ABOUT
This paper explores how Canadian physicians decide on their business structure—whether to operate as sole proprietorships, partnerships, or corporations—and investigates the tax implications of these choices. The decision to incorporate, which can provide tax advantages, is influenced by factors beyond just tax rates, including liability protection and administrative costs. By analyzing administrative data over a ten-year period, the study traces the incomes of physicians and their businesses following a reform that allowed incorporation, offering a long-term view of how tax policies shape income and business decisions. The paper places these decisions in the broader context of healthcare policy, where tax incentives are used as partial compensation for physicians. This approach raises questions about the cost-effectiveness and long-term viability of using tax breaks as a form of support within the healthcare sector. Business income, particularly when tied to incorporated entities, complicates individual income calculations, and this study provides insights into how this affects the overall measurement of income inequality.
EXPECTED OUTCOMES
Small businesses can choose from a range of organizational forms and these decisions are largely shaped by tax considerations. For example, small business corporations in Canada pay substantially lower rates of tax on active business income than many taxpayers pay on their personal income. The low tax rate on small corporations may encourage investment and business growth. On the other hand, corporations may afford shareholders the opportunity to defer taxes until later in life, and to avail themselves of additional tax avoidance opportunities not available to other taxpayers. The net effect of incorporation on equity and efficiency in the tax system is therefore unclear. In the past 20 years, incorporation has been on the rise by doctors and high-income physicians in Canada. This may reflect tax planning opportunities through corporations. This paper studies the causes and consequences of the trend towards incorporation among high-income professionals.
HOW IT RELATES TO THE STONE CENTRE’S MISSION
Since the early 1980s, tax incentives influencing corporate and personal taxation in the U.S. have shifted significantly, coinciding with a period of growing income inequality. Research highlights that the rise of pass-through businesses since the 1990s has been a key driver of this inequality, with tax incentives playing a major role. By using administrative data from tax records and investigating reforms that gave tax incentives for high-income professionals to shift their income, this study contributes to understanding the causes and consequences of income inequality in Canada.