Financial Planning for Physicians

Most physicians benefit from incorporating once their personal income consistently exceeds $150,000 to $200,000. At this level, the difference between personal tax rates (often above 50%) and the small business corporate rate (approximately 12%) creates meaningful tax deferral. If you are spending all your income on living expenses and debt repayment, the benefit of incorporation is reduced since funds must eventually be withdrawn personally.

Physicians should aim for coverage replacing 60-70% of their after-tax income. For a specialist earning $400,000, this translates to approximately $15,000 to $18,000 per month in benefits. Own-occupation coverage is critical - it pays if you cannot perform your specific specialty, even if you could work in another capacity. Purchase during residency for the lowest premiums and guaranteed insurability.

The optimal mix of salary and dividends depends on your personal situation. Salary creates RRSP contribution room and CPP credits but is taxed at higher rates. Dividends are taxed at lower personal rates but do not generate RRSP room. Most physicians benefit from paying enough salary to maximize RRSP contributions (approximately $175,000 in salary), then taking the remainder as eligible dividends.

Corporate retained earnings should be invested strategically. Passive investment income above $50,000 annually can reduce your small business deduction, so consider corporate-owned permanent life insurance (which does not count toward the passive income threshold and pays the death benefit out tax-free through the Capital Dividend Account), holding companies to separate investment assets, and tax-efficient investments that generate capital gains rather than interest income.

Ideally, begin detailed retirement planning at least 10 years before your target retirement date. This allows time to optimize your corporate wind-down strategy, maximize registered account contributions, purify your corporation for the Lifetime Capital Gains Exemption if selling, and establish a tax-efficient withdrawal sequence from multiple income sources.

You have several options: sell your practice and wind down the corporation, gradually draw down corporate assets over time through dividends, or use a combination approach. Each has different tax implications. If you plan to sell, begin purifying the corporation at least two years in advance to qualify for the Lifetime Capital Gains Exemption. Consider whether a physician buying a medical practice from you would prefer an asset or share purchase.