Income Smoothing Using A Corporation To Reduce Tax

Learn about how you can use a Canadian Controlled Private Corporation (CCPC), such as a Medical Professional Corporation (MPC) to smooth your income and reduce taxes. Income smoothing is one of the major benefits of using a corporation for tax planning. It can help you plan for when you have gaps in income. If you have major purchases coming up, an income-smoothing plan can help you keep more of your money. The better you can regulate your income and personal cash flow using a corporation, the more money you have to spend now or invest for the future.

Cash Flow Is Like A River

When you earn income as a professional, you must channel that money to grow your business and fund your lifestyle. Unlike a regular paycheck, business income usually fluctuates from month to month and year to year. Like the water level of a river. This results in surplus cash flow sometimes, and not enough at others.

That fluctuating cash flow hazard is accentuated by our progressive personal tax system. As you earn more money, the percentage of personal income that you lose to tax jumps quickly as you move up tax brackets. It can escalate to over 50% of income earned. If you simply took all of your actively earned professional income directly as personal income, then it is taxed in the year earned.

Excess tax from a good year is not balanced by lower income years.

small business tax

In bumper years, your cash flow river would over-run its banks and much would be lost to taxes. In lean years, you would pay less tax. However, the income previously lost to tax would have already soaked into the ground and been absorbed by our governments – never to be recovered. Gee, that made our governments sound kind of like money-parched soil. Totally unintentional.

Life Cycle Income Smoothing

This ebb and flow of income, with excess loss during good years, can hit businesses that have cyclically good and bad times. Some high-income professionals (like doctors and dentists) appear to have a fairly steady business income stream year to year. With a broader view, however, it does fluctuate wildly over our career spans.

We earn very little income and/or have to manage debt for the first 10-15 years while we train. We must pay that debt back while establishing a practice. Then, we experience a huge income increase in our peak earning years. This is followed by little, or no income, as we age and need to scale back or retire. Without benefits or EI, many self-employed professionals and business owners also have temporary income gaps along the way. We have kids and other illnesses, just like everyone else.

Dams To Regulate Income & Smooth Taxes

Everyone faces these types of changes in earning income throughout their lives. Smoothing that income out over tax years is important. For most Canadians, RRSPs and other pension arrangements smooth out that life-cycle cash flow. Tax is paid on the income as it flows out of the RRSP or pension. These tax-deferred retirement accounts function like a dam where income can build in the reservoir and then be released in a controlled fashion later. However, with high-income professionals, the level of fluctuation is much larger, overflowing those accounts. We need a bigger dam. That is where a corporation comes in.

Canadian professional retirement

Smooth Income For Temporary Income Gaps

In addition to a bigger dam for retirement planning, a corporation can help smooth the temporary gaps along the way. These are bound to occur. Even with a career or business that has a stable demand. For example, while young, you may have parental leaves. In middle age, you may need to take a leave of absence to care for a family member or deal with a mid-life crisis. As you age further, you may have your own physical issues. Mental health problems can strike unexpectedly at any age. Here is a generic example to illustrate the difference that income smoothing can make to your tax bill and therefore how much cash you have left.

corporation tax savings

Smoothing Income for Consumption

In addition to the big income changes over a career, your consumption also changes from year to year. The lifecycle hypothesis suggests that individuals will attempt to maintain a steady state of consumption, even though their income fluctuates. There are two main ways to do that. Debt and saving.

Debt enables you to consume future income now and is helpful in early life to smooth the ride. However, that has some practical problems if you continue to use it throughout your life. Once you have enough income, you must repay the debt, plus save some money for future consumption. There are many ways to save your income and earn interest.

A Corporation For Tax-Deferred Saving

Employees are taxed on their income as they earn it and can only save what is left over. That even applies to some tax-sheltered accounts, like a TFSA or RESP. A self-employed professional or business owner has the opportunity to save partially-taxed income using a corporation. Your corporation pays a low business tax rate upfront. You pay the rest of the tax personally when you take the money out to spend it. With some planning, there are multiple strategies to move large sums of money out of the corporation at a lower overall tax rate.

How to Plan Corporate Payments For Upcoming Consumption

To smooth income and reduce taxes, I look at my planned major expenditures (eg. a house, vehicle, or carbon-fiber mountain bike) over the next three to five years. I can then average my annual income draw for the spending required instead of one massive withdrawal that gets taxed to the hilt. It is important for you to understand this when planning with your accountant. If you don’t tell them your plans, they can’t help you. If you say nothing, the default advice is to just take as little out of the corporation now. With no regard for the next few years. Income smoothing to plan for a big splurge in consumption is illustrated below.

income smoothing major purchase

I did the tax calculations for the above scenario using calculations from my CCPC Income Dispenser Calculator. You enter a personal spending target, basic investing plan, and income. It spits out a plan to efficiently move money out of the corporation to efficiently achieve that after taxes. There are a lot of other possible inputs that you will learn about later in this series of posts. The bottom line for the above scenario is that you saved an extra $24K to invest via your corporation. Just by using some basic planning for upcoming consumption. If you didn’t plan far enough in advance, you might be able to use a “salvage” strategy

A Corporation is a Large Dam

Smooth Your Income

You can use a corporation to control how your business income flows into your hands. That allows you to pool money there in high-income years and release more in low-income years. Smoothly release that personal income to minimize taxes by staying in lower personal tax brackets. If your consumption is stable, but your income fluctuates, this prevents excessive loss to taxes that you can’t make up for.

Plan Your Consumption

It is tempting to just keep as much as possible in the corporation and only release the minimum needed in the current year. That is common advice. However, if you have a planned upcoming splurge, smooth the income required to pay for it over several years if you can. That means less overall tax than a massive payment in the splurge-year. Humans want to smooth consumption, but smoothing income helps you to ultimately leave more in your corporation. That also means more capital to invest for consumption in the retirement portion of your life cycle.

income smoothing corporation

You must learn how the dam works.

A corporation allows for more control in the short term and a larger reservoir of money in the long term compared to the average Canadian beaver dam. However, there are also a number of rules in the tax code to prevent corporation owners from having too much of a tax-deferral advantage. That makes for a very complicated structure and many levers to pull to regulate the flow of money and taxes. Both within and outside of the corporation. Even a dam can break if there is too much water in the reservoir. Similarly, a corporation can become extremely inefficient if the cash flow is poorly managed.

You should have an accountant to safely operate the levers. However, you must also understand how a corporation works to supervise them. They can regulate the flow if they don’t know your plans. Plus, some just follow rules of thumb and may need a nudge to keep your corporation efficient. The next few posts will cover what else you need to know to make sure that you get the most out of your accountant and corporation.


  1. Hi Loonie Doctor,

    One thing I was hoping you could look into – or advise if you already have…

    I’ve heard more than once that you can income split with a spouse without attribution penalty after the age of 65. Fair enough…

    The other ‘rumor’ I’ve heard is that if you professional corp is NOT drawing making any business related income – you can income split with your spouse. Saw this once on twitter by a CFA, and maybe one other time. Can’t really find any corroborating info…

    This might give someone the ability to shut-down their practice for 1-2 years, and split income for perhaps at least 1 calendar year with a spouse?

    Have you heard this? Or is this a pipe dream?

    1. Hey Nick,

      I have heard rumblings of that too at various times. I looked into it and my understanding is that even if your professional corporation transitions to a holdco, that the source of the money matters and TOSI rules would still apply. I have asked a couple of accountants who told me the same thing. So, I don’t think you can do it. If anyone finds otherwise and a reliable to source to back it with, then I would love for them to post it here for me to investigate.


  2. As always, thank you for this helpful post. I may have missed something that was mentioned previously, but would you be able to clarify how the $15K Corp tax refund is triggered in year 3 under no income plan in the example you have written? Thanks very much.

    1. Hey John,
      Excellent question. In that 3rd year, with the higher salary expense to the corporation it generates a non-capital business income loss. That could be carried back up to three years and applied against income. So, applying that against the previous couple of year (where corp business income tax was paid) generates a refund from those taxes previously paid. Another example of how that could happen would be if my corp income dropped to say $50K for a parental leave year and I continued to pay my usual salary to live on. I would imagine if your business generated losses every year, it would raise eyebrows, but once in a while to smooth income should not.

  3. Hi Mark

    Thanks so much for all you do helping hard-working physicians and other self-employed people keep their fair share.

    I have a few questions. My understanding is, that if you withdraw (take a salary or dividend) in the same tax bracket in which you contribute (leave money in the corporation), that there are essentially no tax advantages to incorporation. Why? Because doubling a halved amount (take a salary and invest personally) three times is equivalent to halving an amount doubled three times (invest in corp, then take a payment later).

    So I thought of a few examples and questions which I’m having a bit of trouble wrapping my head around and would be so grateful if you would help me understand

    1) We pay 12%, upto 18% corporate income tax. This obviously gets negated when we pay ourselves a salary as that income is balanced with an expense. However, if we don’t withdraw all of our corporation, and the corporation therefore incurs no expense, does this corporate income tax become a loss on whatever money we don’t withdraw in our lifetime?

    2) What about people that will have passive income streams later in life such that they won’t be in a lower tax bracket? Is there any advantage to incorporation here

    3) If someone is in a relatively advantaged bracket (ie early career person, parental leave, sabbatical, time off) compared to their future earnings, does it make sense to be paid personally rather than professionally in those years?

    1. Hey Kev,

      Some great questions in there. Corporations are tax-deferral. So, if taking money out in roughly the same bracket as deferred in, there is little advantage from that aspect. The big advantage is if you can defer from a high current to a lower future bracket. Your questions hit straight at that issue.

      1) If paying salary, there is no corporate tax or tax deferral. That salary is taxed as personal and the net corp income on the salary is zero (so no corp tax). If corp income comes in, is taxed at 12%, then eventually the rest of the tax is paid when the other 88% is paid out as dividends (and taxed personally). If the same bracket, then the total personal dividend tax plus 12% corp tax is usually a bit higher than if you just got paid salary. The advantage is that you have years to invest and grow that 88% if you don’t need all of the money now. The tax liability grows with the investment growth. However, if you can take it out at a lower future tax rate, then you have reduced the personal tax part of the equation.

      Another way that a corporation can really take advantage of tax-deferral is if the extra capital that you have now (from only paying part of the tax) is used to grow more capital gains. They compound more because the capital gains aren’t taxed until realized (also tax deferral), and flow out of a corporation relatively efficiently in the future.

      2) The issue of having more income later in life is how tax deferral can be a disadvantage. So, yes. If you have a low income now and a high income later, using a corporation to defer tax to later doesn’t help. It could even be worse. If I am in a 40% tax bracket now and defer to pay 54% tax later, that sucks. For most people for whom incorporation makes sense, their current tax bracket is high or the highest. That way, the odds are that your tax bracket during extraction will be lower or at least almost the same. People have this concern with RRSPs too (100% tax deferral). However, the difference is that RRSP investment growth is tax-sheltered and corp investment growth is taxable. So, the tax-sheltering gives RRSP users a lot of buffer to come out ahead – even if they jump tax brackets later in life.

      3) You hit the nail on the head. If you are making little income early on. Or unable to save much of it in the corporation because you are using everything you make to repay debt, fund parental leaves, grow your business, catch up on your tax-sheltered accounts, and catch up on life. Then, incorporation doesn’t make sense – unless you can use it for the other advantages like dividend-splitting (hard to do now) or liability purposes (doesn’t help with professional corporations). I incorporated right away because I could dividend split, but I didn’t save anything in my corp until 5 years into practice!

      Another exception that I would consider is if taking parental leaves and sabbaticals, the corporation could be useful to smooth income in the short-term. For example, if I make $300K this year and take next year off – it would be better to be incorporated and draw $150K this year and $150K next year using a corporation.

      Hope that is helpful.

      1. Thanks Mark! I guess as a follow-up question, to be certain, if you are cashing out in years where the corporation makes no money, that 12% paid to corporate tax upfront is essentially a loss and needs to be made up for by a reduced personal income tax bracket?

        That makes putting money into your corporation beyond what you can take out while still working less attractive, doesn’t it?

        For example, let’s assume the traditional situation where someone passes and leaves their corporate shares to their children – SPECIFICALLY with the money still in the corp at time of death, the children may have have been farther ahead if that money had been taken as personal income, invested and handed to them?

        Kind of a Pandora’s box, I know

        1. Hey Kev,

          The 12% corp tax isn’t a loss. You would pay out the remainder as a non-eligible dividend. That dividend comes with a dividend tax credit that reduces the personal tax to account for the 12% corp tax paid. It isn’t perfect, but only a 0.5% inefficiency in Ontario for example.
          You would usually want to drain a corp over time rather than leave it all in there to be taxed at the highest rates at death.
          It is complex, but if a high income during your working years and excess money to invest beyond a TFSA/RRSP, it works really well as an extra partially taxed-deferred investment strategy.

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