#midwifemonday: Why Most Midwives in Canada won't need to incorporate

If I had to guess...maybe 10% might benefit from it and I'll explain who and why

I’ve said in many of my presentations to midwives across the country across various levels of experience that MOST midwives will likely not need to incorporate ever and maybe 10% of the midwife population will likely need incorporation. The 10% number is just a wild guess but let me break down my thoughts in general and why.

The purpose of incorporation for midwives as healthcare professionals

A quick reminder that midwives as healthcare professionals CAN incorporate but their professional liability follows them. Without getting into the legal jargon - all that means is while some types of businesses can incorporate to avoid the owner being sued and held personally liable - midwives are still personally liable for all the work they do on the job whether they have a corporation or not.

So what’s the purpose of a corporation? (Corp for short)

The main benefit of a corp for midwives is for “tax deferral”. Profits inside a corp get a better tax rate than most profits taken personally. In Ontario as an example you can earn up to $500,000 inside a qualified small business and be taxed only 12.2% on it. That means $500K of profit would be taxed for a total of $61,000. Contrast this with if you earned it personally and owed $229,128 personally! (This includes both tax and CPP - source - https://www.wealthsimple.com/en-ca/tool/tax-calculator/ontario)

This profit in the corp though isn’t yours to spend like you would be able to personally. The corp as a separate business or entity keeps that for “business purposes”. The main benefit comes from being able to use the money to reinvest in the business and grow it (ex. through investing in new equipment etc). The secondary benefit would be investing passively in stocks, bonds etc. You could use $500K-$61K = $439K to reinvest in your business which then helps it grow faster.

The key idea is you have “more” money to grow your business faster and eventually take out later on.

There is one main thing though - you actually need to leave the money in the corporation. If you take all the money out (ex. if you paid yourself a salary of $500,000) then you are paying all that tax personally and brings us back to the $229,128 of tax + CPP scenario.

In order to get the money out of the corporation you need to pay yourself a salary or dividends and then pay tax personally on it. The idea of how much to take out at what time and over what years is a lot of what the ongoing conversation with my midwifery clients is often about.

What do midwives use the corporation for?

They use it most often as a shelter to defer their profits and invest in stocks/bonds for future retirement. Midwifery has some ongoing expenses but nothing that a corporation in and of itself would benefit from.

As a result - the main benefit would be to shelter passive investments like stock/bond investments for the long term.

The thing is - there are other accounts that do the same thing.

Comparing the RRSP/FHSA to a Corporation.

The RRSP and FHSA function very much the same as a corp from the perspective of stock/bond investments. They serve as a deduction so you pay no tax and then only pay tax later when you take the money out (or in the case of the FHSA - no tax if used for an eligible home purchase).

I won’t go through the long drawn out math on this to compare the two - but just trust me that the deduction impact of the RRSP/FHSA leads to having a similar starting point in terms of dollars you are investing.

Additionally - the RRSP and FHSA allow for the same compounding effect of letting the investments grow over time.

The key point is this: If you already have an RRSP and FHSA - you should be trying to fill those up before thinking about using a corporation. This means you need to be saving well in excess of $35K for a corp to make sense. How much more in excess is hard to say but generally - I would say a minimum of $20K to make the costs for a corp worthwhile.

So - will there be come midwives that benefit from incorporating? Yes.

Will all of them? No - given the necessary savings amounts and other accounts available.

Aravind Sithamparapillai is an Investment Advisor with Aligned Capital Partners Inc. (“ACPI”). The opinions expressed are those of the author and not necessarily those of ACPI. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances. ACPI is a full-service investment dealer and a member of the Canadian Investor Protection Fund (“CIPF”) and the Canadian Investment Regulatory Organization (“CIRO”). Investment services are provided through ACPI or Ironwood Securities of Aligned Capital Partners Inc, an approved trade name of ACPI. Only investment-related products and services are offered through ACPI/ Ironwood Securities of Aligned Capital Partners Inc. and covered by the CIPF. Financial planning and insurance services are provided through Ironwood Wealth Management Group. Ironwood Wealth Management Group is an independent company separate and distinct from ACPI/ Ironwood Securities of Aligned Capital Partners Inc.