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The Retirement Savings Dilemma for Physicians in a 2024 Tax World

Posted under: Business Owners, IPP

There are many concerns on the minds of Canadians. Health care and access to a Family Physician is atop that list. Many Canadians do not currently have a Family Physician and the Covid Epidemic shone a light on the shortage of physicians, nurses, and other health care professionals. Ensuring we retain these key individuals and encourage others to go into care roles should be central to our provincial and federal levels of government.

Over the last 6 years we have seen federal tax policy target professional corporations, and Medicine Professional Corporations have been the group most impacted. To understand the impact let us look at tax planning for physicians.

In 2001, Ontario, one of the last provinces to do so, allowed for the establishment of Medicine Professional Corporations (MPCs). This change represented a tectonic shift in tax and retirement planning for doctors in this province, with many others already on board. They were encouraged to have family members as shareholders as a means of sprinkling dividends within the family to reduce their overall tax rate, without the province having to increase payouts, while retaining top notch doctors.

The suggested strategy was adopted by many, which led to the MPCs retaining assets and being used almost as an unregistered pension plan built around the combination of the lower small business tax rate, and the ineligible dividend tax rate, as a singular retirement strategy.

Fast forward to 2018, and we have seen this strategy turned on its head via tax policy. As of 2018, the tax on split income (TOSI) rules meant family members had to account for their efforts that contributed to the profits of the medical practice in order to enjoy the preferred tax rate on the dividends. This was coupled with changes to the taxation of passive income within the MPC, which if the taxable income in a year is north of $150,000, could result in the loss of the small business deduction (SBD) in that year. The tax changes were enacted with no grandfathering of retained assets prior to the budget. For prudent savers that had retained millions in the corporation this change had unintended consequences.

The 2024 Federal Budget proposed increasing the capital gains inclusion rate to 2/3 for corporations. For MPCs, this means the increased realized capital gain within the corporation could cause its passive income to exceed the $150,000 threshold, and thus lose the SBD. This can lead to significantly higher corporate taxes in that year. These changes have raised serious concerns for doctors, many who do not have an alternative source of funds for retirement. The majority of these doctors do not have a pension plan and have long requested one.

Individual Pension Plans (IPPs) have been in existence for decades, yet only a small number of incorporated physicians have taken advantage of these strategies. The IPP allows the MPC to contribute significantly higher amounts than within their RRSP, using pre-tax corporate dollars. Within the IPP we can recapture past years of funding, deduct investment fees, and any administrative fees.

Let us look at the example of Dr. Lee who is a 50-year-old physician and has been incorporated for 10 years. The first 5 years he took a T4 of $100,000 per year, for the last 5 years he increased his T4 to $150,000 per year, and in 2024 he is taking a larger T4 to maximize his RRSP contribution room. Over his working years he has accumulated $240,000 in RRSP assets.

With the IPP, in year 1 the MPC can contribute $39,900 for 2024, plus an additional $120,400 in past service funding, with a transfer of $211,000 from his RRSP as a qualifying transfer. Assuming the 7.5% growth rate that CRA utilizes as an investment rate of return assumption, by age 60 the IPP asset value would be at $1.65 million versus $1.10 million if Dr Lee instead sticks to an RRSP strategy with the same 7.5% return assumption – an increase in retirement assets by 50%.

In the past, the major oppositions by Accountants and Advisors to the IPP were a lack of flexibility, assuming a requirement to fund the plan, and undue complexity. Unknown to many in these groups, IPP legislation has changed immensely. IPP funding rules are based on provincial legislation, and over the last decade, we have seen the majority of provinces relax the funding obligations for IPPs. 

For example, in 2020 Ontario passed Bill 213 that exempts Ontario IPPs for incorporated professionals from the provincial funding rules and other administrative requirements. Funding an IPP is no longer mandatory, administration is streamlined, and in retirement there no longer are locking-in requirements if the plan is terminated. Doctors should not despair. With proper planning, the pain of the tax changes outlined above can be greatly reduced with a shift in tax planning and the use of the IPP.

Founded in 1995, GBL is a leading provider of retirement, health, and cross-border solutions for business owners across Canada. With offices in Calgary and Toronto, we have served 6,000+ clients, have 3,000+ Financial/Investment Advisors in our network, actively manage 2,000+ IPPs and RCAs, and have created 1,000+ HBPs and 3,000+ FMVs. We’re known for our industry leading client service and administration, as well as our top-notch actuarial group. Contact us today at  [email protected] or 403.249.1820 and follow us to learn how we can help Build Your Future.