It’s the notice that no one wants to receive — a tax bill from the Canada Revenue Agency (CRA).
But if you’re the spouse or partner of a physician, particularly of one who has recently started to practise, you may be surprised to learn that receiving a large tax hit for a physician’s first or second year of practice isn’t unusual.
Here’s a look at why this can happen, and some practical advice on how you and your spouse can set up a repayment plan and on how to avoid a reoccurrence in the future.
When taxes are no longer withheld at source
Resident physicians earn a regular salary, with income tax automatically deducted from each paycheque. But once they begin to practice, many physicians will be paid in a different way. Most physicians in Canada are self-employed and generally bill the provincial ministry of health on a fee-for-service basis. Physicians collect that amount as gross professional income (an amount that also has to cover their professional overhead and eligible expenses).
Physicians’ income tax responsibility
Self-employed physicians are responsible for calculating and remitting personal income tax.
An unincorporated physician may be required to make quarterly tax instalment payments to the CRA. For example, your spouse will be required to make instalment payments for 2021 if both of the following conditions apply:
- their net tax owing for 2021 will be above the threshold for the province or territory ($1,800 for Quebec or $3,000 for the rest of Canada);
- their net tax owing in either 2020 or 2019 was above the threshold for the province or territory.
These payments are typically calculated based on a physician’s income tax owing from the previous two years. In the first year of practice, physicians don’t have previous years’ self-employment income on which to base the tax instalment amounts, so they likely won’t be required to make payments in that year.
However, when they file their tax return following their first year of practice, they may have a large amount of income tax payable. If they haven’t planned ahead and saved a portion of their earnings to cover these taxes, they may need to borrow the funds that they are required to remit to the CRA.
An incorporated physician will likely pay themselves a salary from corporate income. If your spouse is incorporated, it’s best to discuss personal and corporate tax payments and decisions around annual compensation with a tax advisor.
Why paying off tax debt promptly matters
Ignoring debt doesn’t make it go away, and delaying payment can mean incurring hefty interest charges. For example, if your spouse has a balance owing for 2020, the CRA will charge 5% compound daily interest (starting May 1, 2021) on any overdue taxes for 2020.
Also, make sure you and your spouse file your tax returns on time. For personal tax return with self-employment earnings, the deadline for filing is June 15 but any taxes owing are due April 30.
If you file late and owe tax that remains unpaid at after the filing deadline, the penalty is 5% of the balance owing, plus 1% of the balance owing for each full month the return was filed after the deadline, to a maximum of 12 months.
Penalties and interest on outstanding balances aside, not paying back taxes promptly may impact other financial decisions you may want to make together like borrowing money, applying for a mortgage or refinancing an existing mortgage. If your spouse is unable to pay the taxes owing in full, the best approach is to contact the CRA. Depending on the situation, they may qualify for a payment arrangement or tax relief.
Where to start
First, don’t panic but do take a proactive approach. Your spouse should speak directly with the CRA to ask any questions or request clarification, and should share the plan for repayment once it’s been created.
Second, borrowing money to pay the taxes owing might make sense, but your spouse will need to calculate how much they’ll pay the CRA in interest over the time it will take to pay the balance, versus the interest that would be charged on the loan.
And finally, as a couple, talk to your MD Advisor* about a plan to pay down debt and save for the tax instalment payments. Owing taxes is stressful, but planning how to handle future income tax debt while considering options for more tax-efficient use of your household’s income will ensure that you and your spouse won’t get caught off guard at tax time next year.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.