As a new professional, you are likely being asked by your banker, lawyer, colleagues, etc. about your new corporation as it is largely assumed that you have already incorporated just because you finished school. But incorporating just because you graduated may not be the best thing for you.
This choice should be made based on your current situation, and not just determined by the numbers of years (or lack thereof) since graduation. There are several personal factors you should consider before you make that decision.
To help you decide, here are a few main questions that should be reviewed together as a whole, rather than on their own.
1. Have you used up all your tuition credits from your years of schooling?
Tuition credits arise from all the years you have paid tuition. As a Health Care Professional, you have many years of tuition! The tuition you paid gives you credits to reduce your taxes owing. If you did not use them while you were in school, they are tracked by the CRA and carried forward until you are able to use them. Your carry forward amounts are available to see on your CRA account.
Yes, I have used them up - If you have used up these credits previously, then looking at incorporation to reduce your tax liability is an option.
No, I have not used them up - If you have enough credits that have carried forward, these may cover personal taxes owing which could help delay the need for incorporation.
2. Are you currently working without a corporation (also known as a sole proprietor)?
Yes - This means that you are currently working and being paid a fee for your services. This arrangement would allow you to continue to operate as is, or to incorporate.
No - Under this scenario, it is likely that you are still in residency, or you have entered into a employee relationship and are being paid a salary. This arrangement would not allow you to incorporate at this time.
3. How much is left in your budget?
After my living expenses and loan payments are made, I still have a few thousand left over - If you are earning more than you need for living expenses, and are leaving money behind in the business, incorporating may help to reduce your overall taxes on those earnings.
After paying for living expenses and extra payments on my student loans, there is very little left - If you find yourself using all of your income to pay for your lifestyle and debts, incorporation would only serve to complicate your business. The key point here is, there should be money left behind in your corporate bank account for incorporation to make sense.
4. Have you taken on debt to bolster your practice?
Yes - Only the interest portion of your loan payments are tax deductible. The principal payments that reduce your loan balance will be taxed at your current tax rate. Having this inside a corporation will mean you will have tax savings on those payments, which will leave more funds available to pay off loans sooner.
No - This may not be a deciding factor on whether you plan to incorporate or not, but is something to consider with your short and long-term goals.
5. Is saving a big part of your long-term goals?
Yes - Used correctly, a corporation can provide you with long-term personal income as long as it holds funds. It can use cash that it does not use to invest in most of the ways you can personally (i.e. non-registered investments). To you, the corporation can be viewed as another type of retirement plan, much like an RRSP.
No - Once again, if you are using all your funds to pay for your lifestyle, incorporation may not be the best option for you.
There is no right or wrong answer as to when you should incorporate. It doesn't matter if you're a doctor, dentist, chiropractor, pharmacist, etc., your personal scenario will be different than all of the other professionals you graduated or work with. In the end, your ultimate decision should coincide with your goals, your lifestyle and your priorities.
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