Corporation Question

[SadAndTired]

Hi all

Ex has incorporated under his name. He is a physician in his second year of practicing.

What would "Management Fees" entail for a sole practitioner? $80,000 worth

How about "Management salaries"? What are those? $162,000 worth

He earned almost $600,000 last year.

Finally, what would your thoughts be on the $100,000 he paid in "dividends" to his wife? Child support worthy? He paid that out of the corp's retained earnings.

Thanks.

[Desperate_Dad]

First of all if he is making that kind of money, he has to be a specialist - probably a radiologist, cardiologist, anesthesiologist. All doctors finish residency on June 30th. He likely took a 1 or 2 year fellowship to specialize. Under the BCA, there is a naming convention so his corporation name will be {His Name} then MPC (Medical Professional Corporation). Only doctor's can own voting shares of an MPC so his new wife has to own non-voting shares to pay her a dividend.


A Management Fee is similar to a salary but appears on Line 164 and Line 137 of his T1. You will notice the gross and net amounts are the same. It can be paid to him or his new wife through an income split.


A Management Salary is a corporate salary which would appear on Line 101 on his or his spouses T1. There will be CPP deducted but no EI. The employer CPP will likely be buried in the management salary on his income statement.


Dividends are paid out of retained earnings (accumulated after tax profits of the corporation less any prior dividends paid out). The amount he paid to his spouse is irrelevant as in lieu of that, you will gross up the after tax profit of the corporation (which would include the income split dividend payout already).

Make sure you get his T1, spouse T1, Corporate T2 Schedule 1 Profit of Loss for Tax Purposes, Schedule 100 Balance Sheet and Schedule 125 Income Statement. The profit on Schedule 1 will differ from the profit on Schedule 125 as one if for tax purposes and the other one is for accounting purposes.


Income Calculation


Management Fees expensed on income statement (plus into Line 137) + Management Salaries expensed on income statement (plug into Line 101) + After Tax profit * 18% grossup (plug into Line 120 and 180)


I've suggested the 18% grossup because its unlikely his accountant would allow his before tax profit to exceed the small business rate of 500,000. You start paying an exhorbitant corporate tax rate above 500,000. He will bonus down through a Management Salary or Management Fee. These figures may not be on the T1 because corporate owners can defer income (this means expense it in one year but not pay it out right away) A sign of deferral would be something like a management bonus payable or management fee payable on his balance sheet.


Last piece of advice - Don't let a lawyer calculate income. They are not accountants and haven't got the foggiest clue what they are doing or what they are talking about.


Let me know if you need further assistance.

[SadAndTired]

Thank you so much DD for sharing so much knowledge with me. I have sent you a PM. I hope you don't mind.