Incorporation and retirement planning

Understanding the choices that incorporated physicians need to make on how they use their earnings to save for retirement

Learning Objectives

  • Understand how saving for retirement can be different for incorporated physicians than for non-incorporated physicians and other Canadians
  • Learn about the benefits of using Registered Retirement Savings Plans (RRSPs) to create tax-deferred retirement income
  • Learn about how new passive income tax rules implemented at the start of 2019 can mean that investing through your corporation can be less favourable than prior to these new rules
  • Review how incorporated physicians can contribute to the Canada Pension Plan (CPP) while working, in order to receive a retirement benefit from CPP in later years

Key Insights

  • Most physicians in Ontario are incorporated, which means that you have more choices when deciding where to put and grow your retirement savings: in your corporation, in your Registered Retirement Savings Plans (RRSPs), or in your Tax-Free Savings Accounts (TFSAs)
  • New tax rules implemented at the start of 2019 mean that investing in a corporation is treated less favourably than in previous years, for corporations earning more than $50,000 in passive income
  • In order to generate RRSP room, you will need “earned income” in the form of salary compensation from your corporation (as opposed to dividends) — paying yourself a salary also means that you can contribute to and benefit from CPP in retirement
  • For 2021, the maximum RRSP contribution room is $27,830; a salary of $154,611 from 2020 is required

Incorporation and retirement planning

If you’re a physician, your financial life probably looks different than that of most other Canadians.

One reason is that most physicians are self-employed, incorporated professionals, meaning your financial picture is inherently more complex than other Canadians, and requires more deliberate planning, including tax planning.

In addition, because most physicians are self-employed professionals, few can join traditional pension plans, meaning you need to create alternative ways to bring income certainty to your retirement years.

Physicians with an incorporated professional practice need to make choices about how they use their earnings to save for retirement (as well as to meet current spending needs).

New tax rules reduce the benefit of investing within your corporation

In addition, new tax rules implemented at the start of 2019 mean that if your corporation earns more than $50,000 in passive income (that is, income not directly generated by the physician, such as income from investments and rental income), then investing through your corporation is treated less favourably than in previous years. These new rules provide an additional reason for physicians to explore saving through accounts outside their corporations.

Paying yourself a salary creates RRSP contribution room

To create RRSP contribution room, an incorporated physician must take some compensation in the form of salary, instead of or in addition to dividends. Earning a salary is required in order to create RRSP contribution room. In order to maximize your RRSP contribution room, which is $27,830 in 2021, a salary of $154,611 from 2020 is required. Every year, the maximum possible RRSP contribution increases, as does the corresponding salary amount required to make the maximum contribution to an RRSP.

Using a TFSA is not dependent on having salary income. You can save using TFSAs, including through the TFSA option in the Advantages Retirement PlanTM, even if you don’t take income in the form of salary and thus do not create any RRSP contribution room. The maximum contribution room for TFSAs in 2020 is $6,000.

Creating income certainty in retirement: The Canada Pension Plan

Taking income in the form of a salary will also allow you to contribute to the Canada Pension Plan (CPP), allowing you to receive CPP benefits when you retire.

In retirement, depending on the extent to which you have contributed some of your income to CPP during your working years, CPP will provide you a secure monthly payment for as long as you live. The payments also increase over time as inflation goes up. As many physicians do not have defined benefit pensions to provide lifelong income in retirement, CPP can be an efficient way to add pension-like income in retirement. For a physician retiring today, the maximum CPP benefit you can access at age 65 is ~$1,155 per month, or ~$13,854 per year.

The CPP is designed to replace some of your income in retirement. Each year, employers and employees make CPP contributions that are calculated as a percentage of the average wage, up to a ceiling called the “year’s maximum pensionable earnings,” or YMPE. If you are a self-employed physician, you will make both the employer and employee contributions to CPP.  For 2020, if you earn $58,700 in the form of salary, you will make the maximum CPP contribution for 2020.

The amount of CPP benefits you receive when you retire is based on two criteria:

  1. How many years you contribute to the CPP between the ages of 18 and 65
  2. How much you contribute to the CPP on an annual basis between the ages of 18 and 65
  3. At what age you decide to take CPP (you can take CPP as early as age 60, but your CPP benefits will be reduced by up to 36% compared to taking it at age 65; your CPP benefits will be increased by up to 42% if you delay CPP until age 70)[1]

Government benefits: When should I take CPP/OAS” provides more detail about timing when to access your benefits including CPP.