In short: In this ZAI Wealth Management example, a British Columbia surgeon earning $480,000 through her Medical Professional Corporation, with a $2.4 million portfolio producing $114,000 of passive income, loses $320,000 of her $500,000 small business limit ($64,000 over the $50,000 threshold, times five) and pays roughly $48,000 more tax a year because $300,000 of practice income is taxed at 27% instead of 11%. Restructuring the portfolio brings passive income back under $50,000 and restores the full limit.
The situation
Illustrative example. "Dr. A" is a hypothetical physician created to show how the rules work. This is not a real client.
Dr. A is a 46-year-old orthopaedic surgeon in British Columbia. Her MPC earns about $480,000 a year of active practice income. After 15 years of leaving surplus in the corporation, she has a $2.4 million corporate portfolio, mostly bonds and high-dividend stocks.
Last year the portfolio produced $114,000 of passive investment income.
The math
- Passive income over the threshold: $114,000 − $50,000 = $64,000
- Reduction to the small business limit: $64,000 × 5 = $320,000
- Remaining small business limit: $500,000 − $320,000 = $180,000
- Practice income now taxed at the general rate: $480,000 − $180,000 = $300,000
- Extra tax at BC rates: $300,000 × (27% − 11%) = about $48,000 a year
How it can be restructured
- Tax-efficient investing: shift toward investments that grow as unrealized capital gains, such as corporate-class funds or low-turnover equity ETFs, instead of interest and dividends taxed every year.
- An Individual Pension Plan: move to a salary-based pay mix so an IPP can be set up. Contributions, including past-service contributions, move money out of the taxable corporate portfolio into a pension where growth isn't counted as passive income.
- A corporately owned exempt policy: growth inside an exempt policy isn't counted as passive income, and part of the death benefit can be paid out tax-free through the capital dividend account.
The result
If passive income comes back under $50,000, the full $500,000 small business limit returns. In this example that's worth roughly $48,000 a year in corporate tax at BC rates, before the costs of the strategies themselves.
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.
How much can the passive income clawback actually cost a physician?
In ZAI Wealth Management's worked example, a British Columbia surgeon with $114,000 of passive income loses $320,000 of her $500,000 small business limit and pays about $48,000 more tax a year, because $300,000 of practice income is taxed at 27% instead of 11%. Bringing passive income back under $50,000 restores the full limit and the $48,000.