On December 15, the federal budget received Royal Assent. To learn more, please read: How 2016 Tax Changes Affect Some Incorporated Physicians
Are you an incorporated physician who practises in a group structure? The 2016 federal budget contains proposed tax changes that could impact you.
Under existing legislation, each incorporated physician in a group structure can claim the small business deduction on up to $500,000 in active business income.
If the proposed legislation passes, incorporated physicians in a group structure may need to share this $500,000 small business deduction among them.
If these changes apply to your medical practice, your corporate taxes could increase and you may need to adjust your financial plan.
In this article, we’ll look at:
- Which physicians are affected by the proposed changes?
- Why is the federal government making the changes?
- How does the small business rate compare with the general corporate rate?
- Is there any advocacy under way?
- What if the proposal becomes law?
- What could this mean for your financial plan?
Which physicians are affected by the proposed changes?
Only incorporated physicians who work in certain types of group structures will be affected.
Why is the federal government making the changes?
High-earning individuals working together in large business groups have been using complex corporate and partnership structures to take advantage of the small business rate, which is meant to support small businesses. As announced in this year’s federal budget, the government wants to maintain the integrity of the tax system and close this perceived loophole.
How does the small business rate compare with the general corporate rate?
In Canada, a small business pays an average tax rate of 15% on business income up to $500,000. This is about half the rate paid by regular corporations.
|Province of taxation||Combined small business tax rate||Combined general corporate tax rate||Difference|
|Newfoundland & Labrador||13.5%||30.0%||16.5%|
Is there any advocacy under way?
The Canadian Medical Association (CMA) has been working diligently since before the fall election to raise awareness with federal decision-makers of the importance of maintaining the current incorporation framework. The CMA’s advocacy efforts resulted in the federal government recognizing the contribution of healthcare providers as small businesses in the budget; this was an important advocacy gain in ensuring access to the incorporation framework. However, along with this advocacy gain, the federal budget included technical changes to the eligibility criteria for the small business deduction.
Following the budget, the CMA launched a new phase of advocacy. As part of advocacy initiatives under way, the CMA is drawing attention to the significant and unintended consequences that this change—if implemented—will have for those incorporated physicians who are encouraged or required by public health policy to work in specific group structures in order to qualify for certain types of funding.
The CMA is also meeting with provincial and territorial medical associations to help engage provincial finance and health ministers, support physicians’ grassroots advocacy and ensure that the physician perspective is represented throughout the formal government consultation processes ahead. Both the advocacy effort and the CMA and MD Financial Management’s close collaboration will continue.
We are encouraging a broader outreach to members of Parliament, particularly in cases where hospital structures will be negatively impacted. Members interested in participating in this grassroots advocacy initiative are encouraged to contact the CMA at firstname.lastname@example.org.
What if the proposal becomes law?
The CMA and MD are mindful that this proposal fulfills a mandate commitment by the federal government. We are continuing our intensive advocacy efforts and we encourage CMA members to consider opportunities to mitigate the consequences, should this measure be implemented.
If you think you might be affected by the proposed changes, we recommend that you consult your accountant and lawyer to determine whether this is so; and to discuss the consequences and whether any changes to your group structure could be made. We also suggest you talk with your MD Advisor to adjust your financial planning strategies.
What could this mean for your financial plan?
If you are affected by the proposed changes, in essence this means you will not be able to defer as much tax. You will be left with less after-tax money in your corporation, which has ramifications for financial planning strategies.
Under the proposed changes, some financial tools and strategies will become more attractive, and others less so. Here are some examples of the effect of losing the lower small business tax rates.
|Financial Strategy||Attractiveness Under Proposed Legislation||Explanation|
|Corporate savings||Less attractive||The corporation will be subject to a higher tax rate, which means less money left in the company after tax.|
|Compensation as salary||More attractive||A higher tax rate tends to encourage salaries. Salary creates RRSP contribution room and allows you to contribute to the Canada Pension Plan (CPP).|
|Compensation as dividends||Less attractive||Dividends are paid from after-tax income, so higher corporate tax rates generally have a negative impact.|
|Registered retirement savings plans (RRSPs)||More attractive||Compared with corporate savings, RRSPs will offer a greater deferral benefit.|
|Canada Pension Plan||More attractive||The relative cost of CPP premiums is low when compared with corporate savings taxed at higher rates.|
|Individual pension plans (IPPs)||More attractive||As with RRSPs, there will be a greater deferral benefit with IPPs than with corporate savings.|
|Scope of personal tax-free dividends||More attractive||The amount of dividends that can be received tax-free personally (in the absence of other income) is greater when distributed from a corporation that has paid higher tax rates.|
|Corporate-owned life insurance||Less attractive||A higher tax rate means less money to fund the insurance premiums, but corporate ownership of insurance may still be beneficial.|
|Debt repayment||Less attractive||A higher tax rate means less money to repay business debt through the corporation, but corporate repayment of debt is still likely the right strategy.|
|Old Age Security||Less attractive||There is a greater risk of having your Old Age Security benefits clawed back if you have eligible dividends, since the dividend income gross-up is higher.|
|Tax-free savings account (TFSA)||Mixed||This one is complicated—it depends on how the TFSA is funded. TFSA strategies based on distributing active business income will improve, but TFSA strategies based on distributing investment income will weaken.|
The CMA is continuing its active advocacy effort, and the issue of these proposed tax changes is far from settled. If the legislation passes, there will be ways to mitigate the negative outcome.
We recommend that you consult your accountant, lawyer and MD Advisor. They can analyze your situation, determine the impact, and help adjust your group structure and financial plan, if necessary.