Indigenous physicians play a crucial role in Canada, particularly in underserved communities where cultural awareness can contribute to better health outcomes for Indigenous peoples. Depending on where you live and whether you earn income on- or off-reserve, you could be eligible for special tax deductions or exemptions.
Here are some useful tips and information to consider.
Some First Nations reserves in Canada have negotiated a tax agreement with the federal government and have their own system of self-taxation. If this applies to you, contact your First Nations government to learn the details and note that some of the information in this article may not apply to your situation.
Northern Residents Deduction
If you live, or have lived, in a qualifying northern zone for at least six months of the year, you may qualify for the Northern Residents Deduction. If you are taxable, this tax deduction may be relevant for your personal tax return. It consists of a residency deduction (for living costs) and a travel deduction. For the purposes of calculating this deduction, the Canada Revenue Agency (CRA) has divided Canada into two zones.
You may qualify for the Northern Residents Deduction if you've lived in a prescribed northern zone (Zone A) or a prescribed intermediate zone (Zone B) for a continuous period of at least six consecutive months. If this applies to you, calculate your deduction using Form T2222.
Definitions and tax implications under the Indian Act
First introduced in 1876, the Indian Act is the law used to set out the Canadian federal government's responsibilities to First Nations peoples. The Indian Act has a long history of discrimination, but we refer to it in this article for the purposes of this tax discussion.
Note: Many Indigenous people in Canada prefer not to describe themselves as Indian; this term is only used in this article because it has legal meaning in the Indian Act.
Under the Indian Act, there are several different legal categories of Indigenous peoples in Canada:
Status Indian (or Status First Nation): Indian status is the legal standing of a person registered under the Act. Entitlement to register is based on the degree of descent from ancestors who are registered or entitled to be registered. As of 2016, there were 820,120 Status Indian (or Status First Nations) people in Canada.
Tax implications: As a Status Indian, you are generally subject to the same tax rules as any other Canadian. However, your income may be eligible for tax exemption under Section 87 of the Indian Act if earned on a reserve.
Non-Status Indian: A Non-Status Indian is a person who self-identifies as "Indian" but who is not entitled to registration on the Indian Register pursuant to the Indian Act. This may be because they lost their status, their ancestors were never registered, or they lost their status under current or former provisions of the Act. However, some may be members of a First Nation band.
Tax implications: The tax exemption available under the Indian Act only applies to an individual who is a “Status Indian" as defined in the Indian Act.
Treaty Indian: A Treaty Indian is an individual who belongs to a First Nation or Indian band that signed a treaty with the Crown, and as a result is entitled to treaty benefits.
Tax implications: Treaty Indians are not entitled to a general tax exemption; however, if income is earned on a reserve, it will be eligible for tax exemption under the Indian Act if the person has Indian Status as defined in the Indian Act.
Métis: Métis are one of three recognized Indigenous peoples in Canada, together with First Nations and Inuit. In 2016, there were more than half a million Canadians who self-identified as Metis.
Tax implications: Métis people are not eligible for tax-exempt income under Section 87 of the Indian Act.
What the Indian Act means for the income you earn as a physician
Indigenous people are subject to the same tax rules as all Canadians unless their income is eligible for tax exemption under Section 87 of the Indian Act. It's important to note that the Indian Act tax exemption is not a “blanket exemption" on everything. Generally, only property of an Indian or band located on reserve is exempt from taxation under this provision. Under Section 87, income is considered “personal property"; on that basis, it is exempt if it's earned on reserve.
What parts of your income are tax-exempt?
The federal government uses guidelines commonly referred to as “connecting factors to the reserve" to assess whether your income is tax-exempt or not. Typical factors include:
- where the service was performed
- the nature of the service
- where the customer or patient is located
- where the service provider lives
- the relevance to the reserve
The Canada Revenue Agency has also published four guidelines that address employment income. Here are some general classifications:
- Income earned on reserve: Indigenous physicians who live, run their practice, and keep their accounting records on a reserve generally do not pay tax on income earned. According to the guidelines, when at least 90 percent of employment duties are performed on a reserve, all income earned is generally considered tax-exempt.
- Income earned through a combination of on- and off-reserve work: Generally, if you provide medical services both on- and off-reserve, the portion of income you earn from on-reserve medical care is not taxed. Income earned off-reserve is commonly taxed but there can be exceptions. Be sure to keep careful and accurate recordkeeping; related practice expenses must be allocated and prorated between on-reserve and off-reserve income. Note: The portion of practice expenses to earned on-reserve, tax-exempt income is not deductible.
- Corporations are not considered an Indian or band, so the Section 87 tax exemption does not apply. A medical professional corporation established by a First Nations physician that carries on a practice on-reserve is not tax-exempt. Note: Some corporations established by the band can be tax-exempt but rely on different exemptions under the Income Tax Act.
Get the financial help you need
There's no one-size-fits-all when it comes to tax planning for Indigenous physicians, but an MD Advisor* can collaborate with tax and legal professionals to help you structure a unique financial plan that works for you.
*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.