Income Splitting Strategies for Medical Professionals

Medical professionals, especially those who are self-employed, often grapple with high personal tax rates, which can soar as high as 53.3% in regions like Ontario. To counteract these hefty taxes, numerous physicians opt to incorporate their practices into entities known as physician-professional or medical-professional corporations. The advantages of this move include enjoying reduced corporate tax rates, the ability to defer taxes, and the flexibility to split income in ways such as employing family members and deciding between salary and dividend disbursements. However, incorporation isn’t the sole avenue for tax planning for medical professionals. Here are some other strategies:
- Spousal Registered Retirement Savings Plan (RRSP): This strategy involves the spouse with a higher income making contributions to the RRSP of the spouse with a lower income. This can lead to tax savings. When the time comes for the lower-earning spouse to withdraw these funds, the income is attributed to the account holder, not the contributor.
- Tax-Free Savings Accounts (TFSA): Another effective method for income splitting is through the TFSA. The spouse with a higher income can transfer funds to the lower-earning spouse, who can then deposit them into their TFSA. The beauty of TFSAs is that the funds within them grow without being taxed and remain tax-free even upon withdrawal. This approach can significantly reduce the couple’s overall tax liability. It’s essential to note that while TFSAs aren’t subject to attribution rules, spousal RRSPs have a 3-year attribution rule. Another tactic involves the higher-earning spouse lending money to the lower-earning one at an interest rate, allowing the latter to invest and generate income taxed at a lower rate.
- Family Trust: For those keen on channeling income to family members, establishing a family trust can be a viable option. The trust’s investment income can be distributed to family members in lower tax brackets. However, it’s crucial to be aware of specific tax regulations when considering if a family trust aligns with one’s financial objectives.