Transitioning into practice is an exciting and challenging time for medical residents.
Not only do you have the professional challenges of settling into your career, there are also a number of financial planning issues to think about. These include coping with a brief gap in income, and managing your income tax payments.
1. Mind the income gap
As a resident, you’re a salaried employee, earning a regular paycheque. But once you’ve finished your residency, the way you’re paid will change.
In Canada, most physicians are self-employed and paid primarily on a fee-for-service basis.
Between the end of your residency and the time you start billing, there could be two or three months in which you have no income.
Not having a paycheque is tricky, but there are things you can do to prepare yourself for this period of transition.
Analyze your net worth.
- What do you own and what do you owe?
- Do you have savings you can tap into?
Take a look at your cash flow.
- Do you have other sources of income?
- Do you have enough credit to get you through the first few months?
Take into account the costs of starting practice.
- Have you thought about everything you’ll need? Costs might include:
- insurance premiums for professional liability protection
- fees for exams (about $3,100 for residents in family medicine and $4,300 for specialist residents)
- medical and office supplies
Consider increasing your line of credit.
- Talk to your financial advisor about your options for ensuring you have enough money to tide you over until you get paid.
2. Get ready for tax instalments
When you’re a resident, income tax is deducted at source from each paycheque. This, too, will change when you move into practice.
If you’re a self-employed physician, the Canada Revenue Agency (CRA) will generally expect you to pay quarterly tax instalments1.
While there are different methods for calculating instalment amounts, as a self-employed physician the amount you pay will typically be based on what you owed on your previous two years’ income tax returns.
In your first year of practice—without this history of self-employment— you likely won’t be asked to make instalment payments. But be prepared: when you file your tax return after your first year of practice, you may owe a large amount of income tax.
If you’re unable to pay all the tax owing, the penalties and interest for missed filing and payments can be significant. Make sure you file your return on time to avoid the penalties, even if you are unable to pay the amount owing.
As a self-employed individual, you have until June 15 to file your personal income tax return; any tax owing, however, is still due by April 30.
Here are some things you can do ahead of time to avoid borrowing money to cover your first year’s taxes.
- Talk to your financial advisor so you know how much you need to save.
- Set aside a percentage of your earnings every month and put it into a savings account.
If you are considering borrowing the funds to cover your taxes owing, think about the interest costs and, more specifically, how the interest charged by CRA compares with your other sources of financing.
Once you’re through your first year of self-employment, the CRA’s instalment requirement will likely kick in. Quarterly tax instalments are due March 15, June 15, September 15 and December 15.
Make sure to keep track of these deadlines, since failing to comply with instalment requirements may also lead to interest charges and penalties.
To help you transition from residency to practice, talk to a financial advisor who has experience with medical residents and early-career physicians. He or she can help you create a plan that meets your unique needs.
1 You will be expected to pay instalments if you anticipate net tax owing of $3,000 or more in the current year, and if you owed more than $3,000 in either of the two previous years. Note that different rules apply to residents of Quebec.