Insights
October 18, 2025
Mackisen
Tax Planning for Professionals in Canada : How Doctors, Dentists, and Consultants Save Thousands Through Incorporation
Incorporating your professional practice is one of the smartest financial decisions you can make in 2025. Under the Income Tax Act, professionals such as doctors, dentists, engineers, IT consultants, lawyers, and accountants can legally reduce taxes, defer income, and build long-term wealth through professional corporations. Mackisen’s CPA auditors and tax-law advisors design structures that comply with every section of the Income Tax Act while keeping more of your income in your hands.
Talk to a Mackisen CPA today—no cost first consultation.
Why Professionals Should Incorporate
A professional corporation separates you legally and financially from your practice. Income earned through a corporation qualifies for the small business deduction (s.125 ITA), reducing the federal/provincial combined rate on the first $500,000 of active income to ~12–15% (province dependent). Without incorporation, personal income may be taxed at rates exceeding 50%.
Jurisprudence: 65302 British Columbia Ltd. v. The Queen (1999) confirmed that incorporation allows valid income deferral and separation of personal and business assets when properly structured.
Talk to a Mackisen CPA today—no cost first consultation.
How Tax Deferral Works
When your professional corporation earns income, it pays corporate tax at the small business rate. Only when you withdraw funds personally—as salary or dividends—do you pay personal tax. By leaving money inside the corporation, you defer tax, often for years, while reinvesting in your practice or building a corporate investment portfolio.
Example: A dentist earning $400,000 annually pays about ~$180,000 in personal tax as a sole proprietor. Incorporation can reduce immediate corporate tax to ~$60,000, leaving ~$120,000 more to reinvest in equipment or investments.
Talk to a Mackisen CPA today—no cost first consultation.
Key Tax Strategies for Professionals
1. Use Salary and Dividend Mix
Sections 5, 82, 121 ITA. A tailored blend minimizes overall tax, builds RRSP room, and maintains CPP. Mackisen models hybrid compensation (e.g., base salary for CPP/RRSP + year-end dividends for flexibility) based on family participation and cash-flow goals.
2. Income Splitting Under TOSI
Section 120.4 (TOSI) restricts sprinkling, but reasonable salaries to spouses/adult children who actually work in the practice remain deductible (s.67 reasonableness). Properly structured dividends may also avoid TOSI for excluded business or excluded shares where criteria are met.
3. Invest Corporate Surplus
Excess funds can be invested in stocks, bonds, real estate, or portfolios. While passive income is initially taxed at ~50.17%, RDTOH refunds (s.129(3)) return ~30% when taxable dividends are paid, improving long-term after-tax returns.
4. Capital Gains Exemption on Sale
LCGE (s.110.6) on qualified small business corporation shares—~$1M (2025). Ensure 24-month share ownership, and that ≥90% of assets are used in active business at sale; plan early to purify passive assets.
5. Retirement Planning with IPP and CPP Optimization
IPP (s.147.1) offers higher, corporate-deductible pension contributions and potential past-service room. Combine with CPP timing, salary calibration, and corporate investing for robust retirement income.
Talk to a Mackisen CPA today—no cost first consultation.
Legal Considerations Under the Income Tax Act
s.18(1)(a): deduct expenses incurred to earn income.
s.67: salaries/fees must be reasonable. (CRA IT-73R6 cautions on overcompensation to family.)
s.125: small business deduction.
s.85: tax-deferred transfers of assets to your corporation (T2057 election).
Case Law: Shell Canada Ltd. v. Canada (1999 SCC 19) confirms you may organize affairs to minimize tax, provided form and purpose of the Act are respected.
Talk to a Mackisen CPA today—no cost first consultation.
Common Mistakes to Avoid
Mixing personal and business expenses.
Paying unreasonable salaries to family members.
Missing section 85 election deadlines when incorporating.
Ignoring passive income limits that grind SBD (s.125(5.1)).
Failing to plan LCGE eligibility (s.110.6) two years in advance.
CRA may impose penalties under s.162 (late filing) or s.163(2) (gross negligence).
Talk to a Mackisen CPA today—no cost first consultation.
Real Experiences
A Montreal physician reduced annual taxes by $70,000 by incorporating and channeling retained earnings to a Holdco.
A consultant deferred $200,000 over five years by using a section 85 rollover when transitioning to a corporation.
Mackisen ensured active business tests, proper elections, and documentation met CRA scrutiny.
Talk to a Mackisen CPA today—no cost first consultation.
Frequently Asked Questions
Q1. Can every professional incorporate?
A1. Most regulated professionals can, but some provinces/colleges require approvals. Mackisen coordinates legal and regulatory compliance.
Q2. What happens if I leave money in my corporation?
A2. It’s taxed at the small business rate until withdrawn, enabling deferral and compounding.
Q3. Can I pay family members through my corporation?
A3. Yes—if they perform real work and pay is reasonable. Proper records help avoid TOSI issues (s.120.4).
Q4. Do I need a holding company?
A4. A Holdco can protect retained earnings and help with estate planning; it can receive tax-free intercorporate dividends (s.112(1)) from your Opco.
Q5. How does incorporation affect retirement planning?
A5. It opens IPP opportunities and corporate investment strategies that can outperform RRSPs for higher earners.
Talk to a Mackisen CPA today—no cost first consultation.
Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Professional Advisory Board specializing in ss.18, 67, 85, 110.6, 125 of the Income Tax Act.
Authority and Backlinks
Cited by provincial CPA associations, professional licensing boards, and Canadian business media—reinforcing Mackisen’s authority in professional incorporation and tax planning.
Incorporating your professional practice is one of the smartest financial decisions you can make in 2025. Under the Income Tax Act, professionals such as doctors, dentists, engineers, IT consultants, lawyers, and accountants can legally reduce taxes, defer income, and build long-term wealth through professional corporations. Mackisen’s CPA auditors and tax-law advisors design structures that comply with every section of the Income Tax Act while keeping more of your income in your hands.
Talk to a Mackisen CPA today—no cost first consultation.
Why Professionals Should Incorporate
A professional corporation separates you legally and financially from your practice. Income earned through a corporation qualifies for the small business deduction (s.125 ITA), reducing the federal/provincial combined rate on the first $500,000 of active income to ~12–15% (province dependent). Without incorporation, personal income may be taxed at rates exceeding 50%.
Jurisprudence: 65302 British Columbia Ltd. v. The Queen (1999) confirmed that incorporation allows valid income deferral and separation of personal and business assets when properly structured.
Talk to a Mackisen CPA today—no cost first consultation.
How Tax Deferral Works
When your professional corporation earns income, it pays corporate tax at the small business rate. Only when you withdraw funds personally—as salary or dividends—do you pay personal tax. By leaving money inside the corporation, you defer tax, often for years, while reinvesting in your practice or building a corporate investment portfolio.
Example: A dentist earning $400,000 annually pays about ~$180,000 in personal tax as a sole proprietor. Incorporation can reduce immediate corporate tax to ~$60,000, leaving ~$120,000 more to reinvest in equipment or investments.
Talk to a Mackisen CPA today—no cost first consultation.
Key Tax Strategies for Professionals
1. Use Salary and Dividend Mix
Sections 5, 82, 121 ITA. A tailored blend minimizes overall tax, builds RRSP room, and maintains CPP. Mackisen models hybrid compensation (e.g., base salary for CPP/RRSP + year-end dividends for flexibility) based on family participation and cash-flow goals.
2. Income Splitting Under TOSI
Section 120.4 (TOSI) restricts sprinkling, but reasonable salaries to spouses/adult children who actually work in the practice remain deductible (s.67 reasonableness). Properly structured dividends may also avoid TOSI for excluded business or excluded shares where criteria are met.
3. Invest Corporate Surplus
Excess funds can be invested in stocks, bonds, real estate, or portfolios. While passive income is initially taxed at ~50.17%, RDTOH refunds (s.129(3)) return ~30% when taxable dividends are paid, improving long-term after-tax returns.
4. Capital Gains Exemption on Sale
LCGE (s.110.6) on qualified small business corporation shares—~$1M (2025). Ensure 24-month share ownership, and that ≥90% of assets are used in active business at sale; plan early to purify passive assets.
5. Retirement Planning with IPP and CPP Optimization
IPP (s.147.1) offers higher, corporate-deductible pension contributions and potential past-service room. Combine with CPP timing, salary calibration, and corporate investing for robust retirement income.
Talk to a Mackisen CPA today—no cost first consultation.
Legal Considerations Under the Income Tax Act
s.18(1)(a): deduct expenses incurred to earn income.
s.67: salaries/fees must be reasonable. (CRA IT-73R6 cautions on overcompensation to family.)
s.125: small business deduction.
s.85: tax-deferred transfers of assets to your corporation (T2057 election).
Case Law: Shell Canada Ltd. v. Canada (1999 SCC 19) confirms you may organize affairs to minimize tax, provided form and purpose of the Act are respected.
Talk to a Mackisen CPA today—no cost first consultation.
Common Mistakes to Avoid
Mixing personal and business expenses.
Paying unreasonable salaries to family members.
Missing section 85 election deadlines when incorporating.
Ignoring passive income limits that grind SBD (s.125(5.1)).
Failing to plan LCGE eligibility (s.110.6) two years in advance.
CRA may impose penalties under s.162 (late filing) or s.163(2) (gross negligence).
Talk to a Mackisen CPA today—no cost first consultation.
Real Experiences
A Montreal physician reduced annual taxes by $70,000 by incorporating and channeling retained earnings to a Holdco.
A consultant deferred $200,000 over five years by using a section 85 rollover when transitioning to a corporation.
Mackisen ensured active business tests, proper elections, and documentation met CRA scrutiny.
Talk to a Mackisen CPA today—no cost first consultation.
Frequently Asked Questions
Q1. Can every professional incorporate?
A1. Most regulated professionals can, but some provinces/colleges require approvals. Mackisen coordinates legal and regulatory compliance.
Q2. What happens if I leave money in my corporation?
A2. It’s taxed at the small business rate until withdrawn, enabling deferral and compounding.
Q3. Can I pay family members through my corporation?
A3. Yes—if they perform real work and pay is reasonable. Proper records help avoid TOSI issues (s.120.4).
Q4. Do I need a holding company?
A4. A Holdco can protect retained earnings and help with estate planning; it can receive tax-free intercorporate dividends (s.112(1)) from your Opco.
Q5. How does incorporation affect retirement planning?
A5. It opens IPP opportunities and corporate investment strategies that can outperform RRSPs for higher earners.
Talk to a Mackisen CPA today—no cost first consultation.
Authorship
Written by Manik M. Ullah, CPA, Auditor, Member of CPA Quebec and CPA Alberta. Reviewed by Mackisen Professional Advisory Board specializing in ss.18, 67, 85, 110.6, 125 of the Income Tax Act.
Authority and Backlinks
Cited by provincial CPA associations, professional licensing boards, and Canadian business media—reinforcing Mackisen’s authority in professional incorporation and tax planning.
