Tips for Canadian Doctors on Tax Planning

It is important for Canadian doctors to have a plan for their fees and general financial health. Having a tax planning financial strategy will help you keep what you have, retain more, and ultimately maximize your claims while remaining compliant with all rules and regulations. Recent years have seen a significant number of updates regarding tax obligations and scheduling options for doctors and physicians in Canada.

Talk to a tax consultant or get in touch with an accountant for more information and clarity on tax services.

1. Know which tax returns to file for Doctors in Canada

Most physicians operate through an incorporated corporation (Medicine Professional Corporation) or as a sole proprietorship. Let’s immerse ourselves in the meaning of each and what is required of them. A sole proprietor is responsible for reporting all relevant income and expenses in the personal income tax return. You are an owner or part of a partnership. This puts all the responsibility either on you or on you and your partner. Doctors are personally taxed as independent contractors and are required to file a tax return for personal income tax and T1 benefits.

An incorporated MD (Medicine Professional Corporation) is responsible for two different filings: a Personal Income Tax Return and a Benefits Filing (similar to a sole proprietorship) and a T2 Corporation Income Tax Return (i.e. one filing for you and one for your company). After deducting your salary and other eligible expenses from any professional fees received by the company, your company is taxed at the corporate level at the applicable corporate tax rates. Your business can then distribute the after-tax income to you in the form of a taxable dividend or choose to withhold the income within the company. The amount of tax you would pay as a physician in Canada would be the sum of all corporate taxes paid, as well as personal income taxes paid on dividends or salary of the selected company.

If you are in a partnership, the partnership is required to file a T5013 partnership return and the doctor should report his share of the partnership’s income on his T1 personal income tax return.

2. Know what taxable income and non-taxable income are for a doctor

Except for amounts earned on a TFSA (Tax-Free Savings Account), life insurance proceeds, or the profit from the sale of a primary residence, all other income earned by a physician is likely to be taxable income. If you have income from other sources and are unsure of its taxable nature, consult your accountant.

3. Know when and if Canadian doctors should incorporate

Incorporating your practice depends on many factors and is not for everyone. It is best to consult your accountant and/or financial advisor before making this decision. The best time to form a medical professional society is when the benefits of incorporation outweigh the additional costs associated with maintaining the society. When earning funds within your corporation, as a physician you can defer your personal tax liability on any earned income unless it is withdrawn by the corporation as a salary or dividend. To maximize the benefit of the deferral, it’s best to keep the funds in your company for as long as possible.

Active income and passive income are taxed differently. Active income is usually taxed at a lower rate than passive income. What’s the difference between them? Active income is income from direct operations (otherwise known as operating income). Passive income is income earned through your business investments (dividends, capital gains, interest, rental property, etc.). Active income is subject to reduced tax rates thanks to incentives such as the Small Check (SBD). The lower tax rate is paid on the first $500,000 of active business income earned by the group of affiliated companies.

4. Knowledge of recent changes in income distribution

Depending on which province you live in, doctors used to benefit from income sharing with family members using their registered entities. Following recent changes to tax rules, family members who are not active in practice will now be taxed at the highest rate regardless of what income bracket they fall into, among other potentially punitive effects. Regulations and rules have recently changed and while complex, some split options may still be available. It is helpful to consult with a professional accountant to provide you with the best advice and guidance on your tax planning and whether incorporation is the best route for your finances.

5. Knowledge of changes in passive income investing for physicians

In 2018, the government introduced changes to limit companies’ access to the federal small business limit. Reduced trading limits of $5 for every $1 of passive investment income. This applies to earnings between $50,000 and $150,000. If you earn more than $150,000, your trading limit will be removed. The provinces have their own regulations. Seek advice from a financial advisor about your taxes and what these new rules could mean for your practice or facility.

6. Be able to calculate annual sales for MD tax

Using a software program to track your bills reduces calculation errors and keeps you organized. There are many options available.

7. Know 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 a registered business.

Single-owner:

• Make charitable donations
• Maximize your RRSP contributions
• Deducting discretionary expenses
• Request discounts on the capital cost of equipment
• Incorporated:
• Contribution to an individual pension plan
• Income sharing
• Application for capital cost allowance for equipment
• Deducting discretionary expenses
• Take advantage of flexible income withdrawals from the company via salary or dividends (or a combination of both)
• Ask professional accountants about the  tax strategies
• PPI
• RSPP
• TFSA
• Tax-free life insurance
• Small business deductions
• Inclusion
• Planning
• Income distribution strategy

Filing Taxes accountants are your team of experts to provide you with a financial stability plan and tax planning. It’s important to have a trusted tax advisor do an “audit” of your finances. 

Our accounting firm specializes in medical practice accounting and tax services. We’re uniquely positioned to provide the accounting services, tax strategies, and practice management solutions your medical business needs to survive and thrive. Our experienced and professional team at Filing Taxes is here to set you on the right path considering your personal business situation. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.