Should You Incorporate As A Health Professional In Canada?

In a recent lunch and learn session, Cas from Tyagi Group shared valuable insights on incorporating as a health professional in Canada. This recap covers key points including business structure options, tax implications, how to pay yourself, and the pros and cons of incorporating. Discover whether incorporating is right for you and how it can potentially save you money.

Check out the Lunch & Learn replay here:

What Are The Business Structure Options In Canada?

As a business owner in Canada, you have four business structures to choose from when setting up your practice:

1. Sole Proprietorship 
2. Partnership
3. Professional Corporation
4. General Corporation

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What’s A Sole-Proprietorship?

A sole proprietorship is the default business structure, owned by one person who receives all profits and claims all losses. Business income and deductions are reported on personal taxes.

How Is a Sole-Proprietorship Taxed?

A sole proprietorship's income is reported on the owner's personal tax return. The owner pays personal income tax on business profits, and eligible business expenses are deducted from this income.

What’s A Partnership?

A partnership involves two or more individuals or entities creating a business, sharing dividends, profits, and losses equally, with all partners equally liable. This structure is uncommon in the health industry.

How Is a Partnership Taxed?

A partnership itself isn't taxed. Instead, profits and losses are divided among partners according to their shares, and each partner reports their share on their personal or corporate tax returns.

What’s A Corporation?

A corporation is a separate legal entity that can own property and enter contracts, completely separate and distinct from its owners. In Canada, health professionals typically form professional corporations, while clinics with multiple providers form general corporations.

How Is a Corporation Taxed?

A corporation pays taxes on its profits at the corporate tax rate. Shareholders are then taxed on any dividends they receive. This creates a double taxation scenario, where both the corporation and shareholders are taxed.

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How Do I Choose Which Business Structure Is Right For My Business?

When choosing a business structure, consider income, personal finances, liability, and business size. Sole proprietorship suits solo practitioners with modest income. Incorporation is better for higher earnings or multiple practitioners.

‍Cass says if you’re making more money than you need, you may benefit from incorporating. Keep in mind, it costs around $10k a year to manage a corporation. This isn’t always the right path for sole-practitioners. However, If you’re opening a clinic or plan to eventually sell the company, it’s better to incorporate early on. Consult a lawyer before making a decision. (By the way, you’ll definitely need a lawyer if you incorporate.)

‍Canadian tax and bookkeeping requirements are different with each business structure, as well as pay structure options. Let’s take a closer look at the pros and cons of each business structure to help establish which one is right for you.

What Are The Advantages Of A Sole-Proprietorship?

• Simple and inexpensive to set up
• Full control over decisions
• All profits go directly to you
• No extra tax returns
• Less administration and outside help needed

What Are The Disadvantages Of A Sole-Proprietorship?

• No legal separation between you and the business
• Personal responsibility for all debts and liabilities
• Difficult to scale
• Challenges in getting approved for bank loans
• Harder to sell

What Are The Advantages Of A Corporation?

• Legal separation between owners and the business
• Limited liability for shareholders
• Easier to raise capital
• Potential tax benefits
• Greater credibility with banks and investors
• Easier to transfer ownership

What Are The Disadvantages Of A Corporation?

• More complex and expensive to set up
• Increased regulatory requirements
• Double taxation (corporate profits and shareholder dividends)
• More administrative work and record-keeping
• Less control for individual owners

Can Forming A Corporation Save Me Money?

According to Cas, if you have significant income you don't need immediately, forming a corporation can save you money by deferring taxes on that income—as long as you leave the money in the corporation. However, savings must exceed the $10k annual cost of maintaining a corporation for it to be worthwhile.

Much like a retirement account, income from the corporation isn’t taxed until the money is taken out. You can also invest the money that’s just sitting in the corporation so you earn even more (though passive income is taxed at a higher rate).

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What Does It Cost To Form A Corporation?

Incorporating can cost up to $10,000 annually, including incorporation fees, annual costs, and additional monthly expenses. The exact amount varies based on your situation.

How To Form A Corporation

First, decide whether you’ll incorporate federal or provincially. Then, fill out the articles of incorporation, and send the documents to the appropriate provincial, territorial, or federal government.

Where Should I Incorporate?

Choosing between federal and provincial incorporation in Canada depends on factors like name protection, business operations, and costs. Federal incorporation offers nationwide name protection and multi-province operation but has higher costs and complex filing. Provincial incorporation is cheaper and simpler but requires extra licenses for interprovincial business.

Cas says it’s important to choose the right one, because it can be difficult and/or costly to change it later. She also recommends working with a lawyer, not an accountant, because healthcare providers have so many legal guidelines to follow.

Do I Form A General Or Professional Corporation?

Most clinics use general corporations due to having multiple practitioners, which offers flexibility and broader business operations. Individual practitioners often form professional corporations as these are tailored to specific professional regulations and offer tax benefits and liability protections specific to their profession.

Key Features Of Professional Corporations

Health Professional Rules

• Governed by provincial legislation; check relevant acts for inclusion
• Consult governing body for permission and compliance
• Allows professionals to offer services through a corporate entity
• Must register with your college or association and keep it updated

Advantages

• Income taxed at corporate and personal levels with deferral options
• Low corporate tax rates
• Flexible tax planning for salaries, dividends, and bonuses
• Opportunity for income splitting with family members
• Choice of fiscal year-end

Disadvantages

• Shareholders are liable for professional claims; need malpractice insurance
• Additional costs: incorporation, amendments, legal fees, annual tax returns
• Separate corporate and personal transactions
• Complex structure requiring shareholders, directors, and officers
• Extra work for tracking assets and income; may need a bookkeeper

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Key Features of General Corporations

Rules

• Any shareholder; multiple health disciplines as contractors
• Practices are at the practitioner level
• Clinic owners are liable for the business
• Some professionals must use professional corporations

Advantages

• Income deferral options; taxed at corporate and personal levels
• Low corporate tax rates
• Flexible tax planning
• Income splitting with family members
• Multiple shareholders share costs
• Choice of fiscal year-end
• Legal separation of liabilities

Disadvantages

• Extra costs: incorporation, annual tax returns, legal fees
• Separate corporate and personal transactions
• Complex structure needing shareholders, directors, officers
• Shared profits with multiple shareholders
• Extra work for asset and income tracking, may need a bookkeeper

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How To Pay Yourself From A Corporation

To pay yourself from a corporation, you can choose between salary and dividends. Salary reduces corporate taxes but is taxed on your personal return. Dividends are paid from after-tax profits, taxed at a lower personal rate but don't reduce corporate income. Your choice depends on personal circumstances and preferences.

Pros and Cons of a Salary

Pros:

• Provides predictable, legally recognized income
• Easier for budgeting, loan applications, and retirement savings
• Regular payroll deductions reduce tax surprises and can lower corporate taxes

Cons:

• Requires payroll account registration and monthly deductions, adding administrative burden
• CPP contributions can be costly now, with benefits realized later
• Less cash in hand each pay period due to regular deductions

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Pros and Cons of Dividends

Pros:

• Simplest way to pay yourself, no payroll account needed
• Can be declared anytime, optimizing tax situations
• Only annual T5 filing required, less personal tax compared to salaries
• Avoid mandatory CPP contributions, increasing current payments

Cons:

• Based on share ownership, tricky with multiple shareholders
• Prevents claiming certain personal tax deductions
• Does not increase RRSP contribution room, missing tax shelter benefits
• No withholding tax means a larger tax bill at year-end
• Fewer expense deductions for the corporation, higher taxable income
• Requires active retirement planning without CPP and RRSP contributions

Which Saves More On Taxes: Salary Or Dividends?

Cas says there's little tax difference between salary and dividends. Individual and corporate taxes balance out similarly. The only real tax savings come from leaving income in the corporation and not using it all.

Should I Incorporate My Practice?

If you're opening a clinic, incorporating is recommended for its legal liability coverage, which outweighs the additional fees. For individuals, incorporating might lead to higher expenses than tax savings. Evaluate your specific situation to decide if incorporation is beneficial for you.

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