BC doctors face a unique set of challenges when structuring their businesses. You are more than a medical practitioner – you’re a business owner, a parent, a partner. By having business structures in place early on, optometrists can reduce taxes, increase savings, and provide stability for their future, and their family.
As an optometrist, have you structured your business for success? Here are a few things to take into consideration when creating your business structures.
The Federal Budget
Effective 1 January 2016, the Federal government imposed an additional 4% tax on individual tax payers earning over $200,000. It is more important now to look at tax-effective ways to build wealth. In BC, for every dollar paid in salary over the threshold of $200,000 (varies per province) a practitioner pays 47.7% tax. As a result, for every $100 the practitioner has $52.30 to invest. If they are properly structured, they would utilize aftertax corporate dollars of 12.5%, translating to $87.50 dollars available for investment purposes.
The 2016 Federal budget changed the way individual practitioners worked together in a common office space, effectively resulting in a sharing of the small business rate of 12.5% for the first $500,000 earned the balance being taxed at 26%. The proper structure is important to minimize the tax leakage as a result of the federal budget changes.
Incorporating and Holding Companies
A question that most optometrists face in their first months of practice is whether or not to incorporate. There are varying ideas as to the proper timing of incorporation, depending on your business goals.
Once incorporated, practitioners are typically advised not to set up a holding company given the additional costs involved in annual filings. What is lost in the equation is the ability for tax deferral and tax effective wealth building. This is a common mistake we have run into when advising optometrists who have structured their businesses without proper financial advice.
The cost of waiting for a couple of years to set up an effective corporate structure is more accounting and legal fees. Setting up a tax effective and efficient corporate structure from the beginning minimizes costs, as well as allowing for immediate tax-deferred wealth building opportunities.
A family trust is a flexible planning tool for estate planning and income splitting. When utilized properly, the tax savings are significant.
Income generated from a “small business” in Canada, that is allocated to beneficiaries of a trust is subject to “kiddie tax”, meaning that minor children (under the age of 19) are taxed at the top marginal rate of 47.7%. From a tax perspective, a trust is effective for adult beneficiaries.
Tax rates and corporate structures described in this article are specifically for the province of BC. Other provinces vary in tax rates and the ability of professionals to utilize a family trust and holding company. Please contact Obsidian for province-specific information.