Physicians, RRSPs, and Passive Income 

Incorporated physicians often establish their medical practice as a corporation to enjoy tax benefits and save more effectively for retirement, beyond what’s possible with just RRSPs (Registered Retirement Savings Plans) and TFSAs (Tax-Free Savings Accounts). This article explores the strategic allocation of funds and investments through the corporation, especially in light of the passive income rules effective from January 1, 2019, and how RRSPs can play a vital role in this context. 

Understanding the Basics 

When you incorporate your medical practice, the income it generates is taxed at the corporation’s rate, which is typically lower than personal tax rates. This setup allows for significant tax savings, particularly on up to $500,000 of practice income, which is eligible for the small business tax rate. The money saved can then be invested through the corporation, and the returns from these investments (interest, dividends, capital gains) are termed as passive income. 

However, it’s crucial to note that passive income within a corporation is taxed at higher rates than practice income. Moreover, since 2019, the amount of passive income can affect your eligibility for the lower small business tax rate on your practice income. 

Calculating Passive Income Limits 

There’s a specific formula to determine the maximum passive income you can have before it impacts your access to the small business tax rate. For instance, if your corporation earns $350,000 in practice income, your passive income needs to stay below $80,000 to maintain the lower tax rate on your practice income. If your net professional income exceeds $500,000, the passive income threshold reduces to $50,000. 

The Role of RRSPs 

If the passive income limits affect you, drawing a salary and contributing to your RRSP can be a strategic move. A salary, unlike dividends, generates RRSP contribution room. Investing in an RRSP allows your savings to grow tax-deferred until withdrawal, reducing the portion of your investments that generate passive income. This can help keep your passive income within the permissible limits while maintaining or increasing your total investment value. 

Additionally, contributing to a spousal RRSP can be an effective way to split income with a lower-income spouse, further reducing your tax burden. 

Paying yourself a salary also reduces the corporation’s net practice income, which can increase your allowable passive income. For example, a $150,000 salary can reduce the corporation’s net practice income from $350,000 to $200,000, raising the passive income threshold to $110,000.