Many physicians who incorporated a Medicine Professional Corporation (“MPC”) – often at the behest of their accountant or financial planner – believe that their MPC is meant to be their pension plan for the post-medicine phase of their life. This blog article provides a cautionary tale to such professionals.
Anecdotally, within some quarters, there are those who argue that a ‘grand bargain’ was tacitly passed between the provincial governments (who control government medical plans) and the profession, and that this bargain was that the public payor would not increase fee for service compensation but as a concession, would allow physicians to incorporate a Canadian Controlled Private Corporation that benefits, at least on the first $500,000 of taxable income, from the much lower small business tax rate (currently 12.2% tax in Ontario in 2025).
Prior to giving physicians the right to incorporate, income earned by physicians personally was exposed to the highest tax brackets (over 50% in Ontario at the top bracket in 2025). The logic of this presumed grand bargain was as follows: we won’t keep increasing the fees you get to bill for medical services, but by interposing an MPC, that income will be taxed at a fraction of what you used to be taxed at, and if you don’t need to spend everything, your MPC can invest those retained earnings as a quasi pension plan.
Let’s Set The Record Straight!
There was never any such ‘grand bargain’. Doctors across Canada have been granted the right to incorporate over many decades and incorporation did not suddenly appear when public health systems began to experience financial difficulties. The arguments underpinning this presumed ‘grand bargain’ were heard in 2017 when the federal government introduced a white paper on the taxation of Canadian Controlled Private Corporations (“CCPC”) which led to tax changes such as the introduction of the tax on passive income. More recently, the grand bargain argument was resurrected when the federal government proposed to increase the inclusion rate on capital gains earned by a CCPC such as an MPC in 2024 from the current 50% to a proposed 66.6%. Had this draft legislation become law, it would have made using the MPC as a quasi pension plan even less tax effective than it already is.
On the surface, the intuition that if the MPC only faces a low corporate tax rate on active income earned from the Provincial payor, and then carefully invests the retained earnings corporately in certain products that don’t get taxed right away, seems to be sound. Unfortunately, our current tax laws militate against this type of approach as described below in greater detail. The truth is that if a physician really wants to build a highly tax-efficient pension plan for themselves, they ought to set up a registered pension plan instead. While there are many roads that lead to Rome, some like using the MPC as if it were a pension plan are fraught with many tax pitfalls.
The Pitfalls of using one’s MPC as if it were a pension plan
Because an MPC is a for-profit enterprise, it is constantly exposed to ongoing taxation on its earnings. The first layer of tax is the ‘active business’ income tax that occurs when the MPC receives taxable income from the provincial payor (e.g. OHIP in Ontario). Thus, in the best-case scenario, the first tax payable ranges between 12.2% and 26.5% (in Ontario, but similar across other provinces and territories). If the MPC has a corporate investment account and generates ‘passive income’ as well, the tax rate is significantly higher, namely over 50% in most jurisdictions (50.17% in Ontario in 2025). If we look to the MPC as providing a blend of active and passive corporate income, the average blended tax rate might be well over 30%.
Since 2018 and the introduction of the tax on passive income for CCPCs and thus for MPCs, while the MPC’s passive investments can safely generate passive income that does not exceed $50,000, once that threshold is crossed, the low active business tax discussed above (e.g. 12.2% in Ontario on the first $500,000 of active business income) progressively disappears. For every 1$ of such passive income (above the $50,000 limit), the MPC loses 5$ of its small business exemption of $500,000. Thus, if passive income earned by the MPC were $100,000, that means $50,000 is safe, and the other $50,000 must be multiplied by 5 to reduce the $500,000 small business limit to a mere $250,000. In other words, if the MPC had $400,000 of taxable active business income, the first $250,000 would still benefit from the 12.2% tax rate, but the next $150,000 would be taxed at 26.5%. We already know that the $100,000 of passive corporate income is also taxed at a flat 50.17%. We sometimes refer to this erosion of the small business limit as the passive income grind, or P.I.G.
If the physician opted to leave Canada to become a non-resident of the country for tax purposes, the value of the shares of the MPC, owned by the physician would now be subjected to the “departure tax”, a type of capital gains tax measuring the presumed value of the shares against the adjusted cost bases of said shares when the MPC was first established. Investments held inside the MPC’s corporate investment account would form part of that value that is now being taxed.
Similarly, if the physician were to pass away, for estate tax computational reasons, the same principle applies, since the physician is deemed to have sold his or her shares of the MPC at fair market value the day prior to death, and the Estate now has to report a taxable capital gain. Where the physician forgot to write a Corporate Will to avoid the probate of the shares of the MPC, provincial taxes may also (depending on the province) become due.
Finally, ignoring leaving the country or Planet Earth, when the MPC finally decides to pay the physician a dividend (the quasi-pension) on a regular basis to fund retirement years, these dividends are also taxable, but this time in the hands of the physician. All told we are looking at potentially 6 different ways that wealth earned by the Provincial payor ultimately gets subjected to some form of tax.
A Better Alternative: Use of an actual registered pension plan
Assuming the laudable goal of putting money aside for retirement in a tax-efficient manner, one obvious alternative to using the MPC as a quasi pension plan is to have the MPC set up an actual pension plan.
Contributions made by the MPC to the pension plan do not attract the active business tax since an offsetting expense/deduction is claimed when monies earned are contributed to the plan.
Passive growth on those contributions do not attach the 50%+ passive tax rate either, since the pension plan is tax-sheltered. In fact, any passive income in the pension plan does not cause any P.I.G. problems since those assets are not considered MPC assets, rather they are pension assets. Thus, the $500,000 small business deduction limit is preserved longer at the lower tax rate.
Should the physician become a non-resident of Canada, the assets in the pension fund are not taxed under the departure tax rules, since the pension assets are considered “exempt assets”. If the physician forgot to write a Corporate Will, the capital inside the pension fund does not get probated since the cash is paid directly to the beneficiaries (spouse or otherwise) thereby bypassing the Estate and the probate court process and fees.
Thus, the only time the physician has to pay tax is in retirement when in receipt of a pension benefit. Depending on the residency status of the retiree, the actual tax paid on said pension might be as low as a flat 15% thanks to international tax treaties that Canada has signed with about 100 countries around the world. Even if the physician retires in Canada, the tax rate might be lower if he or she has a spouse with a lower income, since pension-income splitting rules can provide some interesting tax arbitrage.
The choice is clear: continue using the MPC as if it were a pension plan and expose wealth to ongoing taxation OR use an actual pension plan and materially reduce the tax drag to set aside maximum dollars for retirement years.