Should American Citizen Physicians in Canada Incorporate?

Are you a U.S. physician considering a move to Canada?

Hundreds of American physicians have made the move to Canada in recent years, thanks in part to the government’s efforts to recruit these much-needed professionals.

And while practicing medicine in Canada and the U.S. do have many similarities, one of the unique aspects to being a physician in Canada has to do with the actual employment/self-employment arrangement.

In the United States, the majority of physicians are employees of the organization where they practice. However, in Canada, physicians are generally considered self-employed, and are effectively contractors of the organizations where they work. And one the biggest opportunities in Canada is for self-employed physicians is to incorporate their practice.

Can an American Physician Incorporate a Medical Practice in Canada?

There is a widely believed misconception that American citizens cannot incorporate in Canada. While there is no law barring U.S. citizens from opening a Canadian private corporation, there are U.S. tax complexities that prevent Americans from realizing all the tax advantages that incorporation has to offer.

However, that does not necessarily mean incorporating should be dismissed altogether.

How Do American Physicians Pay Taxes if They Do Not Incorporate?

If a physician in Canada does not incorporate, they generally are taxed as sole proprietors. This means that all income is taxed at their marginal, or progressive, tax rates for federal and provincial purposes.

For example, taxable income in excess of $265,545 is taxed at 53.50% for BC residents (2026 figure). Sole proprietorships are still able to deduct business expenses such as professional licensing, insurance, home office expenses, and other professional fees. Contrary to popular belief, a corporation is not needed to deduct business expenses to reduce taxable income.

For American physicians operating as a sole proprietorship in Canada, they would report their income on Schedule C of their US tax return (Form 1040), and on the T2125 of their Canadian tax return (T1). If the income was physically earned in Canada, then Canada would have primary taxing rights, and either the foreign earned income exclusion or foreign tax credit would be available on the U.S. tax return, to eliminate double taxation.

Do American Physicians in Canada Have to Pay Self-Employment Tax?

One of the biggest expenses for self-employed Americans is the 15.3% self-employment (SE) tax.

However, because self-employed individuals working in Canada pay into the Canada Pension Plan (CPP), the Canada-U.S. Totalization Agreement excludes Americans for paying the SE tax if those same earnings are subject to CPP. The CPP tax rate is lower than the SE tax rate, and is capped at a much lower level of income. ($85,000 for 2026)

What are the Benefits of Incorporating in Canada?

Tax Deferral

One of the most attractive features of incorporating as a physician is access to low corporate tax rates on active business income. The first $500,000 of active business income earned by a Canadian-controlled private corporation (CCPC) generally qualifies for the Small Business Deduction (SBD), resulting in corporate tax rates of approximately 9% to 12%, depending on the province.

The difference in tax rates is stark compared to progressive tax rates for individuals. A corporation allows a physician to leave funds inside the company and initially pay tax at a much lower rate.

It is important to understand that this does not always create permanent tax savings. If profits are eventually distributed to the physician as dividends or salary, tax at an individual level will generally be payable. However, by delaying that second layer of tax, the physician can keep more money invested within the corporation, and working for them inside the corporation for years or even decades.

For example, a physician earning $400,000 annually who only needs $200,000 for lifestyle expenses could leave the remaining profits inside the corporation, where they are taxed at a significantly lower rate than if the income had been earned personally. This creates a larger pool of capital available for investment and long-term wealth accumulation.

Building Wealth Inside the Corporation

Beyond tax deferral, another significant advantage of incorporation is the ability to build wealth using corporate after-tax dollars.

When profits are retained within the corporation rather than distributed personally, a physician can invest those funds and allow them to grow over time. Because the initial corporate tax rate on active business income can be substantially lower than personal tax rates, more capital may be available for investment from the outset.

Over the course of a career, this can result in a sizeable investment portfolio being accumulated inside the corporation. In many cases, the corporation effectively becomes a separate source of retirement assets that can later be accessed through a combination of salary and dividend withdrawals as retirement income needs arise.

American physicians should be cautious when selecting investments within a Canadian corporation. Certain Canadian investment products, including many Canadian mutual funds and Canadian exchange-traded funds (ETFs), may be classified as Passive Foreign Investment Companies (PFICs) under U.S. tax rules. PFIC reporting can be extremely complex and may result in punitive U.S. tax treatment if not managed properly. As a result, investment decisions within a corporate structure should be coordinated with both Canadian and U.S. tax considerations in mind.

Caution: The Small Business Deduction Grind

The Small Business Deduction (SBD) generally applies to the first $500,000 of active business income. However, this limit can be reduced if the corporation, together with any associated corporations, earns more than $50,000 of passive investment income in a year.

This is commonly referred to as the SBD grind. For every dollar of passive investment income above $50,000, the SBD reduces by $5. For example, if a corporation earns $75,000 in passive income in a given year, the SBD will be reduced by $125,000 [($75,000 – $50,000) x 5] the following year. This will mean only the first $375,000 of active business income will be eligible for the low corporate tax rates of 9-12%, depending on the province.  

Once a corporation exceeds the available Small Business Deduction limit, active business income above that threshold is generally taxed at rates ranging from 23-30%, depending on the province. While still lower than the top marginal individual tax rates, the tax deferral benefit becomes less significant.

For physicians building substantial investment portfolios inside their corporations, investment income and corporate structure should be monitored carefully to avoid inadvertently reducing access to the lower corporate tax rates.

Legal Liability Protection

Incorporation can also provide a degree of legal protection by separating business assets from personal assets.

It is important to note that a professional corporation does not generally shield a physician from personal liability arising from professional negligence or malpractice. However, a corporation may provide protection against certain business-related liabilities and contractual obligations. It can also make it easier to separate personal investments from funds retained within the medical practice.

Flexibility for Future Income Splitting and Business Planning

Incorporation can create planning opportunities that may become valuable later in life, even if those opportunities are limited initially.

For example, a physician may choose to include a spouse as a separate, non-controlling shareholder through a different class of shares. While the Tax on Split Income (TOSI) rules can significantly restrict income-splitting opportunities during a physician's working years, those restrictions generally no longer apply once the physician reaches age 65.

As a result, dividend distributions to a spouse in retirement may create opportunities to reduce overall family taxes. Unlike the U.S., which allows for joint filings between spouses, in Canada, each spouse has a requirement to file their own tax return and pay taxes on their respective income at their marginal tax rates.

In addition, a corporation can provide greater flexibility for succession planning, ownership transitions, and potential future business transactions.

What are the U.S. tax implications of incorporating?

While incorporation can offer significant tax deferral opportunities in Canada, the analysis becomes more complicated for U.S. citizens.

A Canadian corporation controlled by a U.S. citizen is generally considered a Controlled Foreign Corporation (CFC) for U.S. tax purposes. This triggers a variety of additional U.S. filing and reporting obligations. And without considering special elections and exemptions, the U.S. tax rules may mean that the income earned by the Canadian corporation is taxed to the shareholder personally, at U.S. tax rates of up to 37%.

Form 5471 Filing Requirements

One of the most significant compliance requirements is Form 5471, filed with the IRS.

This form is often described as one of the most complex international information returns in the U.S. tax system. Failure to file can result in substantial IRS penalties, even where no additional U.S. tax is ultimately payable. As a result, incorporation will generally increase annual tax compliance costs for American physicians.

The Section 962 Election

One of the most important planning tools available to U.S. citizens who control Canadian corporations is the Section 962 election.

At a high level, this election allows certain income earned within a CFC to be taxed using U.S. corporate tax rates rather than individual tax rates, while also allowing additional deductions and credits.

Starting in 2026, revisions to the to Global Intangible Low Taxed Income (GILTI) rules, now called the Net CFC Tested Income (NCTI), which business earnings within a Canadian corporation generally fall into, changed how CFC income is taxed. A Section 250 tax deduction against NCTI of 50% of income may be taken, along with a foreign tax credit of 90% of the foreign taxes (or Canadian corporate taxes) paid.

In practice, they may mean that there may be a few additional percentage points of U.S. taxes owed on earnings retained within a Canadian corporation that were subject to the low Canadian corporate tax rates using the Small Business Deduction. However, the combined Canadian and U.S. tax burden can still be dramatically lower than earning the same income as a sole proprietor and paying tax at personal rates exceeding 50%.

In many situations, American physicians may find themselves paying a combined tax rate in the vicinity of 17-19% on retained corporate earnings. The exact result depends on numerous factors including income levels, province of residence, foreign tax credits, and compensation planning between salary and dividends.

But for high-earning physicians who are able to save a significant amount of their income, paying a few extra percentage points in U.S. taxes on their earnings may still be advantageous over operating as a sole proprietor.

High Tax Exception

Where Canadian corporate tax on a particular stream of income approaches or exceeds approximately 19% (90% of the U.S. corporate tax rate of 21%), the U.S. high-tax exception may eliminate the need for additional U.S. tax altogether.

This becomes particularly relevant for active business income earned above the $500,000 Small Business Deduction threshold and for many forms of passive investment income earned within the corporation.

As a result, the U.S. tax challenges associated with incorporation are often less severe than many advisors initially assume.

Net Investment Income Tax Considerations

One area that deserves particular attention is the U.S. Net Investment Income Tax (NIIT). NIIT is an additional 3.8% Medicare surtax that certain high-earning Americans are subject to on investment income, including dividends from Canadian corporations.

The recent IRS v. Bruyea litigation resulted in the consensus that the IRS will not allow for a foreign tax credit against NIIT, to account for the Canadian taxes paid on investment earnings. Consequently, American physicians may face an additional layer of U.S. tax when extracting funds from the corporation as dividends.

Physicians generally have the flexibility to draw a combination of salary and dividends from their corporation, and the impact of NIIT should be considered when determining the best course of action when withdrawing corporate dollars.

Canadian Unlimited Liability Companies (ULCs)

In some situations, a Canadian Unlimited Liability Company (ULC) may be considered as an alternative structure for American physicians in Canada.

From a Canadian perspective, a ULC generally qualifies for treatment similar to a Canadian corporation. From a U.S. perspective, it may be treated as a flow-through entity, allowing income to flow directly onto the shareholder's U.S. tax return.

This can create opportunities to utilize foreign tax credits more effectively and reduce some of the complexities associated with Controlled Foreign Corporation rules.

However, ULCs introduce their own technical considerations and are generally utilized only after detailed analysis of both the Canadian and U.S. tax consequences.

Other Consideration: Professional Costs

Finally, physicians should recognize that incorporation involves costs beyond the tax implications themselves.

In addition to legal fees required to establish the corporation, annual compliance expenses are typically much higher than for a sole proprietorship. These costs may include:

• Corporate bookkeeping and accounting
• Annual T2 corporate income tax returns
• Corporate legal maintenance
• Form 5471 reporting
• Cross-border tax planning and compliance

For a physician generating significant excess cash flow that can remain invested within the corporation, these costs may be justified. For a physician who must withdraw virtually all earnings each year to support lifestyle expenses, the benefits of incorporation may be significantly reduced.

Conclusion

Many American physicians are told that incorporation should be avoided entirely because of U.S. tax rules. While there is some truth to the fact that U.S. citizens do not enjoy all of the same benefits as their Canadian-only counterparts, this guidance is often overly simplistic.

For physicians who consistently earn more than they spend and wish to build wealth inside a corporate structure, incorporation can still provide meaningful tax deferral opportunities despite the additional U.S. reporting requirements. The availability of foreign tax credits, high-tax exceptions, and Section 962 elections means that the U.S. tax impact is often far less punitive than many assume.

In many cases, the question is not whether an American physician can incorporate in Canada, but whether they are able to retain enough earnings within the corporation for the tax deferral benefits to outweigh the additional compliance costs and U.S. tax complexities.

Ultimately, the decision should not be based solely on citizenship status. Instead, American physicians should evaluate their expected earnings, spending needs, investment goals, and long-term retirement plans before determining whether incorporation is the right fit for their situation.

At Plena Wealth, we specialize in comprehensive cross-border wealth management for U.S. citizens living in Canada. Our team works with physicians and other professionals to coordinate Canadian and U.S. tax planning, investment management, retirement planning, and corporate structuring strategies.

Plena Wealth Advisors help with all aspects of your financial management: 

• Cross-border wealth, tax, retirement and investment planning
• Management of Canadian and U.S. retirement accounts
• Analysis on retirement benefits including pension plan and government assisted plans (CPP, OAS, Social Security)
• Tax reporting
• Estate planning and risk management strategies

Your Plena Wealth Advisory Team is here to help navigate these complexities with you. We would be happy to set up a call to discuss your specific situation to ensure you are making the right decisions.

Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.