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The Accounting Side of Medicine

UWO MD Business Interest Society February 10, 2012

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The Road to being a Physician

Fellowship

MD Resident

Practicing Physician

Medical Student

Medicine Professional Corporation

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WHEN TO THINK ABOUT TAXES

You should think about taxes all the time. Major life changes Birth; Marriage; New Job/Practice/Corporation; Moving; Investing; Wills; Inheritance; Gifts; Separation/Divorce; Death;
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Taxes as a Resident or Fellow

Generally employment income (some exceptions) Income tax, CPP, EI, other deductions withheld Receive net amount every pay period Receive a T4 every year File tax return before April 30th Calculate taxes owing Receive credit taxes withheld during year Difference is payable or refundable Deductible expenses generally minimal

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Tax Credit vs. Tax Deduction

Tax credit worth equivalent of deduction in lowest tax bracket = 20% Tax deduction worth amount of deduction x marginal tax rate (maximum 46%)
Usual Tax Credits to the Resident or Fellow Tuition, Education, Textbook Tax Credit Must apply credit against income taxes (cannot defer) Examination Fees (e.g. RCPSC) Medical Expenses & Donations Student Loan Interest Tax Credit

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Possible Tax Deductions to the Resident or Fellow

Automobile Expenses Cell phone (business use airtime) Malpractice (CMPA) Membership Fees Membership & Union (PAIRO) dues Moving Expenses Travel costs during interviews For Residency/Fellowship positions No For ultimate Practice site No Other Issues Moonlighting Self-employed Fellowships

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What is a Corporation?

Separate legal entity Limited liability BUT professionals not shielded from professional negligence claims Corporate roles Shareholders Directors Officers Employees

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Benefits of Incorporating - Overview

Income split Income smooth Tax deferral Dividends cheaper than salaries Other perks

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Income Split - Overview

Objective: shift income to low income family members. Maximum tax savings = 26% of the income shifted. Methods: Salary (employee role) Deductible expense. Do not need to be incorporated to pay a salaries to family members. Salary to family must be reasonable Dividend (shareholder role) Paid from after-tax corporate income

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Income Split Example of Savings with Spouse

Total Income $300,000 $400,000 $500,000

After-Tax Income Professional No Corporation Corporation $212,500 $269,500 $326,500 $195,500 $249,000 $302,500

Annual Tax Savings $17,000 $20,500 $24,000

Assumes doctor salary of $132,400, spouse salary of $24,000, maximum RRSP contributions and full income splitting of remaining after-tax corporate funds as dividends using 2012 tax rates.

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Income Split Example with Spouse + Adult Children

Total Income $300,000 $400,000 $500,000

Tax Savings Spouse $17,000 $20,500 $24,000

One Child $40,000 $28,000 $32,300 $35,700

Two Children $80,000 $36,500 $44,600 $48,000

Assumes doctor salary of $132,400, spouse salary of $24,000, maximum RRSP contributions and full income splitting of remaining after-tax corporate funds as dividends using 2012 tax rates.

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Income Smooth - Overview

Drawing a consistent personal cash flow from the corporation instead of random draws has several potential benefits: Controls spending Assists budgeting Easier to manage Taxes consistent Taxes minimized Saving for retirement, a leave of absence, or your childrens education

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Income Smooth When Earnings Low or Interrupted

Corporations allow shifting of personal income to periods where actual earnings may be lower Example: maternity leave or sabbatical - no income coming into the corporation but you can still draw dividends to create a personal income

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Tax Deferral - Overview

Small Business Deduction Small Business Deduction on up to $500K of income (after deducting expenses) Small Business Corporate Tax Rate only 15.5% Theory of Integration Investing the Tax Deferral

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Tax Deferral

Tax is not paid at the personal level until salary or dividends withdrawn from corporation Owner/manager can control timing of salary and dividend withdrawals Concept is similar to RRSP tax is deferred until withdrawal of cash into personal hands

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Tax Deferral

Corporate rates small business = 15.5% (up to $500K) big business = 26% Investment income = 46% Marginal personal rates $0K to $43K = 20 - 24% $43K to $85K = 31 - 39 % $85K to $132K = 43.4% over $132K = 46.4%

Maximum Tax Deferral = 46.4% - 15.5% = 30.9%

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Theory of Integration

Income from Corporation Corporation Tax Available for Dividend Personal Tax (maximum rate) Net After Tax Cash Income from Corporation Personal Tax (maximum rate) Net After Tax Cash Potential Tax Deferral (31%) Overall Tax Savings (3.4%)

$100,000 (15,500) 84,500 (27,500) $57,000 $100,000 (46,400) $53,600 $30,900 $3,400

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Investing the Tax Deferral - Options

Corporate investment options Stocks, mutual funds, fixed income (GICs / bonds) Life insurance with cash value Tax sheltering of investment income Reducing tax to estate Real Estate and equipment for practice Working capital Shares and loans of related corporations Investing in personal use assets (e.g. House, recreational properties, vehicles) inside a corporation generally not recommended

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Using Corporation as part of Retirement Plan

Use corporation as an income supplement after employment ends but before RIF conversion at age 71 Pay dividends for retirement income requirements beyond minimum RIF withdrawals and government pensions Continue to income split in retirement by taking dividends from corporation

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Other Perks

Non-taxable benefits Club dues Life insurance premiums Office-in-home Health plans Enhanced tax credits for Academic Physicians contributing to research activities Individual Pension Plan Higher contribution limits than RRSPs More expensive to administer and reduced flexibility Generally not recommended Lifetime Capital Gains Exemption ($750k tax free gains) No practical benefit to physicians since their practices have no goodwill value.

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Initial and Ongoing Costs of Incorporation

Incorporation costs (1st year only) Lawyer fees Accountant fees CPSO corporation registration (initial application and annual renewal) Additional tax and administrative complexity = higher costs Costs are tax deductible

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More Details about Incorporation

Naming conventions are restrictive (e.g. John Doe Medicine Professional Corporation) Restrictive share ownership children, spouse, parents, only Separate legal entity Corporation Minute Book Articles of Incorporation Bylaws Resolutions Ledgers Share subscriptions, Ledgers, Certificates Separate bank and investment accounts

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More Details about Incorporation Contd

Withdrawals from corporation must be formalized as salaries or dividends with T4s and T5s prepared to report them Must provide balance sheet and reconcile company accounts on an annual basis Income flows to corporation Expenses paid from corporation Must file corporate tax return Must still file personal returns, but simpler

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More Details about Incorporation Contd

Taxes paid in 3 ways: Corporate income tax instalments (monthly) Salary deductions and payroll remittances (monthly) Personal instalments on dividends (quarterly)

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Why would I not Incorporate?

Cost and additional complexity may outweigh benefits if: Nobody to income split with (e.g. single, dual high income); Net income under $250,000; AND Need all income personally (debt repayment, RRSP, TFSA, RESP)

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Why would I not incorporate - Example

Total Income $200,000 $250,000 $300,000 $400,000 $500,000

After-Tax Income Professional No Corporation Corporation $125,500 $154,000 $182,500 $239,400 $296,300 $123,400 $150,200 $177,000 $230,500 $284,000

Annual Tax Savings $ 2,100 $ 3,800 $ 5,500 $ 8,900 $12,300

Assumes doctor salary of $132,400 and paying all remaining funds as dividends using 2012 tax rates.

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Top Ten Financial Tips

1. Check out all your practice options and incentive opportunities. You are in demand and in a good position to negotiate. 2. Spend the time to properly educate yourself on OHIP and other billing procedures. Maximize the legal amount of billings to which you are entitled, including non-OHIP services. 3. Engage the services of an accountant and lawyer who knows your profession. Call them before making any major financial decisions or commitments. 4. Obtain appropriate insurance coverage disability, life, liability, overhead. 5. Systematically set aside for your tax payments. Always pay taxes when due.

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Top Ten Financial Tips

6. Pay down your personal debt to reasonable levels, then maximize your RRSP and TFSA contributions, then invest inside the corporation. 7. Do not invest in tax shelters or other risky investments. Your best investments are your RRSP, TFSA, and paying down personal debt. 8. Consider incorporating your practice and/or paying a lower income spouse a salary to save taxes. 9. Avoid the temptation to spend immediately on big-ticket items, such as an expensive vehicle or house. Save up significant down payments first. 10. Set your lifestyle at a level which reflects your income last year, not at what you anticipate you might make this year. This way, your spending won't "get ahead" of your income.

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How Can Collins Barrow Help You?

Professional income statement and personal tax return preparation for unincorporated physicians Comprehensive assistance with the entire incorporation process Ongoing corporate accounting and tax services Tax minimization and cash flow planning for you, your corporation and your family Advising on partnerships, professional corporations, associations and cost-sharing arrangements Retirement and Estate planning Ontario MD Resident basic personal tax return preparation at no charge

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Thank-you!

Brandon Gilbert, BMath, MAcc, CA Partner Collins Barrow Chartered Accountants 495 Richmond St. at Dufferin Ave, London (519) 679-8550 bdgilbert@collinsbarrow.com

www.cbhealthcaregroup.com

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Clarity Defined.

TM

This presentation is for information purposes only and includes tax information current to February 10, 2012. This presentation is not intended to substitute for obtaining accounting, tax, financial or legal advice from a qualified professional. We assume no liability or responsibility for any errors or omissions and users are cautioned this presentation may not be appropriate for their purposes.