrate, a corporation would only need $121,950 of cash flow to repay a $100,000 loan. To pay off a personal debt of $100,000, you need $181,820 (assuming a top personal tax rate of 45%), or $59,870 additional income. In the absence of a corporation, you will need 50% more of your hard-earned practice cash flow to pay off debt.

The illustration below shows the benefits of tax deferral for Ontario.

Tax Deferral -
CORPORATION
Corporate income before salary	$100,000	$150,000	$200,000	$250,000	$300,000
Less: salary to doctor	(84,000)	(84,000)	(84,000)	(84,000)	(84,000)
Taxable income - corporate	16,000	66,000	116,000	166,000	216,000
After-tax income - corporate	13,024	53,724	94,424	135,124	175,824
After-tax salary of doctor	61,642	61,642	61,642	61,642	61,642
PROPRIETORSHIP
Total after-tax income available personally and corporation	74,666	115,366	156,066	196,766	237,466
After-tax income available to doctor	69,417	96,898	123,693	150,338	177,134
Tax Deferral Advantage	5,249	18,468	32,373	46,428	60,332

To ensure that you use the least amount of practice cash flow to retire debts, look for tax strategies to convert personal loans into corporate loans. To maximize tax deferral benefits, only draw funds from the company to pay for necessary personal and living expenses, and retain as much cash flow as possible in the company.

When the company eventually pays out funds to you in the form of dividends, you will be assessed personal tax. With proper planning, you can minimize the amount of personal tax you eventually pay. For instance, you can withdraw the funds from the corporation during a time period when you have very little other income, perhaps upon retirement from your practice. Keep in mind that when you and your spouse retire, you will have no other income and can therefore take out about $60,000 per year from the corporation without paying any tax. Planning well in advance can turn a tax deferral into absolute tax savings.

Income Splitting.

For those of you who need every dollar of practice cash flow to pay off the house mortgage, or to help the kids through school, income splitting is the most sought after benefit of incorporation. When you allocate income from the corporation to family members in low tax brackets, you will reduce the overall family tax burden. Placing doctor and family members in the same tax bracket is perfect income splitting. The following table shows the income splitting benefits you can achieve by "sprinkling" income to members of your family.

Income Splitting Benefits.
			Dependants
Corporate Income After Doctor Salary	1	2	3	4	5
$100,000	$16,400	$24,600	$29,500	$29,700	$29,400
$150,000	$16,400	$29,600	$37,200	$43,100	$44,600
$200,000	$16,400	$33,200	$42,700	$49,800	$54,600
$250,000	$16,400	$33,700	$46,700	$55,700	$62,300
$300,000	$16,400	$33,700	$50,000	$59,700	$68,800

Assumes Ontario doctor earning $100,000 of salary.

Income Splitting Illustration
PROPRIETOR		Professional
Net practice income	-	$250,000	-
Income tax	-	(101,600)	-
After tax cash	-	$148,400	= $148,400
CORPORATION		Professional
Corporate income	-	$250,000	-
Salary to Professional	-	(80,000)	-
Net income	-	170,000	-
Corporate tax	-	(31,600)	-
Cash available for dividends	-	138,400	-
Dividends allocated to your two children	-	(138,400)	-
Cash retained in company	-	Nil	= Nil
PERSONAL	Children	Professional
Salary	Nil	80,000	-
Dividends	138,400	Nil	-
Tax	(14,200)	(20,600)	-
After-tax cash	$124,200	$59,400	= $183,600
SAVINGS		Professional
After-tax cash (proprietorship)	-	$148,400	-
After-tax cash (corporate)	-	$183,600	-
Savings	-	$35,200	-

Tax deferral and income splitting strategies are just two of the benefits of incorporation, but guaranteed to put money in your pocket!

Income Splitting Info EX.

Spouses1 are allowed to split qualified retirement income with their spouse. This can result in a reduction of family taxes and can also minimize the impact on income-tested tax credits and benefits. If you have a spouse who is in a lower tax bracket, you and your spouse will be able to elect to have up to 50 per cent of eligible income transferred to the lower income spouse. Eligible income is defined as income eligible for the pension income credit.

What types of income are eligible?

Under age 65, only income received directly from a pension plan or received because of the death of

Your spouse qualifies for pension income splitting. Income from other registered plans such as Registered Retirement Income Funds (RRIFs), annuities purchased with your Registered Retirement Savings Plan (RRSP) and Deferred Profit Sharing Plans are only eligible for splitting if you are age 65 or older. Government plans such as Canada/Quebec Pension Plan (CPP/QPP) and Old Age Security (OAS) do not qualify under the federal pension income splitting rules. Generally, income from non-registered investments will also not qualify. One exception is when the income is received from a Guaranteed Interest Contract (GIC) provided by an insurance company. A GIC from a life insurance company reports the interest accrued as annuity income which qualifies for the pension income credit at age 65. The interest element of a non-registered annuity contract (prescribed & non-prescribed) is another exception for those age 65 or older.

Income Splitting Options.

Eligible income

You can split up to 50 per cent of eligible income, described above, with a spouse. Because of income tested benefits such as age credits, medical expenses and claw backs on OAS, the optimum transfer may be less than 50 per cent. The examples below demonstrate that some analysis will be necessary each year to determine the optimal amount to split with your spouse in order to maximize the reduction in taxes and minimize the impact on income tested tax credits and benefits. Canada/Quebec Pension Plans Although not part of the Federal initiative with respect to pension income splitting, these government plans already allow spouses who are at least 60 years of age to share up to 50 per cent of the benefits earned while you were living together. Spousal RRSPs Contributing to a spousal RRSP can also result in tax savings. Under these rules, RRSP and RRIF income can only be split at age 65 or older. However, spousal RRSPs provide income splitting at any age and are not restricted to 50 per cent. Also, if your spouse is younger, the income can be delayed until the year after your spouse reaches age 71.Following are two examples taking into account tax credits for the basic personal exemption, age credit and pension income credit, where applicable.

Example 1: Both spouses are age 65 or older. The maximum benefit occurs by splitting just enough

Income to avoid an OAS claw back for Spouse 2.