Tax planning for doctors in Canada often comes down to one decision: whether to run your practice through a medical professional corporation. For a physician earning a strong income, personal tax adds up quickly at the top marginal rates. A corporation adds a layer of corporate tax, at a lower rate, before any money reaches you personally.
That two-layer structure is powerful, but it is often misunderstood. Incorporation does not erase tax — it changes when tax is paid and at what rate. It also opens up choices around salary, dividends, deductions, and how surplus earnings are invested.
This guide covers how incorporated physicians are taxed, when incorporation makes sense, and how to pay yourself. It also looks at what's deductible, the rules on passive investment income and income splitting, and whether sales tax applies to what you bill. This guide is general education, not advice for your situation - always consult a tax professional.
How tax planning for doctors in Canada works
An incorporated physician runs their practice through a medical professional corporation. The corporation earns the practice income and pays corporate tax on what it keeps. The physician then pays personal tax only on the money they withdraw as salary or dividends.
That two-layer structure is the heart of physician tax planning. It does not make income tax disappear. What it can do is change when tax is paid and at what rate. Personal results vary by province and circumstances.
The small business deduction and the general corporate rate
A medical professional corporation is usually a Canadian-controlled private corporation (CCPC). A CCPC can claim the small business deduction (SBD) on its active business income.
Federally, the SBD applies a 9% rate to the first $500,000 of active business income each year. Income above that limit is taxed at the general federal rate of 15%.
These are federal rates only. Each province or territory adds its own corporate rate, and a few use a higher limit, so the combined rate depends on where you practice.
The $500,000 business limit is shared among associated corporations, and the federal limit can be reduced by the passive investment rules covered below. In Quebec, the reduced provincial rate also requires the corporation to pay for at least 5,500 hours of work a year, so a physician without staff may not qualify for it. The full limit is not automatically available to every corporation.
Why a corporation defers tax rather than eliminating it
When a physician leaves earnings inside the corporation, only corporate tax has been paid so far. The remaining after-tax money can stay invested until it is needed. Personal tax is triggered later, when the money is paid out.
This is tax deferral, not tax elimination. Over a career, the timing and the amount of each withdrawal are often where the real value lies.
When incorporation makes sense for a physician
Incorporation tends to help most when a physician earns more than they need to spend. Surplus income can then stay inside the corporation to grow. It also creates flexibility over how and when you pay yourself.
Incorporation carries costs too: legal set-up, separate corporate tax returns, and ongoing accounting. It also adds rules to follow. For a physician who spends everything they earn, the benefits are smaller.
Surplus income, career stage, and how long money can stay invested all affect whether incorporation is worthwhile.
Paying yourself: salary versus dividends
Once the corporation earns income, a physician can pay themselves with salary, dividends, or a mix of both. Neither option is automatically better. They simply behave differently.
How salary builds retirement savings room
Salary is a deductible expense to the corporation, and it counts as earned income for the person receiving it. Earned income builds registered retirement savings plan (RRSP) contribution room at 18% of the prior year's earned income, up to an annual dollar limit. For 2026, that limit is $33,810.
Salary also triggers Canada Pension Plan (CPP) contributions. The physician effectively pays both the employee and employer portions through the corporation. That is a real cost to weigh against the RRSP room and CPP pension it builds.
How dividends work from a medical corporation
Dividends are paid out of the corporation's after-tax profits, so they are not deductible to the corporation. They do not create RRSP room and do not require CPP contributions.
Dividends are taxed personally with the help of the dividend tax credit, which accounts for tax the corporation already paid. Non-eligible dividends generally come from income taxed at the small business rate. Eligible dividends generally come from income taxed at the general rate, and the two are taxed differently in the physician's hands.
What's deductible through a medical corporation
A corporation can deduct reasonable expenses incurred to earn business income. For a physician, several categories come up again and again.
Deductibility generally depends on keeping records and invoices, and on each expense being reasonable and genuinely tied to the practice. What qualifies depends on the facts and documentation.
Continuing medical education (CME)
Courses, conferences, and journals that maintain or improve the skills you already use in your practice are generally deductible. Costs to obtain a new qualification are not.
Meals at these events are usually limited to 50% deductibility. A personal holiday added to a conference is not deductible.
Licensing, college, and membership fees
Fees you must pay to keep the right to practice are generally deductible. That includes provincial college dues, licensing fees, and specialty or association memberships.
Canadian Medical Protective Association (CMPA) dues
Canadian Medical Protective Association (CMPA) dues are generally deductible for the period the practice is run through the corporation. If you incorporate partway through the year, the amount is prorated, and any rebate reduces the deductible amount.
Home office expenses
Where part of your home is used to earn corporate income, a reasonable portion of home costs may be deductible. The allocation must be reasonable and well documented. Eligibility depends on the facts, documentation, and corporate structure.
Vehicle expenses
Only the business-use portion of vehicle costs is deductible, so business and personal kilometres need to be tracked separately. Capital cost claims on a passenger vehicle are also subject to a cost cap.
Health spending account
A corporation can offer a health spending account, a private health services plan (PHSP), to cover medical and dental costs for employees. That includes the physician acting as an employee.
To qualify, the plan has to be properly structured. Substantially all payouts must go to expenses that would be eligible for the medical expense tax credit.
Passive investment income and the $50,000 threshold
Many physicians invest surplus earnings inside the corporation. The income those investments generate is treated differently from practice income, and above a threshold it can reduce the small business deduction.
Adjusted aggregate investment income (AAII)
The relevant measure for determining the threshold is adjusted aggregate investment income (AAII). Broadly, this is passive income such as interest, rents, and a portion of capital gains earned inside the corporation.
Once the prior year's AAII is above $50,000, the federal $500,000 small business deduction (SMB) limit starts to fall. Ontario doesn't apply this reduction to its provincial limit. It drops by $5 for every $1 of AAII over the threshold, and is fully phased out at $150,000 of AAII. The $50,000 threshold is also shared among associated corporations, as is the SMB, as the Canada Revenue Agency (CRA) explains in its small business deduction rules.
Refundable dividend tax on hand (RDTOH)
Investment income earned inside a corporation is taxed at a high rate up front, but part of that tax is refundable. It is tracked in a notional account called refundable dividend tax on hand (RDTOH). The refund is paid to the corporation when it pays taxable dividends to shareholders.
The idea is integration: investment income shouldn't be meaningfully better off inside a corporation than in personal hands. Since 2019, the account is split into eligible and non-eligible pools, which affects the type of dividend that triggers the refund. Not all corporate investment tax paid is refundable.
Income splitting and the tax on split income (TOSI)
Paying dividends to a spouse or adult children used to be a common way to spread income across lower tax brackets. The tax on split income (TOSI) rules, extended to adults for the 2018 tax year, largely curtailed that.
When TOSI applies, the split income is taxed at the top combined federal and provincial marginal rate. That rate can reach roughly 50% to 55%, depending on the province. The CRA sets out the income sprinkling rules in detail.
There are exclusions. Examples include a family member who works in the business on a regular, continuous, and substantial basis. Another is a spouse's income once the physician is 65 or older.
One exclusion that often does not help physicians is the excluded shares rule, which generally does not apply to professional corporations. As a result, income splitting through a medical corporation is far more limited than it once was. Its availability depends on the facts and the applicable exclusions.
Do physicians charge sales tax on medical services
For goods and services tax and harmonized sales tax (GST/HST) purposes, most insured and medically necessary physician services are exempt. A physician does not charge GST/HST on those services. Just as important, the physician generally cannot claim input tax credits (ITCs) to recover GST/HST paid on expenses tied to those exempt services.
Not every service a physician provides is exempt. Whether a service is taxable turns on its purpose. Services that are not for protecting, maintaining, or restoring health are generally taxable.
Examples include independent medical examinations for insurers, reports for legal proceedings, employment or driver's licence medicals, and cosmetic procedures done for non-medical reasons.
This distinction drives the registration question. The $30,000 small supplier threshold for GST/HST registration is measured against taxable revenues only, and exempt medical billings do not count.
So a physician can bill large amounts for insured services and still have no registration obligation. The CRA explains registration and the small supplier threshold for GST/HST.
A physician whose taxable services exceed $30,000 in a single calendar quarter, or over four consecutive quarters, does need to register. Once registered, the physician charges GST/HST on the taxable services and can claim ITCs on the portion of expenses tied to them. Whether services are exempt or taxable depends on the mix of work performed.
Common tax planning mistakes to avoid
A few missteps come up often in tax planning for doctors in Canada:
Treating deferral as permanent savings, and forgetting the personal tax still owing when money is withdrawn.
Letting passive investment income drift past $50,000 without realizing it can grind down the small business deduction.
Assuming dividends to family members are still an easy way to split income after the TOSI rules.
Believing large medical billings force GST/HST registration, when insured services are exempt and don't count toward the threshold.
Claiming home office or vehicle costs without documentation or a reasonable business-use split.
Paying only dividends and overlooking the RRSP room and CPP pension that salary can build.