RRSPs and TFSAs for Incorporated Doctors

Debbie Bongard - Jul 29, 2020

For medical professionals, incorporating your medical practice comes with numerous benefits including a significant reduction of your tax liability which, in turn, allows you to save more for retirement. Through the appropriate use of RRSPs and TFSAs

RRSPs and TFSAs for Incorporated Doctors


For medical professionals, incorporating your medical practice comes with numerous benefits including a significant reduction of your tax liability which, in turn, allows you to save more for retirement. Establishing a Canadian-controlled private corporation (CCPC) can be a way to shelter your earnings by leaving them within the corporation rather than taking additional income. Further, through the appropriate use of RRSPs and TFSAs, you can save additional funds by managing how much income you decide to flow through from your CCPC to your T1.

Many incorporated professionals retain their professional earnings in their corporate accounts. Typically, these funds are invested to generate passive investment income in the form of capital gains, dividends, interest and rental income.

With a CCPC, professional income that is left within corporate accounts may be eligible to be taxed at the small business tax rate of 12%, rather than be subject to significantly higher taxation, possibly at the highest marginal tax rate of between 47% and 53%. It is important to note, however, that new tax legislation passed in 2018 may restrict your eligibility to use the small business tax credit on professional earnings if your incorporated medical practice earns too much passive income. The formula for calculating the amount of passive income your corporation may earn before access to the small business tax rate is affected is:


$150,000 – 20% of your Professional Net Income = Passive Income Allowed Before Impact


For Example: if you earn $400,000 in professional income, your passive income must stay below $70,000 to remain eligible for the small business tax rate and avoid paying a higher tax rate on your professional income. 
($150,000 – 20% X $400,000 = $70,000)
Please note: Any net professional income above $500,000 would not benefit from the small business tax rate.


Registered Retirement Savings Plans (RRSPs)
With a CCPC, you pay yourself a salary that is to be reported as personal income for tax purposes. Your salary is considered by the Canadian Revenue Agency (CRA) to be earned income which subsequently creates RRSP contribution room.

Registered Retirement Savings Plans (RRSP) are tax-deferred registered investment accounts that allow you to defer paying tax on the contributed funds until funds are withdrawn in retirement. By contributing to your RRSP, you are not only reducing your current tax liability but also setting yourself up to benefit from having to pay a lower marginal tax rate when funds are eventually withdrawn - assuming your income is lower in your retirement years. 

As previously mentioned, when you contribute to your RRSP, you receive a tax credit which reduces your earned income while allowing you to effectively save for retirement in the future. Your annual RRSP contribution limit is calculated as 18% of your gross income up to a maximum contribution limit. For 2020, the maximum allowable RRSP contribution is $27,230, which means that you would have to take a salary of at least $151,278 from your corporation in 2019 to max out your RRSP contribution room.
 
Tax-Free Savings Account (TFSAs)
A Tax-Free Savings Account (TFSA) is another type of registered investment account that has significant tax benefits. While contributions to a TFSA are not tax-deductible at the time of contribution, you don’t have to pay tax on withdrawals from your TFSA account. TFSA contribution room is cumulative, beginning the year you turn 18, up to a maximum of $69,500 if you were born in 1989 or earlier.

You also have the ability to re-contribute any withdrawals you make from a TFSA which allows you to use the TFSA for multiple investment goals. Lastly, one of the most notable benefits of a TFSA is that it allows your money to compound and grow in a tax-sheltered account. This means that any capital gains or investment income generated in the account are tax-free.
 
Putting it All Together
Just as incorporation of your medical practice has its benefits, so do these tax-efficient investment accounts. With RRSPs and TFSAs, you can maximize the benefit of your incorporation through cash flow management and decisions surrounding asset reallocation. By withdrawing enough income to maximize your RRSP and TFSA contributions, you can utilize two additional investment tools so that surplus income is better utilized rather than merely generating passive income in your corporation.

This multi-faceted approach requires the coordination of your investments and your tax account to get your cash flow to work in the most efficient way possible. By doing so, you are ensuring that you are reaping the greatest benefits of having a professional corporation, while also structuring your finances in a way to help you reach your longer-term goals.

Our team at Bongard Wealth Advisory has extensive experience dealing with financial matters of this sort. If you have any questions or would like to speak to any of our experienced team members, please do not hesitate to contact us. We’re here to help.