Most Canadian doctors establish a corporation that receives the fees for their provision of medical services. This “medical corporation” then pays the doctor a salary. A typical financial plan for doctors in Canada usually involves establishing a second company as well – a holding company that holds and invests money. This structure has generally worked well for quite some time as earnings inside the holding company are taxed at the low corporate tax rate rather than a doctor’s personal tax rate.
However, a recent change to Canadian tax law increases the tax rate on a holding company’s passive investment income; this change hurts doctors in particular, who often hold large amounts of passive income in holding companies and will therefore now be subject to a higher tax rate. This tax rate hike is prompting many more Canadian doctors to consider moving to the US.
Questions arise about what to do with holding companies and medical corporations when Canadian doctors become US residents. Do they wind up their medical corporation? Do they amalgamate their medical corporation with their holding company? Should they even retain their holding company post-move? Once a doctor moves to the US, retaining funds in a Canadian holding company may not be the best course of action for cross-border tax reasons. It is important for Canadian doctors to understand the US tax rules surrounding these companies before they move so that they don’t become caught in a cross-border tax trap.
When doctors moving to the US analyze how to handle their Canadian corporations, they must also consider the application of departure tax.
Prior to moving south, a Canadian doctor may consider liquidating their Canadian corporations and creating a more tax-efficient structure in which to hold funds as a US tax resident.