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3 Basic tax tips for physicians and dentists

Date: 01/17/2017

Category: Tax and Estate Planning

Physicians and dentists are some of Canada’s highest income earning professionals. As such they are also subject to some of the most punishing tax rates in the country. Each individual doctor has their own unique situation and requires their own personalized tax and investment plan. But, there are some common tax tips that all can use. Below are my top three.


Defer, defer, defer:


There are two legal ways to save on taxes in Canada. The first is to obtain an immediate reduction in tax using any number of legal means such as income splitting (discussed below), maximizing legal deductions, or taking advantage of various tax credits. The second, which requires a bit more creativity is to defer paying tax to a later date. The deferral of tax is primarily achieved by doctors using a professional corporation and based on the principals of time value of money: i.e. paying for something later is better than paying right away.


Physicians and dentists practicing through a professional corporation and earning active business income are subject to the small business deduction on the first $500,000 of taxable income earned annually. As of 2016 this is a flat rate of 15% in Ontario. Compare that rate to the top marginal personal rate of 53.53% and you can quickly see the potential for tax deferral by using a corporation.


By retaining the earnings that they do not require to fund their lifestyles in their corporations and subsequently investing those funds, physicians and dentists can achieve an excellent tax deferral which, if planned correctly, can be converted to a sizable tax savings upon retirement.


The power of income-splitting:


Income splitting is one of my favorite tax saving techniques. Physicians and dentists are lucky, they are the only professional group in Ontario that can include immediate family members as non-voting shareholders of their professional corporations. A full analysis of income splitting is beyond the scope of this post, but below are the basics.


While corporate tax rates are for the most part fixed, personal tax rates are tiered based on level of taxable income earned in a year. For example, say a physician has a young family with a stay at home spouse. The physician’s spouse is busy caring for two young preschoolers and earns no income.


If this physician earns $250,000 of taxable income per year they would pay approximately $95,388 in tax. If a perfect income split were applied between the physician and the spouse the tax bill would be reduced by $23,288 to $72,100. That’s a 24% reduction in tax.


Build a tax-efficient investment portfolio:


Once you’ve deferred paying tax on your active business income and you’ve saved yourself some money the next step is to invest it. Investing in a taxable account is a bit trickier than investing in a non-taxable account like an RRSP or TFSA as the taxation of your investment income and gains must be considered.


The first item you’ll want to consider is your advisor compensation. Fees paid directly to your advisor for asset management qualify as tax deductible when incurred. On the other hand, commissions are added to the adjusted cost basis of your investments which is not as tax efficient. From a tax perspective, you’ll want to opt for fees over commissions.


You will also want to consider portfolio turnover. From a tax perspective, you are looking for a low turnover portfolio. Portfolio turnover is a measure of how frequently assets within a portfolio are bought and sold. Selling assets with embedded gains triggers taxable capital gains, and, you guessed it, tax. From a tax perspective, you are looking for less turn-over and more long-term buy-and-hold.




Tax and investment are intimately intermingled and having a close connection with your accountant and investment advisor can mean the difference between saving on taxes and leaking significant money to tax unnecessarily. Physicians and dentists require a special touch due to their legal structure constraints and high levels of income. With a bit of planning and an advisor that understands your industries you are well on your way to building significant wealth.


Fabio Campanella CPA, CA, CFP, CIM is a co-founder of Praetorian Wealth Advisory in Toronto, ON ( and Campanella McDonald LLP ( in Oakville, ON.




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