In short: A Canadian Medical Professional Corporation cannot reliably pay "tax-free" eligible dividends: eligible dividends require a General Rate Income Pool (GRIP) balance, which most MPCs taxed only at the small business rate do not have, and paying eligible dividends without GRIP triggers a 20% penalty tax on the excess. ZAI Wealth Management explains where the idea comes from, why building a dividend portfolio to create GRIP pushes passive income over $50,000, and the hidden cost of a dividends-only plan: no RRSP room, no CPP, no IPP eligibility and no child care deduction.
Where the idea comes from
Because of the dividend tax credit, someone with no other income can receive a fair amount of eligible dividends and pay little or no personal tax. That's where the "tax-free dividend" idea comes from. For most physicians it doesn't apply cleanly.
GRIP and eligible dividends
A corporation can only pay eligible dividends if it has a balance in its General Rate Income Pool (GRIP). An MPC builds GRIP in two ways:
- Practice income above the small business limit, which was taxed at the general rate.
- Eligible dividends it receives from Canadian public companies in its own portfolio.
An MPC that earns only small-business-rate income usually has little or no GRIP, so its dividends are non-eligible, with a smaller credit. Paying an eligible dividend without enough GRIP triggers a 20% penalty tax on the excess (Part III.1), unless it's corrected by election.
The passive income backfire
Dividends your corporation receives from public stocks count toward the $50,000 passive income limit. Building a large dividend portfolio inside the MPC to create GRIP can erode your small business rate.
The hidden cost of a dividends-only plan
- No RRSP room and no IPP: dividends aren't earned income, so they don't build RRSP room and can't support an Individual Pension Plan.
- Child care deductions: these are limited by earned income, which dividends don't count toward.
- No CPP pension: dividends don't build CPP.
A balanced mix of salary and dividends usually beats either extreme. See salary vs. dividends.
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
Can a doctor take tax-free dividends from their medical corporation?
Not reliably. Eligible dividends require a General Rate Income Pool (GRIP) balance, which most Medical Professional Corporations taxed only at the small business rate do not have; paying eligible dividends without GRIP triggers a 20% penalty tax. Building a dividend-paying portfolio to create GRIP usually pushes passive income over the $50,000 clawback threshold. ZAI Wealth Management treats the tax-free dividend idea as a sales pitch, not a strategy.
Can a medical corporation deduct child care expenses?
No. Child care is claimed personally by the lower-income spouse, up to $8,000 per child under 7, $5,000 per child aged 7 to 16 and $11,000 per child eligible for the disability tax credit, capped at two-thirds of that spouse's earned income. Dividends are not earned income, so a physician paid only in dividends may be able to deduct nothing. ZAI Wealth Management's fix is enough T4 salary to create earned income.