Julie: Good night, everyone. Welcome to this Federal Tax Changes Affecting Physicians in 2017 webinar from MD Management. My name is Julie Gauthier. I’m a Wealth Lead at MD Management, also a Financial Planner, and I will be your host for tonight. Joining me tonight, Marty Clement, CPA, CA, at MNP, and Nick Korhonen, CPA, CA, as well at MNP. Thank you, gentlemen, for being there with us.
About MD—who we are and what we do. We are owned by the Canadian Medical Association and we have a single mandate: help physicians achieve their financial well-being. In order to execute that mandate, we work in the best interests of clients, so our Advisors work on salary and not commission, and they provide objective advice that is in the client’s best interests. We want to deliver value to you, physicians, and stay focused on your needs. Over and above investment management, we also offer a broad holistic financial planning review through our Advisors, insurance review as well, we can help you with estate and trust planning. Banking and borrowing is also part of our service offer and of course, last but not least, medical practice incorporation guidance, which is going to be our focus tonight during the presentation.
If, during the presentation, you have any questions, we encourage you to put them in the chat box, question and answer, at the bottom right of your screen and we’ll take the questions at the end of the seminar.
So, from MNP, I’ll transfer the speech to Marty so you can talk to us a little bit more about your firm.
Marty: Great. Well, thanks very much, Julie. It’s a real privilege to be here. And as demonstrated by the map, MNP maintains offices coast to coast, so from Vancouver Island all the way to Nova Scotia. And we’ve got offices in both urban and rural areas. So, MNP is a full-service accounting firm. We’re national in scope but we really pride ourselves on being local in focus. And a really large part of our business or practice at MNP is working with professionals and physicians. And in fact, we work with about 7,600 physicians in Canada, so we’re involved with many different aspects of the healthcare sector. It’s great to be here. And what I’m going to do now is I’ll turn it over to my colleague, Nick Korhonen, who will kick it off tonight.
Nick: Thanks, Marty.
Julie: The menu for today is going to be tax changes affecting physicians. Budget 2017: was it relevant? We will ask ourselves the question, and review a little bit more on the budget from 2016. And also talk about a topic which is often neglected, but raises a lot of questions: it’s the GST and HST implications with your physician work.
So, Budget 2017: was it relevant?
Nick: Thanks, Julie. The 2017 federal budget was tabled back in March and there was significant uncertainty surrounding this budget, as many changes were anticipated. People thought we might see changes to the small business deduction, in addition to the changes last year, changes to income splitting, and changes with respect to capital gains. Fortunately, in the end these changes didn’t materialize. And Budget 2017 was actually a relatively quiet budget. We didn’t see any changes to personal or corporate tax rates. There are no changes to the small business deduction, income splitting, or the taxation of capital gains.
But what was the most interesting or potentially concerning about the budget in 2017 was the announcement that the government is currently reviewing certain areas with respect to tax planning using private corporations.
Julie: Yes, it’s what is not said in the budget that is the most interesting.
Nick: Exactly. Buried deep in the budget on, I think, page 400-and-something, there was a comment that the government’s currently reviewing three specific items. Firstly, they’re looking at sprinkling income. And what this means is they’re reviewing the mechanism by which high-income individuals distribute income to low-income family members in order to reduce their tax liability. Secondly, they’re having a look at the use of private corporations holding passive investment portfolios. Passive investment portfolios: this includes things like stock, bonds, real estate, other passive investments. And specifically, what the government is concerned with is the fact that corporations are getting beneficial tax rates on their business income and, instead of reinvesting those savings into the business, are investing them in these passive investments.
Julie: Yes, because the government wants the industry and the economy to run and this money to get back into the economic cycle.
Nick: Exact. So, from a policy perspective, they’re not necessarily satisfied with the current treatment. And then, the last thing they’re looking at is capital gains planning. Currently, there are strategies that exist which allow shareholders to extract funds from their corporations at capital gains rates of tax as opposed to dividend or salary rates. And these rates are about half of what you would otherwise pay, so for example, in Ontario, you can get tax savings of up to 27%, so obviously, Finance isn’t very happy with that result and they’re reviewing that.
Now, what’s important with these changes is Finance didn’t actually release any specific details about exactly what mechanisms they’re looking at, timing or what we can expect. What they did say is that we’ll see a policy paper in the next few months, which is going to provide us with more detail about the specific sections that they’re looking to change and what their policy responses are going to be with respect to these items.
Julie: Exactly. On the upcoming changes, the potential changes, we ask that you stay tuned. Either your tax specialist or your MD Advisor can help you stay aware of what is coming up. We will definitely, at MD, communicate with our clients to tell them what’s coming up when it’s released. But in the meantime, it’s status quo with your financial plan, we don’t need to change anything specifically.
Nick: Exactly. That’s my advice to my clients right now, is for the time being we have no idea what this is going to look like, how it’s going to materialize or even if it is going to materialize. So, for the time being, maintain the status quo, take advantage of the options that exist today, and if there are changes in the future, we can adjust strategy to adapt to those changes at that point in time.
Julie: Well then, let’s talk a little bit about Budget 2016, which contains much more material in terms of changes for our clients.
Nick: Yes, absolutely. Budget 2016 was anything but a quiet budget, I would say, especially with respect to the medical community. As everyone knows, there were several changes which impacted the medical community specifically and what we’re going to focus on tonight is the changes with respect to the small business deduction for physicians practicing in group structures.
As a starting point, if I’m looking at these changes, we just wanted to address briefly the legislative process that went into it. These rules were introduced in March 2016, but there was intensive lobbying by the medical community, including the Canadian Medical Association—
Julie: Of course, yes.
Nick: —and several of the provincial groups were involved in that lobbying effort as well. As a result, we didn’t actually see the legislation pass until December 2016. So now, we’re starting to see the impact of that legislation.
Julie: Exactly. The CMA has estimated that the new legislation would impact 10,000 to 15,000 physicians. It’s still to be revealed because, as you said, the legislation passed a little bit later in the year, so the impact is now starting to kick in.
Nick: Exactly. What’s important is even though the legislation passed in December, it’s still effective for year-end starting after March 22, 2016. So, it’s possible that you’ve already had a year-end that has been subject to these new rules, or you’re coming up on a year-end where you’re going to have to deal with this.
Julie: Totally. Any policy to consider?
Nick: Yes. Later on in the presentation, we’ll be discussing some potential alternatives that could help get the small business reduction back. But before we look at that, I think it’s important to consider the policy behind some of these changes. The Liberals have restated in several statements that the policy for the small business deduction is that you get one small business deduction for one business. And that’s a key point, because it’ll change depending on everybody’s structure. So, physicians who are looking to restructure need to ask themselves are they in fact several businesses who are collaborating together, or are they one business with several members of that one business? And that will drive the restructuring that’s available to the physician if and when they do decide to restructure.
Julie: Yes. We have to consider why the group’s structure was put together before trying to change anything or review anything in that same group.
Nick: Exactly, exactly.
julie: Let’s have a look a little bit at Quebec, because they were very good at adding another layer of complexity into the budget measures this year.
Nick: Yes, so Quebec actually beat the feds to this one, and they implemented changes with respect to the provincial small business deduction in their 2015 [provincial] budget. The 2015 budget in Quebec proposed to make changes where a corporation would only get the small business deduction if one of two conditions was met. The first being that the corporation has more than three full-time employees, the second being that the corporation operates in a primary or manufacturing sector. Any corporation that didn’t meet these tests would have no small business deduction at the provincial level. Now, obviously, there was some concern about that and some clarification was required, so the 2016 provincial budget modified the three-employee test and changed it to a number of hours. What it says now is that a corporation needs to have employees who are working 5,500 hours per year in order to get the small business deduction, and if they have employees who are working between 5,000 and 5,500, there’s a transitional rule that allows them to claim a partial small business deduction at the provincial level.
Now, the important thing to note is that these rules for Quebec are only applicable for the provincial small business deduction. So, even if you don’t meet this requirement for the provincial small business deduction, it’s still possible that you can get the federal deduction and it’s important to navigate both sets of rules.
Julie: Exactly. It can mean more complexity for our financial planner, because depending on which province you are in and what rules apply to you, you can have multiple rates to apply to your taxation and your corp. And just a remark around the 5,500 hours. It actually corresponds, plus or minus, to three full-time employees, but it was adjusted mostly to adapt to the seasonal businesses that we have all around the country anyway.
Nick: Exactly. And so, a couple key clarifications that we just wanted to bring up, because we get a lot of these questions from our clients and I know MD has been getting a lot of these questions as well. The clients have been asking us: “Well, with these changes, does it still make sense to incorporate?” And really, the answer usually is yes. And the reasons are as follows. At this point, there haven’t been any changes to income splitting for professionals. Income splitting remains a really powerful tool that you can use to manage your tax liability as a professional, taking advantage of adult children, spouse, parents, other members who are entitled to be shareholders of that corporation.
Julie: And people that you would take care of anyway. You would pass along some money to your older kids to help them for school, or to your parents because they’re older and they need some support. Income splitting makes sense when you would anyway help those people.
Nick: Exactly. So, there’s still significant benefits to be had there. The other point I wanted to make is that even in the absence of a small business deduction, so if you lose the small business deduction, corporate tax rates on business income are significantly lower than personal tax rates across Canada. And we’ll see that in a couple of slides, but really what this means is that there’s still a significant advantage to earning income through a corporation versus paying high-rate personal tax on that same income.
Julie: Yes. Before we move on to the examples, I would like to remind people: if you do have any questions, feel free to post them in the chat room, in the question and answer, and we’ll get to them at the end of the webinar with pleasure.
We have a couple of examples to show the difference between the rates in the small business deduction.
Nick: Exactly. As a starting point, we just wanted to revisit what the small business deduction is. What the small business deduction is at the federal level is that the first $500,000 of corporate income earned in Canada is subject to a lower rate of tax. Depending what province you’re in, the combined rate is between 10% and 18.5% across Canada. Now, as I noted earlier, the top personal marginal rate in most provinces is around 50%, which means there’s a pretty significant advantage to having that small business deduction. And so, this—
Julie: And we have a table. We like numbers.
Nick: Exactly. We like numbers as accountants. This slide helps to demonstrate what that potential saving is in each province and territory across Canada. You can see it shows the small business rate of tax at the corporate level compared to high-rate personal tax if that income had been earned personally. And in most provinces, you’re between 30% and 40% that you can defer your tax by leaving money behind in your corporation that’s been earned.
The next slide shows the general corporate rates that are applicate if you no longer get the small business deduction compared to the existing small business deduction rates of tax. You can see that the general rate of tax in most provinces is quite a bit higher than the small business rate. In Ontario for example, we’re 11.5% higher. B.C. is 13% higher. And we go as high as 17.5% higher if we get into Nova Scotia. There is a significant increase in the corporate taxes that are applicate if you lose your small business deduction, but you can see that those rates are all still significantly lower than that 50% personal rate that we’re seeing in many provinces. So, even in the absence of the small business deduction, you’ve got significant savings at the corporate rate.
Julie: Exactly. Deferring income is still a valid option, even if you lose your small business deduction. Let’s see what it looks like with an example, with real numbers.
Nick: Perfect. So, what does this all mean, then? If we combine the corporate and the personal side, we have to look at what the implications are to the small business deduction. This slide shows the corporate side of the change. The first column that you see there shows what the implication was under the old system where you had access to the small business deduction. If we earn $300,000 of income in the corporation, you pay corporate taxes of about $45,000, leaving you with $255,000, which can either be distributed to the shareholders or could be invested within the corporation. Under the new rules however, like we said, you’re paying a higher general rate of corporate tax. So, on that same $300,000, you would pay about $79,500 in tax, which only leaves you with $220,500 to distribute or to reinvest. At this example, it’s about $35,000 of lost tax deferral as a result of losing the small business deduction.
But what gets really interesting is when we go to the next slide. Under the old system, you had $255,000 that could be distributed, and you pay about a 45% tax rate, using Ontario numbers anyway, which is about $115,000 in tax. So, your after-tax personal cash that you can use to spend is about $140,000. Now, if you look under the new rule where you’ve lost that small business deduction, you see that the personal tax rate is actually significantly lower than it was under the old system. So, you pay a lower level of personal tax as a result of paying more corporate tax earlier. The result is that you have personal cash of about $134,000, so a difference of about $6,000. Right now in Ontario, that difference is 1.9% and the tax theory is that those numbers should technically be the same.
Julie: Exactly. That’s the integration principle in tax.
Nick: Exactly, exactly.
Julie: We would like for them to be really the same, but $6,000 is not that bad.
Nick: Exactly. So, 1.9% is relatively small and what we see is every year, as provinces make small tweaks and changes and the federal government makes tweaks and changes, that number is always in flux and it always hovers around zero. In theory, the key point to take home from this is that if you’re not saving money in your corporation, if you’re distributing money out of your corporation every year, you should be indifferent as to whether or not you get the small business deduction, because the after-tax cash available to you personally should theoretically be the same under both options.
Julie: Exactly. We see an example here around the impact depending on how much you want to retain in your medical corp.
Nick: Exactly. The example we just looked at assumed that you were saving $300,000 in your corporation and then distributing that money. And we showed that the real cost is that you’re prepaying some corporate tax for the benefit of a reduced personal tax down the road. The amount of that prepayment, what’s known as a deferral, is dependent upon how much you save in your corporation every year. At $300,000, we see that $35,000 number that we already looked at. But as your corporate savings decline on a year-to-year basis, you’ll see that that lost deferral actually decreases significantly, to a point where if you’re not saving in the corporation, you really don’t have a lost deferral and therefore, you’re not impacted by the new rules.
Julie: Of course, yes. And we’re actually having a question around lower savings: Would it be better not to be incorporated and save that into an RSP rather than losing that deferral and going over? That question is a really good one and I would encourage you in that case to review that with your financial planner, accordingly with your tax advisor, in order to see in your situation and especially in your province, is it better to go with a remuneration in salary without being incorporated or what looks like a salary when you’re not incorporated, or a dividend remuneration into your corp. Because exactly when you save less, losing the small business deduction has some impact over the long run.
Nick: Exactly, exactly. And I think an important thing there is the corporate deferral is just one of the benefits of incorporating and that’s why we wanted to reiterate earlier that income splitting is still a significant benefit and arguably, it’s probably one of the larger benefits of incorporating since it’s absolute tax savings. It’s not a deferral of tax, it’s a pure savings upfront.
Julie: Pure saving, yes.
Nick: If you’re still able to income split, even if you don’t have the benefit of a deferral, there’s significant advantages to using a corporation.
Julie: Exactly. It really depends on your circumstances. Yes, there’s an impact of losing the small business deduction, but depending on why you decided to incorporate in the first place, we need to have a look at your specific situation.
Nick: Exactly. With that, I’ll hand it off to Marty who is going to talk about what the actual changes were in the 2016 budget and review some examples of structures that are affected and structures that might work to not be affected by the new rules.
Marty: Well, great. Thanks very much, Nick. And so, we’re going to take the time to examine some of these changes and in particular, the changes really relate to two kinds of structures: the first being a partnership structure, followed by a corporate structure. Let’s just dive right in and look at the partnerships.
Julie: Yes, because it’s a really high interest in terms of the type of structure: Is there any type of structure I can use to not be impacted by this loss of the small business deduction?
Marty: Well, there are and you know what, we’ll certainly get to that. In the context of partnerships, what Finance Canada has done is they’ve introduced this new concept of a designated member. So, often in these partnership structures, the individual physician would be the partner and the professional corporation would render services to the partnership under a service contract. The new small business deduction rules are treating that contracting professional corporation as a partner of the partnership. Generally speaking, a designated member is a PC—and when I say PC, I’m going to be referring to a professional corporation throughout the slides. So, it’s a PC that provides services or property to a partnership, and either the PC, a shareholder of the PC, or someone who does not deal at arm’s length with either has a direct or an indirect interest in the partnership. It’s pretty easy to fall into these rules, especially when we start looking at structures that are commonly used.
Julie: Yes, so let’s see some examples of structures where the small business deduction is being lost or impacted.
Marty: Yes. This is a particular structure here where under the old regime or prior to Budget 2016, PC 1 would have a small business deduction and PC 2 would have a small business deduction. And so, this is a typical structure that would be used—this one was frequently used in an academic health science centre or a teaching hospital. And it worked very, very well for groups of physicians who are highly integrated and they valued teaching, research, admin, plus their clinical work. This model worked very, very well to redistribute income to really encourage group behaviour while producing income tax benefits … that was part of it. And also, by managing the GST and HST consequences of moving moneys around physicians.
Here, in this particular case, before Budget 2016, you’d have two small business deductions. If the appropriate elections are filed, we’re down to a situation where you would have one small business deduction and as Nick was alluding to, the federal government is looking at this and really characterizing this as one business and there would be one small business deduction to share here.
Julie: Exactly. And depending on the year-end they have picked, they could already be impacted by these changes.
Marty: Yes, you know what, that’s a great point. Absolutely. If your year-end was on or after March 22, 2016, you may have already had a full year where you would be into these new rules. But at a minimum, if you’re still in one of these structures, the new rules will be applying now, just because of the amount of time that has elapsed.
Julie: That’s another example of a structure where there will be impact.
Marty: Yes, and so, this is often referred to in practice as what is called a “partner sidecar arrangement.”
Marty: Bit of tax speak there. But in this particular case, the doctor, so Doctor 1 in this case, would have a professional corporation that was a partner in a partnership. And the partnership’s professional corporation would contract his or her partner duties out to PC 1a here. And by contracting those duties out, it generated an entitlement to additional small business deductions. Again, this was a very useful structure for groups prior to Budget 2016, but this is now a structure that’s no longer producing multiple small business deductions.
The second part of this relates to structures that are impacted where you might have a corporate structure in place rather than a partnership. So just again, generally speaking here, if you’ve got a PC which is that professional corporation and you’re rendering services directly or indirectly in any manner whatever to another private corporation, and the PC, the shareholders of the PC, or someone not dealing at arm’s length with either has got an interest in the private corporation that’s acquiring services—you’re going to be earning specified corporate income. And under the new rules, when you earn specified corporate income, you’re not going to be eligible for the small business deduction.
One thing that we’ve talked about as a rule of thumb is that if you’re a professional corporation and another private corporation is paying you, the rule of thumb should be to stop and check and see if these new rules apply as to whether or not you’re earning specified corporate income. They’re broadened in scope and they’re very low in threshold, so you may find yourself in these rules pretty quickly.
Julie: Yes, good point. Here’s a graphic example of that.
Marty: Yes, and so, this is very similar to the first sort of schematic we looked at where you’ve got a professional corporation here that’s seeing patients. It’s owned by Doctor 1 and Doctor 2, both of which have professional corporations. Their professional corporations are rendering services to the professional corporation here in the context of clinical care. And so, we’ve gone from a situation where conceivably, we’ve had three small business deductions to where now all the participants in this group would be sharing one small business deduction, they’d be earning specified corporate income.
Julie: And here’s another structure that could be very similar to the previous one that will have impact as well.
Marty: Yes, very similar to the slide before. The nuance here is that the professional corporation is the shareholder of the PC. So, this will depend province by province. This may not be applicable to everyone, just depending on the provincial legislation, but again, a similar structure here that again was producing three small business deductions and now is only producing one. And again, the policy here is they’re looking at this and saying, “There’s really one business here,” because of the connections and all of the services that everybody is rendering to themselves.
Julie: Exactly. Here’s a bit of a decision tree where we can review if we are impacted or not and what should be our course of action for next steps.
Marty: Yes, this is exactly that. This is just a general framework. The first question to ask here is: did the new small business deduction rules, do they apply to my PC? If the answer is no, it’s business as usual. If the answer is yes, it’s really important to understand the root and review the impact of the tax deferral loss. And when you can understand what you’ve lost and you can quantify it by spending the energy and the money and taking on the complication to maybe get the small business deduction back, you really know what you’re trying to obtain.
Julie: Exactly. Quantifying the loss helps where you want to put your energy.
Marty: Yes, absolutely. If you’re in a situation where you’ve got minimal corporate savings and that’s going to be the case for the foreseeable future, you may not want to restructure it. It may not make sense. But if you’ve got a lot of corporate savings, and as we pointed out, if you don’t have $35,000 a year to invest with your MD Investment Advisor and have that money work for you in your portfolio—that’s a lot of money every single year for a long period of time—that certainly could have a material impact on your financials plans, your retirement plans. And that alone may warrant restructuring and taking on the complexities that are involved here.
Julie: Let’s see some situations where the impact is not there or at lower risk, because it helps to encourage ourselves for some of our attendees who may wonder.
Marty: Yes, absolutely. The situations that aren’t impacted. It’s always helpful to know whether you’re impacted or not, but if it’s not impacted, it could also be a possible solution depending on how you’re carrying on your practice of medicine. This is the easiest example here. If you have a professional corporation, you’re rendering services, you’re seeing patients, you’re doing all of those things a physician would do, here, there’s clearly one business where there’s one deduction.
Julie: Yes. It’s very easy to see.
Marty: If that’s the situation you find yourself in, it should be business as usual.
Now, this particular slide isn’t a whole lot different from the first one and I’ll explain myself in a second here. But here, we have a service company and we’re going to assume that the service company is really at an arm’s length here and there’s no cross-ownership of any kind. And I come across these situations where you find non-doctors or maybe doctors that are really in the business of providing infrastructure for practices. And when I say “infrastructure,” it’s: you might have a company that goes out and signs up for a lease, it hires personnel, secretaries, nursing staff, buys all of the supplies and then sells those to the physicians. And so, there’s large groups in Canada that offer this service, especially in the context of family medicine.
Here, you’ve got PC 1 rendering services to the patients and same with PC 2. If PC 1 and PC 2 just happen to decide to acquire services from the service company, the small business deduction rules shouldn’t apply here and it should respect the fact that PC 1 and PC 2 are really their own businesses.
Julie: Exactly, exactly. They just use the same services from the same company. There’s no sharing of income or any other kind of thing.
This one is really interesting.
Marty: Yes, so here, you have a situation where the professional corporation 1, PC 1, may hire or may contract with an associate PC or a locum. On the basis that the associate or locum has no direct or indirect interest in PC 1 and they’re dealing at arm’s length, the small business deduction would likely be here two times. Just going back a couple of slides where we said: if the rule of thumb is that you’re being paid by another private corporation, you should always ask as to whether or not the small business deduction rules apply. So, we’ll sort of see that on the next slide as why it’s always good to ask.
Julie: It is!
Marty: Yes, so here—
Julie: It’s really important to ask.
Marty: Yes. Very similar here. If the associate PC is in fact owned by—I had a situation where the son had bought the father’s practice and as part of the father’s retirement plan, he was an associate to the son and was winding down. And when the new rules—
Julie: Kicked in.
Marty: Yeah—when the new rules kicked in here, the discussion with father and son was who was getting the small business deduction and how do you want to share it. So, siblings, parents, spouses are all examples here as to how you may inadvertently fall in.
Julie: Yes, the arm’s length rule really does apply. This is a situation where we have some physicians as well who are sharing costs in the practice, and that’s really important to note that the situation will not be impacted in that sense.
Marty: Yes. And so, the new small business deduction rules don’t apply to cost-sharing arrangements and in fact, that was confirmed by the Minister of Finance which was very helpful, because a number of physicians were concerned with the proposed legislation. And in response to the concerns the physicians raised, the Minister of Finance offered some tax planning advice and said, “Look, the new rules apply to partnership and corporate structures, but they won’t apply to cost-sharing arrangements.” And so, really, the cost-sharing arrangements, generally, you have more than one party and they agree to share costs of a business or a project according to an agreed-upon formula or some other basis that the parties agree to. And cost sharing here really respects the fact that each PC is in business for itself and cost sharing is the economic vehicle that the physicians or the pro corps here are using to pay for cost in an efficient manner.
A lot of physicians are moving to a cost-sharing arrangement. It works very well from an income tax perspective. For GST purposes, if you’re in a cost-sharing arrangement, it’s very important to obtain GST advice, just to make sure you’re compliant with everything that you need to be compliant with there. And cost sharing will generally only work if you have a principal/agent relationship. Very important that that legal concept is established if you’re, in fact, going to be in cost sharing and cost sharing successfully.
Julie: And we actually have a little bit of a checklist to make sure that our cost sharing arrangement works.
Marty: Yes. And again, these are just some questions that if you’re a practice owner or a participant in a cost-sharing arrangement, these are things that you should just be thinking about periodically and asking your advisor about. And if you’re looking at implementing a cost-sharing arrangement, it’s really important to get the correct GST and HST advice. Just a couple of things here. Do you have a cost-sharing agreement, has the documentation been kept up to date if you do, in fact, have one? Physicians come and go from the arrangement, so it’s important to make sure that your documentation is kept evergreen. Sometimes documentation—
Julie: Yes, documenting is not always the strength of physicians, so it’s really important there to review that and make sure you’re up to date with that arrangement.
Marty: Yes, I actually came across an agreement from 1964 once, and this is actually two years ago. So, a lot of things have changed.
Marty: So, it’s really important to make sure your agreement is always up to speed. Again, is there a principal/agent relationship? And that’s fundamental to your cost-sharing arrangement. If you don’t have the principal/agent relationship and money is changing hands amongst the cost-sharing participants, you could be viewed as acquiring services from the physician or somebody else, and if you’re acquiring services, GST may apply even though it’s unintended.
Julie: Yes—very well.
Marty: And at law, are you liable for the costs or other risks? That’s a crucial point of your cost-sharing arrangement, too. So really, just understanding what it is you’re doing, there are some fine lines as to sharing costs or acquiring services. It’s really important that this is taken good care of.
Julie: And another situation that we see often is an association between physicians in order to practise medicine. They want to put some guidelines around the practice and therefore, they pick and choose associations.
Marty: Yes, these are common arrangements. You see them in academic health science centres, family health organizations, other groups of physicians use them. And so, associations, just as you said, are not impacted by the new small business deduction rules.
Julie: That’s good news.
Marty: It is good news. And you know what, they work very well. And so, an association, for income tax purposes, is ignored so it’s really nothing for income tax purposes. If you’re in an association, the new small business deduction rules shouldn’t apply. And we just have a little bit more on the next slide.
Just generally speaking here, your association will govern the manner in which the participants—how they organize the practice or their business affairs, it just lays down the ground rules that provides the governance framework around the practice, so who’s going to be working when, house calls, chair, if physicians are going to be away from practice, how all of that works. They are often in tandem with cost-sharing arrangements, so it may outline how cost sharing would in fact work. And if there’s funding from a provincial government or a university or hospital, an association may provide a mechanism as to how to properly communicate with these external stakeholders and be accountable and negotiate in view of all these others things on behalf of the physicians.
Julie: Yes. Let’s get to the GST and HST section, because this may have a lot of impact on physicians, even if sometimes we don’t know. So, I think we’ll learn a lot into that section as well.
Marty: Yes. Physicians, they earn revenues from a lot of sources. It’s not always just patient care. So, it’s really important to be aware of everything that you’re doing. And just a few points before we get into the hospital on-call here. There has been a lot of new information released by the Canada Revenue Agency over the last five or six years, and so, this is new information. And when there’s new information, it’s always necessary to go back to your practice and see how that new information may or may not—
Julie: May or not apply.
Marty: —impact your affairs. But you want to be aware of it, you want to look at your own situation. Just a general point here: a physician is required to charge, collect and remit GST if the worldwide sales, and these are taxable sales so not rendering patient care, if it exceed $30,000 over any four calendar quarters.
Well, let’s take a closer look at on-call here. And so, what happens with on-call is going back to September of 2016. The CRA released an interpretation on how it views on-call. And so, an interpretation really provides the Canada Revenue Agency’s view of how a legislation applies to a generic fact pattern. It’s not binding, no specific facts were giving in this case. But from what we can surmise, a doctor and advisor somewhere were concerned about the application of GST or HST to on-call payments and so, they asked the CRA without providing the many documentation as to how tax may or may not apply. The CRA came up with the following:
The CRA said, “Look, on-call payments are a retainer or a stipend paid by the hospital to physicians for being available.” That’s how they understood this. And they said, “Look, it looks to us, it’s effectively a physician is providing the hospital with a right to call upon the physician to attend the hospital.” So, it’s not always necessary to have physicians on the floor, but if there’s an influx of patients, it is necessary to have them nearby to take care of the patients. And in this particular case, the CRA stated that the on-call payments aren’t tied to actual hours worked and it’s not dependent on whether or not you rendered a service or not. And so, the CRA also made the conclusion that the on-call fee can’t be consideration for a supply of healthcare service, because when you deliver the healthcare service, then you’re usually—
Julie: You’re exempted.
Marty: You’re exempted, but you’re usually billing a provincial insurance plan for a specific fee code or a specific procedure. So, in this case, the CRA said, “Look, on-call payments here are subject to GST or HST.” And this was back in September. And I think that the CRA probably fielded a number of calls from physicians and/or their advisors, because this is new information. The general position on on-call right across Canada is that GST doesn’t apply, or HST or QST. And so, the CRA reiterated their position in Excise and GST News No. 101 just a couple of months ago, reiterating that they think it’s taxable even in the context of a clinical setting. It’s very difficult to paint on-call with one brush and so, on-call, it’s really necessary to examine your own facts and circumstances and see if GST or HST is applicable. It’s not going to be the same physician by physician. The agreements are different, also the provinces—
Julie: The provinces are having very different rules around those payments as well, so it’s important to review by province.
Marty: Yes, the provinces have their own rules and then there’s specific legislation that applies to certain provinces. So again, no uniform approach, but the message here is that you can expect the CRA to take the position that these payments are taxable until the CRA says otherwise. And so, again, it’s necessary just to seek the advice and to understand what you need to do or what you may be comfortable with.
Just going back to 2011 here and after two years of deliberation … the CRA was asked all of these questions in 2009 and it took them two years to come up with the conclusions here. But this particular ruling was the first ruling that I’m aware of that really dealt with physicians in academic medicine. And the CRA was asked to conclude as to how GST or HST may apply to management instructional services rendered by a physician or a professional corp. to a university. The CRA concluded that they were subject to GST because there’s no exempting provisions. The CRA concluded that part-time teaching services rendered to a university would also be subject to tax. And lastly here, the CRA was asked to weigh in on a mixed service agreement. And under the mixed service agreement, the physician was being paid for a number of deliverables, clinical care, management, administration and, I think, teaching. And so, his duties were 60% clinical and 40% other. And the CRA here couldn’t conclude on the basis for the taxable activities, everything that’s not clinical is really inconsequential to the overall arrangement. In this particular case, the CRA looked at the arrangement and said the arrangement itself was subject to GST. So, if you have these mixed service agreements again, it’s case by case—
Julie: Important to check.
Marty: —and it’s important just to check—yes, absolutely.
Julie: That’s really interesting. A little bit more details on the Ontario ruling.
Marty: Yes, this one is certainly Ontario-centric and it’s in the context of AFP payments or alternate funding plan payments. So, these payments are usually made to physicians and academic centres for teaching research and admin. And the CRA, going back to 2012-2013, initially took the position that these payments, when made by the province to a physician, were subject to GST. After considering arguments and further information, the CRA concluded that the AFP funding payments from the province to a practice plan—and the practice plan is sort of those structures that we were looking at at the start of the slide—is in fact a grant and on the basis that the funding is a grant, GST does not apply. But again, the CRA said that when the payments leave the practice plan, the application of GST will be tax-specific at that time.
Julie: Let’s have a summary around GST and HST, and then we’re going to take up the questions. A lot has been running since we started the webinar. We’ll be more than happy to answer them.
Marty: Yes. Just a lot of new information in the past five or six years, and physicians and a lot of people are coming to the realization that physicians do do a lot of things besides see patients.
Marty: Yes. So, it’s very important to clearly understand that. If it’s managed, GST or HST compliance can in fact reduce your practice costs, so it’s helpful. So if you’re bringing GST into your practice, presumably it reduces your costs. That could be great. And when you’re speaking with your advisor or your accountant, it’s very important to explain to your accountant all of your bank deposits. And maybe that’s the exercise you do before you go into your accountant. Just review your bank deposits, and if they’re for clinical payments or if they’re research, teaching, admin, just summarize them nicely, go in and talk to your accountant and say, “Here’s all of the things that I’m paid for.” And if you’re getting paid for something that’s brand new, you’re entering into a new agreement—
Julie: Yes, very—like a different activity, or a new agreement, it’s a good time to ask the question to your tax specialist.
Marty: Yes, absolutely. It’s really important just to monitor that on an ongoing basis, because throughout a physician’s career, they’re generally going to be doing a number of different things. As you’re doing different things, the rules apply differently.
Julie: Exactly. Thanks very much, Nick and Marty, for this webinar tonight. We’ve had a lot of questions. You can continue to put them in the question and answer section of the webinar. Our first question: there are several questions about the difference between cost-sharing arrangements and partnerships. How can we better understand the difference between the two? Or even the difference between a partnership and an association?
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