It is important for Canadian doctors to have a plan in place for their taxes and overall financial health. Having a financial strategy when doing your tax planning will help you maintain what you have, keeping more of it and ultimately maximizing your claims while remaining compliant with all rules and regulations. The past few years have seen a considerable amount of updates on tax obligations and planning opportunities for doctors and physicians in Canada. SRJ Chartered Professional Accountants are focused on the continuously evolving landscape of changes affecting Canadian doctors, their tax obligations and their overall financial well being. Here are some tips to help you maximize your practice’s earnings and ensure you have a good tax plan in place for the ever changing tax landscape.
1. Knowing what tax return(s) to file for Canadian Doctors
The majority of physicians operate either through an incorporated corporation (Medicine Professional Corporation), or as sole proprietors. Let’s delve into what each means and what is required from them.
A sole proprietor is responsible for reporting all relevant revenue and expenses as part of their personal income tax return. You are the owner or part of a partnership. This places all responsibilities of liability under you or you and your partner. Doctors are taxed personally as sole proprietors and they are required to file a T1 Personal Income Tax and Benefit Return.
An incorporated MD (Medicine Professional Corporation) is responsible for two different returns – the T1 Personal Income Tax and Benefit Return (similar to a sole proprietor) in addition to a T2 Corporation Income Tax Return (i.e., a return for you and one for your company). After deducting your salary and other allowable expenses against any professional fees earned by the corporation, your corporation is taxed at the corporate level according to applicable corporate tax rates. Your corporation may then distribute abt after-tax income to you as a taxable dividend or decide to retain the income within the corporation. The amount of tax you would pay as a Doctor in Canada would be the sum of any corporate taxes paid as well as any personal income taxes paid on either dividends or salary taken from the corporation.
If in a partnership, the partnership is required to file a T5013 Partnership Return and the doctor would need to report their portion of the partnership income on their T1 Personal Income Tax Return.
2. Knowing what taxable income and Non-Taxable income is for doctors
Other than amounts earned inside a TFSA (Tax-free savings account), proceeds from life insurance, or gain on the sale of a principal residence all other income earned by a doctor is likely taxable income. Please consult with your accountant if you have income from other sources and are unsure as to the taxable nature of it.
3. Knowing when and if Canadian doctors should incorporate
Incorporating your practice depends on many factors and isn’t for everyone. Before making this decision it is best to obtain a consultation from your accountant and/or financial advisor. The best time to set up a medicine professional corporation is when the advantages of incorporating outweigh the extra costs associated with maintaining a corporation. When you earn funds within your corporation, as a doctor you can defer your personal tax liability on any income earned to the extent that it is not withdrawn from the corporation as a salary or dividend. To maximize your deferral advantage, it is best to leave the funds in your corporation for as long as possible. Most corporate income is taxed at a lower rate, around 12.2% in Ontario vs business income earned directly to you is around 53%. As such, a deferral of approximately 40% is available for funds that you do not immediately need. Deferring the tax on these funds would increase income you have available to invest and earn investment income (or passive income) on. Please note, these general rates provided may change depending on your province of residence and factors including the amounts in question.
Active Income and Passive Income are taxed differently. Active income is usually taxed at a lower rate than passive income. What is the difference between the two? Active income is income earned from direct operations (otherwise known as operating income). Passive income is income earned through your corporate investments (dividends, capital gains, interest, rental real-estate, etc). Active income is subject to lower tax rates through incentives such as the small deduction business (SBD). A lower rate of tax is paid on the first $500,000 of active business income earned by an associated group of companies.
4. Knowing the recent changes to income splitting
Depending on your province of residence, doctors previously benefited from splitting income with family members through the use of their incorporated entities. After recent changes to the tax regulations, family members who are not active in the practice will now be taxed at the highest tax rate regardless of what bracket income they fall in, as well as other potentially punitive effects.
The regulations and rules have recently changed and although complex, some splitting opportunities may still be available. It is beneficial to consult with SRJ Chartered Professional Accountants to provide you with the best advice and guidance for your tax planning and whether incorporating is the best route for your finances.
5. Knowing the changes to Passive income investments for doctors
In 2018 the government brought in changes limiting a corporation’s access to the federal small business limit. Business limits have reduced by $5 for every $1 of passive investment income. This is applied to earning between $50,000 to $150,000. If you earn more then $150,000 your business limit is taken away. Provinces have their own regulations in place. Please seek the advice of a financial advisor regarding your taxes and what these new rules may mean to your practice or structure.
6. Knowing how to calculate annual receipts for MD taxes
Using a software program to keep on top of your receipts reduces calculation errors and keeps you organized. There are many options available such as Hubdoc or ReceiptBank. Clients of SRJ Chartered Professional Accountants receive a complimentary ReceiptBank account to help keep their records virtually.
7. Knowing how Canadian doctors best reduce taxable income
There are different ways to reduce your taxable income depending on whether you are a sole proprietor or are incorporated.
Sole Proprietor:
- Making charitable donations
- Maxing your RRSP contributions
- Deducting discretionary expenses
- Claiming capital cost allowances on equipment
Incorporated:
- Contributing to Individual Pension Plan
- Income splitting
- Claiming capital cost allowance on equipment
- Deducting discretionary expenses
- Taking advantage in flexible withdrawals of income from the corporation through salary or dividends (or a mix of both)
8. Ask Professional Accountants about the following tax strategies
- IPP
- RSP
- TFSA
- Tax-exempt life insurance
- Small business deductions
- Incorporating
- Estate planning
- Income splitting strategies
SRJ Chartered Professional Accountants is your team of experts providing you with a plan for financial stability and tax planning. It is important to have a trusted tax advisor do a ‘check up’ on your finances. For more information contact us at 647-725-2537 or send an email to info@srjca.com.
Frequently Asked Questions
What is effective tax planning?
Effective tax planning includes having a sound financial plan in place. Your tax planning should help you maintain what you have, keep more of your income and maximize your deductions, all while remaining compliant with rules and regulations. You should also be aware of the forms you require to be filed when it’s tax season. Having a financial advisor who works alongside you to assist and implement your financial plan is step number one. Speak to SRJ Chartered Professional Accountants on how they can assist you with your tax planning.
What is the best way to reduce your taxable income?
Depending on whether you’re a sole proprietor or incorporated there are different ways to reduce your taxable income.
If you’re a sole proprietor some ways to reduce your taxable income is by claiming all eligible deductions, maximizing your RRSP contributions and investing in flow-through investments.
If you are incorporated some ways to reduce your taxable income is by contributing to IIP, income splitting and claiming capital cost allowance on equipment.
How much tax do doctors pay in Canada?
The amount of taxes you need to pay is dependent on your specific situation. Are you a sole proprietor or incorporated? Are you in a partnership? There are many avenues that need to be evaluated to assess the taxes you owe. Speak to your financial advisor to obtain a full picture of taxes owed.
How can I maximize my tax benefit?
Some strategies that can be implemented to maximize your tax benefits are small business deductions, estate planning and income splitting strategies. For a longer list of strategies, please see section 8 above.