Incorporation of a locum practice
BY GREG TONER
Originally published in OVMA Focus Magazine Jan/Feb 2023
I recently spoke with a veterinarian who had graduated a few years ago—let’s call him Steve. Steve started working as a locum three days a week in 2022, so he could spend more time with his newborn. Steve’s partner works for a major bank, and their salary was more than enough to fund the couple’s household expenses such as car and mortgage payments, groceries, and utilities. Steve loves working as a veterinarian, and he wanted to know more about what incorporating would mean for him as a locum or associate veterinarian. He admitted to having no idea about how to run a business.
We discussed how veterinarians could incorporate, provided their corporations meet several criteria established by the College of Veterinarians of Ontario (CVO). These corporations are called Veterinary Medicine Professional Corporations (VMPC). They are separate, legal entities that “sit” between the veterinarian and the practice they’re working for, either as a locum or associate. There are different billing arrangements—some VMPCs charge an hourly fee for their principal veterinarian’s time, others charge a percentage of the fees that their principal veterinarian produces.
VMPCs have a business bank account and business credit card. All revenues are deposited to the VMPC bank account and expenses are paid out of the VMPC bank account or with the credit card. The VMPC pays all professional expenses for the principal veterinarian.
With the profits earned (fees billed, less expenses paid), the VMPC then pays the principal veterinarian with either a dividend or a salary. This is where Steve and I really spent some time understanding his personal situation. He shared that their hopes were to have one more child, and that he was hoping to take 15 months of parental leave, since he felt like he missed out on that time with their first child. Steve had questions about whether he should opt in to contributing to employment insurance as a self-employed veterinarian, whether a salary would be better than dividends, and if a corporation made sense.
We discussed how dividends are paid from the corporation’s after-tax profit, and Steve would be entitled to a tax credit that approximates the amount of tax that was paid by the corporation, so that there’s no income tax difference between being paid a salary or a dividend.
There are several critical differences between salaries and dividends that factored into Steve’s decision making:
Dividends aren’t subject to Canada Pension Plan (CPP) contributions, resulting in a savings of $7,402 for 2023, but there’s no eligibility for the CPP in retirement.
Each $100 of salary generates $18 of RRSP contribution room ($171,000 of salary in 2023 creates $30,780 of RRSP contribution room), while dividends don’t generate any RRSP contribution room.
Some disability insurance plans don’t insure dividend income.
In certain cases, banks won’t consider dividend income when business owners apply for mortgages or loans.
Steve is a quick learner and caught on that the main benefit of incorporating is the ability to defer the personal taxes on any income that you can leave in the company. Corporations pay tax at a rate of 12.2 per cent in 2023 in Ontario, compared to individual tax rates that are as high as 53.53 per cent in 2023 in Ontario. This creates an opportunity for tax deferral where a veterinarian doesn’t need all their income to fund their lifestyle. Any income that’s not drawn from the corporation as a salary or dividend will only be subject to the corporate rate of tax, deferring any personal level of tax until the corporation pays those funds out to the veterinarian shareholder.
The corporation can invest these funds in public company shares, mutual funds, exchange-traded funds, real estate, private investments, or even Bitcoin. Steve joked that Bitcoin might be too risky for them, but the couple have been on the lookout for their first duplex rental property, and that investing in that duplex through a corporation would allow them to invest sooner, since they wouldn’t have to pay personal tax on their down payment.
One of his partner’s biggest questions was about the cost. They are currently paying $750 a year for their personal tax returns, which includes Steve’s self-employment in- come. This is a standard rate. I told them it would be more expensive, as it typically costs about $3,000 in legal and accounting fees to establish a professional corporation and register it with CVO. On an annual basis, they’ll need to prepare financial statements and a corporate tax return and update the company’s minute book. This will cost $4,000 to $5,000 per year.
In the end, the couple decided that incorporating made sense. Being able to leave excess funds in the corporation and use the corporation to smooth Steve’s income out over his parental leave when he’s off with their next child suited their financial plans. From their perspective, the CPP savings outweighed the cost of setting up and maintaining the corporation, and they liked that they had the infrastructure set up to save corporately and start to build their real estate portfolio.
Greg Toner, CPA, CA, TEP, CLU, is principal at VetCPA.
Reprinted from the Ontario Veterinary Medical Association’s Focus magazine www.ovma.org
