In short: Ordinary mutual fund trusts held inside a Medical Professional Corporation pay out interest, dividends and realized capital gains every year on a T3 slip, whether or not the physician wanted them, and those distributions are taxed at roughly 50% inside the corporation and count toward the $50,000 passive income threshold. ZAI Wealth Management explains the two costs and what incorporated physicians use instead: corporate-class funds, low-turnover equity portfolios and an Individual Pension Plan.
Annual distributions you didn't ask for
Most mutual funds are set up as trusts, and they must pass their interest, dividends and realized capital gains to investors every year. Even if your corporation never sells a unit, it receives a T3 slip and pays tax on those distributions.
Two costs for an incorporated physician
- High tax on investment income: passive income inside a private corporation is taxed at roughly 50%. Part of that is refunded when the corporation pays taxable dividends, but the money is tied up until then.
- The clawback: those distributions count toward the $50,000 passive income limit. Once your corporation passes it, the small business rate on your practice income starts to shrink, pushing part of it to the general rate of roughly 23% to 30% depending on the province.
What to do instead
The fix is about how investments are placed, not just which ones you pick:
- Corporate-class funds can rebalance internally with fewer taxable distributions.
- Low-turnover equity portfolios let more growth build up as unrealized gains, taxed only when you sell.
- Registered and exempt environments, such as an Individual Pension Plan, move growth out of the passive income calculation entirely.
Read more in our guide to avoiding the passive income clawback.
Run your own numbers with our Physician Tax Savings Calculator.
For illustration and general information only. Tax rules change and every situation is different, so speak with your advisor and accountant before acting on anything here.
Common questions
Are mutual funds a problem inside a medical corporation?
Ordinary mutual fund trusts are. They distribute interest, dividends and realized gains every year on a T3 slip, which is taxed at roughly 50% inside the corporation and counts toward the $50,000 passive income threshold. ZAI Wealth Management favours corporate-class funds, low-turnover equity portfolios and, where it fits, an Individual Pension Plan, so growth is deferred until the physician chooses to realize it.