A physician incorporates early in their career.

At first, the corporation is simple. Practice income comes in, enough money comes out to cover the mortgage, family expenses and RRSP contributions, and whatever is left stays in the company.

A few years pass.

The $25,000 that once sat in the corporate bank account becomes $250,000.

Then $750,000.

Eventually, there may be $1 million or more invested inside the corporation.

And somewhere along the way, the question quietly changes.

At the beginning, it was:

“Should I incorporate?”

Now it is:

“What am I supposed to do with everything I have built inside this corporation?”

Because an MPC with $25,000 sitting in the bank is a very different planning problem from an MPC with $1.5 million invested inside it.

As retained earnings grow, the decisions become more important.

Salary or dividends is only the beginning.

Now you are thinking about passive investment income, the small business deduction, RDTOH, shareholder loans, holding companies, retirement, estate planning and eventually how to get the money back out.

Incorporation is the setup. What happens next is the strategy.

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“Should I pay myself salary or dividends?”

Now you are thinking about:

passive investment income;
the small business deduction;
RDTOH;
shareholder loans;
holding companies;
family ownership;
retirement;
estate planning; and
eventually getting the money back out.

Incorporation is the setup. What happens next is the strategy.

This guide is for Ontario physicians who already have a Medical Professional Corporation and want to make sure they are actually using it properly.

The question that matters most: what are you doing with the money you leave behind?

The main tax advantage of an MPC is generally not that the corporation permanently pays less tax.

It is tax deferral.

If your practice earns substantially more than you need personally, part of that income can potentially remain inside the corporation rather than being immediately exposed to high personal tax rates.

Over time, those retained earnings can become significant.

Consider a physician whose corporation earns $450,000 annually and who needs $200,000 personally.

After corporate tax, compensation and other adjustments, there may still be a meaningful amount of cash left inside the corporation every year.

Do that for ten or fifteen years and the corporation can become much more than a vehicle for billing medical services.

It can become one of the physician's largest financial assets.

That is when tax planning needs to evolve.

An MPC with cash is not the same as an MPC with investments

In the early years, retained earnings may simply accumulate in a corporate bank account.

Eventually, most physicians start investing them.

That is where the tax picture changes.

Active business income from the medical practice and passive investment income are taxed very differently inside a private corporation.

Interest, portfolio dividends, rental income and taxable capital gains can create higher corporate tax rates, refundable tax balances and, eventually, an impact on the corporation's small business deduction.

That does not mean corporate investing is bad.

Far from it.

It means the physician needs to understand that an MPC with a large investment portfolio is no longer a simple operating company.

It has become a tax-planning vehicle as well.

The $50,000 passive-income threshold is one number incorporated physicians should know

Successful physicians often build corporate investment portfolios gradually.

Then one year they discover that the investments are affecting the tax rate on their medical practice.

Under the federal passive-investment-income rules, when adjusted aggregate investment income earned by a corporation and its associated corporations exceeds $50,000, the corporation's federal small business limit begins to grind down.

The grind continues until the small business limit can effectively disappear once the relevant investment income reaches $150,000.

The important point is that the rule looks at investment income, not simply the market value of the investment portfolio.

So the better question is not:

“How much money do I have invested?”

It is:

“How much taxable investment income is this portfolio generating?”

Those are very different questions.

A portfolio focused heavily on interest-producing investments can create a very different corporate tax result from a portfolio generating primarily unrealized capital growth.

Once your MPC has meaningful investments, this calculation deserves attention every year.

Corporate cash is not your personal cash

This sounds obvious, but it causes enormous problems in owner-managed corporations.

You own the corporation.

But the corporation's money legally belongs to the corporation.

That distinction matters.

Suppose your MPC has $300,000 in its bank account and you transfer $50,000 to yourself to renovate your house.

That $50,000 does not become tax-free simply because you own the company.

The withdrawal needs to be accounted for properly.

Depending on the facts, it may be treated as:

salary;
a dividend;
a shareholder loan;
reimbursement of an expense;
repayment of money previously advanced to the corporation; or
potentially a shareholder benefit.

This is why personal spending through an MPC can create ugly year-end surprises.

If corporate withdrawals are not identified and documented throughout the year, the accountant may be forced to reconstruct them months later.

Good tax planning starts with knowing what every significant personal withdrawal actually represents.

Watch your shareholder loan before it becomes a tax problem

One of the most common issues we see is a growing shareholder-loan receivable.

The physician withdraws money during the year but no salary or dividend is declared at the time.

The withdrawals accumulate.

At year-end, there may suddenly be a large amount owing back to the corporation.

Depending on the circumstances and how long the balance remains outstanding, the shareholder-loan rules can potentially cause that amount to be included in the shareholder's personal income.

This is an area where bookkeeping and tax planning meet directly.

You should know throughout the year whether you are:

taking compensation from the corporation

borrowing from the corporation.

They are not the same thing.

Salary versus dividends becomes more strategic as the MPC grows

For a newly incorporated physician, salary-versus-dividend planning can feel relatively simple.

Later, there are more moving pieces.

Salary generally:

creates RRSP contribution room;
creates CPP participation up to the applicable maximums;
is deductible to the corporation; and
creates employment income personally.

Dividends generally:

are paid from corporate after-tax income;
do not create RRSP contribution room;
do not attract CPP contributions; and
can provide flexibility over the timing of personal income.

But once the corporation holds investments, the decision can also interact with:

RDTOH;
eligible and non-eligible dividend balances;
personal marginal tax rates;
retirement income;
mortgage qualification;
RRSP strategy;
other family income; and
cash-flow requirements.

That is why the right answer can change from year to year.

A 38-year-old physician building retirement savings may have a completely different compensation strategy from a 63-year-old physician planning to retire in three years.

RDTOH sounds technical. The planning behind it is not.

Once private corporations earn investment income, they can accumulate refundable tax balances known as Refundable Dividend Tax on Hand, or RDTOH.

In simple terms, some corporate tax paid on investment income can eventually be refunded to the corporation when it pays qualifying taxable dividends.

CRA describes RDTOH as an accumulation of refundable portions of certain corporate taxes, reduced by dividend refunds previously received.

The practical takeaway is important:

Do not judge corporate investment taxation by the tax paid in year one alone.

The eventual tax result can depend on:

the income earned by the corporation;
the corporate tax initially paid;
RDTOH accumulated;
dividends subsequently paid;
the dividend refund received by the corporation; and
the shareholder's personal tax.

This is why dividend planning and investment planning should not live in separate silos.

Should you move investments to a holding company?

Eventually, many incorporated physicians ask:

“Should I set up a Holdco?”

Sometimes yes.

Sometimes no.

A holding company can be useful for separating investments or other assets from the operating activities of the professional corporation.

It may also provide flexibility for future reorganizations, succession planning or other corporate investments.

But this is where physician planning becomes more specialized.

Ontario medicine professional corporations operate under specific ownership and authorization rules, and not every structure available to an ordinary operating company can simply be copied into a physician structure.

CPSO also requires a medicine professional corporation to maintain a valid Certificate of Authorization in order to practise through the corporation, with annual renewal required.

A Holdco therefore needs to solve a real problem.

It should not be added simply because someone said:

“Doctors should have Holdcos.”

A Holdco does not make the passive-income rules disappear

This point is worth emphasizing.

Moving investments into another corporation does not necessarily remove them from the passive-income calculation.

Associated corporations can be looked at together for purposes of the small business deduction.

So a physician should not assume:

“I moved my investments to Holdco, so the passive-income problem is solved.”

It may not be.

A Holdco can still have legitimate benefits.

But if the entire reason for creating one is to sidestep the $50,000 passive-income threshold, the structure needs much closer analysis.

For a deeper discussion of Holdcos, management companies, trusts and CPSO ownership restrictions, see our separate guide on Medical Professional Corporations, Holding Companies & Tax Planning for Physicians.

Complexity should earn its keep

This is a principle we use constantly.

Adding another corporation means adding:

another tax return;
another set of financial records;
another bank account;
another minute book;
additional legal fees;
additional accounting fees;
more intercompany transactions; and
more opportunities for errors.

There can absolutely be a reason to add another company.

But there should be an identifiable economic or planning benefit.

A complicated organizational chart is not evidence of good tax planning.

Sometimes the best structure is still one well-managed MPC.

Family shareholders: legal ownership and tax efficiency are two different questions

Ontario rules permit certain family members to own non-voting shares of a medicine professional corporation, subject to the professional-corporation requirements.

But that does not automatically mean dividends paid to those family members will produce income-splitting benefits.

Canada's Tax on Split Income rules can cause certain dividends received by family members to be taxed at high rates.

So when considering family shares, ask two separate questions:

Is this share ownership legally permitted?

and

What happens for income-tax purposes if the corporation actually pays a dividend?

Do not assume the answer to the first question answers the second.

Paying family members for real work can be different

A spouse or adult child who genuinely works in the practice may potentially be paid reasonable compensation.

Examples might include:

billing administration;
bookkeeping;
scheduling;
office management;
payroll administration;
social media;
marketing; or
technology support.

The key word is reasonable.

A spouse who works eight hours a week should not suddenly receive a $100,000 salary simply because they are in a lower tax bracket.

The corporation should be able to demonstrate what work was performed and why the compensation was commercially reasonable.

Documentation helps.

Depending on the role, that might include:

a job description;
payroll records;
hours worked;
responsibilities; and
evidence supporting the compensation level.

The best tax planning usually reflects what actually happened economically.

Do you own another corporation? You may have an associated-corporation issue.

Physicians often own more than one corporate entity without appreciating how the tax rules interact.

You might have:

an MPC;
a Holdco;
an ownership interest in a clinic;
a real estate corporation;
another operating company; or
corporations involving family members.

Depending on ownership and control, those corporations may be associated.

That can matter because associated corporations generally share the small business limit.

Passive investment income can also interact across the corporate group.

Creating Corporation #2 does not necessarily create a second $500,000 small-business limit.

Whenever another company is added to the structure, association should be part of the discussion.

Your investment portfolio should eventually influence your tax planning

Suppose your corporation currently earns only $25,000 of passive investment income.

No immediate problem.

But the portfolio is growing by $200,000 every year.

At some point, the $50,000 threshold may become relevant.

That means the time to start planning is before the threshold is crossed.

Depending on the physician's overall circumstances, the discussion might include:

asset allocation;
realizing capital gains;
additional personal withdrawals;
RRSP contributions;
TFSA funding;
personal investing;
insurance;
retirement timing; and
the structure of the corporate group.

You cannot always eliminate the tax consequences.

But you can avoid being surprised by them.

Eventually the question changes from accumulation to extraction

For years, the objective may be simple:

Leave money inside and let it grow.

Then retirement approaches.

Suddenly the objective reverses.

Now you need to get money out.

Imagine a physician retires at age 65 with $2 million of investments inside an MPC.

The practice income stops.

But the tax planning does not.

Now the questions become:

How much should come out every year?
Dividends or salary?
When should CPP start?
When should OAS start?
When should RRSPs or RRIFs be drawn?
How much corporate investment income will be generated?
Will OAS clawback become relevant?
Should the corporation remain open?
Should the corporation eventually wind up?
What happens to the investments if the physician dies?

A physician can spend 25 years accumulating wealth inside an MPC.

Extracting that wealth efficiently can take another 20.

Retirement planning should begin before retirement

The worst time to start thinking about winding down an MPC is the month before you retire.

If retirement is five or ten years away, there may already be planning opportunities.

That review should include:

corporate retained earnings;
investment assets;
RDTOH;
capital dividend account balances;
eligible dividend balances;
shareholder loans;
registered retirement assets;
expected CPP;
expected OAS;
personal spending requirements;
estate objectives; and
whether other corporations are involved.

The more time available, the more flexibility you generally have.

What happens to the MPC when the physician dies?

An MPC does not disappear simply because the physician dies.

The shares are an asset of the physician's estate.

If there is substantial wealth inside the corporation, there can be tax at both the shareholder and corporate levels as the estate deals with the shares and ultimately extracts the underlying assets.

Post-mortem corporate planning can therefore become very important.

Depending on the circumstances, accountants, tax lawyers and estate professionals may need to coordinate strategies to reduce unnecessary double taxation.

If your corporation has accumulated significant wealth, it should be incorporated into your estate plan long before that planning is actually needed.

The annual MPC meeting should be more than “your T2 is ready”

This is probably the biggest practical takeaway.

Once a physician's corporation starts accumulating meaningful wealth, the annual year-end conversation should not end with:

“Here is your corporate tax return and here is what you owe.”

The review should increasingly cover:

corporate profit;
personal cash needs;
salary versus dividends;
shareholder loans;
investment income;
passive-income exposure;
RDTOH;
capital dividend account balances;
RRSP room;
corporate investments;
associated corporations;
planned major withdrawals;
retirement horizon; and
estate considerations.

The tax return reports what already happened.

Planning determines what happens next.

The MPC you incorporated ten years ago may no longer be the MPC you need today

That is the central point.

At incorporation, you may have had:

little retained cash;
no investment portfolio;
no children;
no Holdco;
no retirement plan;
no other corporations.

Ten years later, everything may have changed.

Your corporation should evolve with you.

Sometimes that means adding a structure.

Sometimes it means changing compensation.

Sometimes it means withdrawing more money.

Sometimes it means doing absolutely nothing because the existing structure is already working well.

The answer should come from the numbers, not from a template.

Already incorporated? Ask a different question.

If you already have a Medical Professional Corporation, you probably do not need another conversation about the benefits of incorporation.

You need to know whether the corporation you already have is being used intelligently.

At MiAccounting, we work with Ontario physicians to review the entire financial life of their MPC, including:

compensation;
retained earnings;
corporate investments;
passive income;
shareholder loans;
Holdco considerations;
associated corporations;
retirement; and
eventual extraction of corporate wealth.

Because after incorporation, the important question is no longer:

“Should I incorporate?”