If your corporation’s income is taxed at a low tax rate of say 12 per cent, it means $88 out of every $100 of practice income is retained in the corporation.
The tax deferral benefit will have a huge impact on your retirement savings.
Suppose you are a 35-year-old B.C. doctor earning $250,000 before tax. You need $125,000 of after tax income for personal and living expenses. You invest your remaining income in a stock portfolio with an annual growth rate of six per cent for 30 years.
If you are not incorporated, your after-tax savings will grow to $2.5 million in 30 years by the time you are 65.
If you use your corporation, your corporate savings will grow to $5.8 million by age 65. If you draw all the funds from the corporation when you retire, you will pay income taxes of $1.9 million, leaving you with $3.9 million.
By incorporating, you can generate $1.4 million more in retirement savings than an unincorporated doctor. If you are not incorporated you would have to work another seven years to age 72 to make up the shortfall.
With personal tax rates creeping up to 50 per cent of your income, you’ll never able to save enough money to retire without sacrificing your standard of living. But if, however, you incorporate your practice, the money you save on taxes will provide for a worry free lifestyle during retirement.
