If you've ever considered working relief shifts as a pharmacist, you've probably heard colleagues mention that you should incorporate your practice. This is a very common structure in Canada for pharmacists who are doing relief or locum shifts and there's a good reason why.
First, it’s critical to understand if you even qualify for the benefits of a corporation. The CRA has recently been cracking down on “Personal services business” corporations. This is where a person structures themselves as a corporation, but acts like an employee. Pharmacists can fall into this category where you’re exclusively or primarily taking relief shifts for a single location. That’s not what corporations are meant for, and the CRA will strip your use of the small business deduction and general tax rate reductions, which are some of the most appetizing things about incorporating. Instead, to reap the benefits of this structure, you’d need to pass the CRA’s test. Generally, this means working with multiple unrelated payers (ie: not a single pharmacy or string of pharmacies owned by the same person), the ability to set your own hours and decline shifts, negotiate your rate of pay, hold your own liability insurance, and have a written agreement with the corporation (not “you” as an individual) as the contracting party.
What are the benefits of a pharmacist professional corporation? Like other types of corporations, this exists as a separate legal entity from you as an individual. This means, from a tax perspective, the corporation and you are treated as two separate individuals. Used strategically this can be a huge benefit at tax time.
For example, rather than your pay going directly to you and being taxed at your marginal tax rate (which can be quite high), the pay can go into your corporation first. Then you can pay yourself a salary and/or dividends based on your income needs and only be taxed on the income that you actually use as an individual. Any leftover income can stay inside the corporation to defer the taxes to a later year. The money earned by the corporation will still be taxed, but at a lower rate, allowing a larger amount of capital to be invested inside the corporation (though, it’s important to be mindful of the passive income rules for investing inside a corporation).
When taking the pay personally (ie: not using a corporate structure) there are also some interesting investment strategies that you can use. Because relief pay often doesn't have any taxes withheld, you can take a portion of the gross amount and invest it into an RRSP, which generates a tax deduction. This deduction would cancel out an equal amount of taxable income, allowing you to directly and immediately start growing your money in a tax-sheltered investment account without having to wait for your spring tax refund.
It’s important to know your RRSP contribution limit and stay within it before using this strategy. RRSP room is generated from your previous year’s earned income, so if this is your first year working, you may not have sufficient room. Additionally, if using a corporate structure and paying yourself dividends (instead of salary) it’s important to note that dividend income does not account as “earned income” and therefore earns no RRSP contribution room.
Relief pharmacists also need to be aware of the CRA’s instalment rules. Typically, if you owe $3,000 ($1,800 in Quebec) or more in taxes in the current year and one of the two prior years, the CRA is going to want quarterly installments. If you carry that shortfall, they’ll also charge you interest. It’s worth having a conversation with your accountant to see if this applies to you.
<2>What about professional liability?Incorporation does not limit professional liability. You are the professional and will always be personally liable for any negligence regardless of structure. While there are important liability protections inside a corporation, these would be non-professional liabilities. Things like premises, contracts, suppliers, employment claims, equipment leases, etc.
Should I incorporate if I am also an employee?
Maybe. If you are drawing a salary as a staff pharmacist, you are not eligible to funnel that income through a corporation instead. The corporation is for relief or other business-related income. But many pharmacists will have dual income sources. Some will work as staff while taking on relief shifts on the side. The relief portion of your income can absolutely go through a corporation but it only makes sense if there is enough income being earned. There are costs and complexities to having a corporation so if you're only doing a couple of hours of relief work per month, the cost of setting up the corporation would outweigh the benefits of this structure. And of course, if those relief shifts are exclusively at your “staff” pharmacy, be aware of the Personal Services Business rules stated above.
It is important to get good guidance from a licensed tax professional before moving ahead with incorporation. Based on your income needs, long-term goals, and the amount of relief shifts you're doing, all of these factors are taken into account in determining whether or not it's wise to incorporate. There's no exact percentage or exact dollar amount at which a corporation magically makes sense. More so it's an individualized point where the long-term benefits of using the corporation outweigh the cost of maintaining it
Once I incorporate, am I stuck using that structure forever?
One of the great things about the pharmacy career is that you have the flexibility to change the trajectory of your career in many different ways. With those changes changing your corporate structure may also make sense. You may start your career purely working relief shifts, in which case a corporation probably makes sense, but then after a few years you might decide to take on the stability and predictability of a staff job. Later on in your career you may even decide to buy into an independent pharmacy. The optimal structure in each of these scenarios is vastly different.
The good news is that you are never stuck in any one structure. Corporations can be opened, wound down, and new corporations can be opened later in life for entirely different purposes. However, it’s important to know the costs and implications of each of those transitions. Winding up can trigger deemed dividends on distributions above paid-up capital, or realization of accrued gains on corporate investments. You need to file a final T2 as well.
If you’re stepping away from self-employment but opt to keep your corporation dormant for future use, this still comes with ongoing costs you need to be aware of. You’ll still need the annual T2 (even if it’s nil), registry filings, minute book upkeep, and the annual college of pharmacy renewal. For these reasons, even though you’re not truly “stuck” in one structure, it's a good idea to have at least a high-level roadmap of what you want your career to look like so you can plan it out accordingly and avoid unnecessary and costly transitions.
Obviously life takes many twists and turns and nobody knows the exact trajectory that your life will take. If you can determine at least a rough outline of what you'd like to accomplish with your career, this can save you a lot of money and headaches at those transition points.
It is a good idea to review your structure anytime there is a significant change to your employment situation, ensuring that you’re always optimized for the way you earn your money. Small percentage points add up and compound over many years, so those slight changes can have a big impact years down the road.
- Salary is your foundation It pays your day to day bills, builds your RRSP limit, and contributes to CPP.
- Dividends from after-tax profits When your corporation keeps money inside, it pays a lower tax rate. When pushing this back to yourself as a dividend, you'll pay the difference (roughly)
- No single right answer The correct mix of salary and dividends depends on your needs and goals.
Related Pharmacist Resources: "Employee vs. Self-Employed:" A Guide for Canadian Relief Pharmacists. If the CRA decides you’re really an employee of the pharmacy, your corporation can end up paying more tax than you would have paid without one. This free eBook shows how the CRA makes that decision, and how to check where you stand. Avoiding Personal Services Business Classification Paying Yourself Salary vs. Dividends: Incorporated pharmacists can pay themselves is several ways. Here are there trade offs.