Tax Instalment Payments: Five Things New Physicians Need to Know

June 29, 2017

Transitioning into practice can be both exciting and stressful. On the business side, there are a number of financial planning issues you’ll need to address. One of these is managing your income-tax payments.  

Here are five things you need to know.

  1. Income tax is no longer deducted at source

    As a medical resident, you earn a regular salary and income tax is deducted from each paycheque. Basically, you’re paying your taxes as you earn your income.

    But once you become a practising physician, the way you’re paid and how you pay your income tax could change.

    If, like many physicians, you expect to be self-employed, you’ll typically bill your provincial ministry of health on a fee-for-service basis. The amount you receive will be your gross professional income, before any expenses are incurred to run your practice. Your taxable professional income, which is equal to your gross revenue less deductible expenses, will be subject to personal income taxes that you will need to pay from your net earnings.  

  2. Quarterly tax instalments start the following year

    As a self-employed physician, you’ll have to send your income tax payments to the Canada Revenue Agency (CRA) in quarterly instalments, which are due on March 15, June 15, September 15 and December 15 of each year.

    While CRA will send you instalment reminder notices, you should still make sure you keep track of these deadlines, since failing to comply with instalment requirements may lead to interest charges and penalties.

    In your first year of practice (July-December 2017), you likely won’t be asked to make instalment payments. But be prepared: when you file your personal tax return after your first (partial) year of practice (April 30, 2018), you could owe a large amount of income tax.


  3. Tax instalment amounts are based on previous two years’ taxes

    While there are different methods for calculating instalment amounts, the amount you pay will typically be based on what income tax you owed on your previous two years’ income tax returns. Here’s what happens in your first three years of practice.

    Year 1: July 2017 to December 2017

    Normally, as a self-employed physician, your instalment amounts are calculated based on your income taxes payable from the previous two years. 

    Your first year of practice is a special situation and you are generally not required to make instalment payments in your first year because you would have no previous income tax balances payable on which to base this calculation.

    Keep in mind though that you may have a large amount of income tax owing when you file your tax return since you would not have paid any taxes over this period.

    Year 2: January 2018 to December 2018

    Again, note that instalment payments are based on the previous two years’ income tax balances payable.

    In Year 2, you would only have had one partial year of self-employment income (July 2017 to December 2017). The government may ask you to make only the final two instalment payments (September and December), rather than all four instalments.

    Instalments Due

    Amount Due

    Comments

    March 15, 2018

    $0

     

    April 30, 2018 – Taxes due

     

     

    Even though your tax return doesn’t have to be filed with the CRA until June 30, 2018, any balance of income tax payable is still due by April 30, 2018.

    June 15, 2018

    $0

    The CRA receives your first personal income tax return reporting self-employment income and determines your instalment requirements for the balance of the year.

    Sept 15, 2018

    50% of the taxes paid on April 30, 2018

    The government’s instalment calculation method assumes your 2018 income taxes payable are going to be equal to 2017 but in reality, it could be double.

    Dec 15, 2018

    50% of the taxes paid on April 30, 2018

     

    Year 3: January 2019 to December 2019

    In Year 3, you would only have one and a half years of self-employment (July to December 2017 and all of 2018).

    Instalments Due

    Amount Due

    Comments

    March 15, 2019

    25% of the taxes paid on April 30, 2018

    The government is still basing the instalment amount on 2017, which could represent only 50% of 2018 income taxes payable.

    April 30, 2019 – Taxes due

     

    Difference between installments already paid for 2018 and actual taxes owing must be remitted to CRA

     

    June 15, 2019

    25% of the taxes paid on April 30, 2018

    The government is still basing the instalment amount on 2017, which could represent only 50% of 2018 income taxes paid.

    Sept 15, 2019

    25% of April 30, 2018 plus 50% of difference paid on April 30, 2019

    There will be a jump in the amount.

    Dec 15, 2019

    25% of April 30, 2018 plus 50% of difference paid on April 30, 2019

    For example:

    2017 taxes payable: $15,000

    2018 taxes payable: $25,955

    Instalments:

    March 2018: $3,750 (25% of 15,000)

    June 2018: $3,750 (25% of 15,000)

    September 2018 and December 2018 are each $9,227 calculated as:

    $3,750 x 2 = $7,500

    Total instalments payable for 2018 are $25,955.

    Therefore, the last two instalments are the difference of $18,454 ($25,955 – $7,500), divided by 2 to get the September and December payments of $9,227 each.

     


  4. Filing deadline, penalties and interest charges

    As a self-employed physician, you and your spouse or common-law partner have until June 15 to file your personal income tax returns; any taxes owing, however, are still due by April 30.

    If you fail to file your tax return on time, you could face late filing penalties. And if you’re unable to pay all the tax owing, there will be interest charges.


  5. How to plan for income-tax payments

    Here are some things you can do ahead of time to manage your tax instalment payments.

    • 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 or a tax-free 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.

    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.

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