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3 strategies for physicians facing reduced cash flow

Person wearing a backpack, crossing a stream over rocks, hiking through foothills.

Burnout was a serious issue for Canadian doctors long before the pandemic. Two years in, with no guaranteed end to the crisis in sight, the problem has only gotten worse: it seems as if everyone knows a physician who is thinking about cutting back their hours, retiring early or simply quitting.

If you’re considering reducing your hours, halting your practice for a while, or retiring earlier than planned, it’s important to take a fresh look at your financial planning.

Here are three ways to prepare for a reduced and perhaps uncertain income level so you can take the break you need.

1. Assess your cash flow and budget

Income. Estimate what your new income will be and subtract your practice expenses to determine your cash-flow needs. Look at reducing variable practice expenses: will you have enough with your revised business revenue to cover expenses for at least several months? Your MD Advisor* can help you model various scenarios in your financial plan.

Expenses. Focus in on personal expenses that you can reduce or eliminate without much impact on your lifestyle, taking into account that with closures and restrictions some of your expenditures — vacations, theatre, sports, dining — may have been reduced. Will you have enough to cover your, and your family’s, needs?

2. Raise some cash

Emergency cash. If you have emergency funds set aside, this may be the time to use some of it.

Line of credit. As a physician, you may already have a line of credit secured by your home or other assets at very favourable rates. As of April 14, 2022, Canada’s five largest banks are offering a low prime rate of 3.20%. The prime rate is what the banks charge their best customers.

Corporate retained earnings. If you’re incorporated and have retained earnings in your corporation, talk to your MD Advisor and accountant about how best to manage a distribution. Be aware that there are corporate tax and personal compensation implications to consider.

Life insurance policy. Consider using the cash surrender value on your life insurance. If you have a permanent life insurance policy, you may have access to the cash surrender value, but there will be tax implications. Doing this may result in a lower overall death benefit, and your policy may require future contributions to adequately fund it for life. Another option is to see if you can temporarily defer premium payments on the policy (which will extend the duration of your planned premium/deposit period).

Investments. If you absolutely must sell investments to increase your short-term cash flow, talk to your MD Advisor to determine which option is best for you:   

  • Non-registered investment account: If you sell some assets at a loss, you can use these capital losses to offset capital gains — in the current year, in any of the preceding three years, or in any future year. If you sell and realize capital gains, you’ll pay tax on 50% of the realized capital gains.
  • TFSA: Withdrawals are tax-free, and you’ll be able to recontribute these amounts later (the amounts withdrawn will be added back into your contribution room the following calendar year).
  • RRSP: Withdrawals are taxed as income, and you don’t get the contribution room back. Remember that there are withholding taxes on your withdrawals. The funds are withheld as an instalment toward your final tax liability, which will be determined when you file your income tax return for the year.

3. Revisit your long-term planning

Investment contributions. If you make regular or pre-authorized contributions (PACs) to your RRSP, TFSA, non-registered accounts or corporate investment accounts, you can decrease the amount that you regularly put in or temporarily halt the contributions.

Early retirement. If you are contemplating moving your retirement forward, meet with your MD Advisor. They will help you to review your vision and goals for your retirement and make adjustments based on your current priorities and unique circumstances.

Estate planning. Taking time to prepare or update a will ensures your assets are distributed in the way you wish — and minimizes the burden on your loved ones — should you pass away. Also make sure that you have power of attorney1 documents for personal care and financial matters to appoint someone to make decisions for you if you become unable to do so.  

If you have any questions about these strategies and which options are best for you, please contact your MD Advisor.

1 In Canada, a power of attorney can be called a “continuing power of attorney,” “enduring power of attorney” or “protection mandate,” depending on the jurisdiction and the terms contained in the document. A power of attorney for personal care can be called a “representation agreement,” “personal directive,” “enduring power of attorney appointing a personal attorney,” “health care directive,” “advance health care directive” or “protection mandate,” depending on the jurisdiction.

* 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.