In this episode Stephanie Lewis and special guest Curtis Anderson tackle the topic of taxes and how physician families can plan strategically to save on taxes and reach their financial goals faster.
You’re listening to The Financial Literacy Podcast, brought to you by MD Financial Management.
Canada’s only national financial services firm dedicated to helping physicians and their families with their unique financial needs.
SL: Hello listeners and welcome back to another episode of The Financial Literacy Podcast. As you know, on this podcast we talk about financial planning to meet the unique needs and goals of physicians and their families.
My name is Stephanie Lewis. I am so happy to be here hosting today’s episode as we tackle the topic of taxes and how physicians and their families can plan strategically to save on taxes and reach their financial goals faster.
And joining me today to answer all our questions and offer some great tax advice is Curtis Anderson.
CA: Hey everyone!
SL: Curtis, thank so much for taking the time to be here. We are really looking forward to hearing all your amazing tips on tax planning for our listeners.
CA: Thank you! Yea, I’m looking forward to being a part of this talk. I think the word “tax” carries a lot of weight and is an area of a lot of confusion or anxiety for many physicians’ households. So, I’m really excited to help ease some of that stress by bringing some useful tax saving and tax minimizing strategies to light for listeners.
SL: Amazing. Well, let’s jump right in and start by talking about the role that taxes play in financial planning, particularly for physicians.
CA: For sure. Like I said, taxes can be confusing and overwhelming, and I think that stems mainly from a lack of understanding or access to resources. So, right off the bat, if you’re someone with these feelings when it comes to discussing or dealing with your taxes, I would recommend finding a financial advisor and an accountant that you trust to help you build that understanding and achieve your goals faster.
If you prefer to do-it-yourself, MD's blog InvestedMD has some great free tax guides to help steer you in the right direction.
There are so many different kinds of income tax rules, and so many factors that influence which taxes apply to your income. But there are many deductions, credits and strategies that people can use to reduce the amount of tax they have to pay. An accountant, and more specifically a tax accountant, will help you identify your goals and look for the tax strategies that fit those goals, along with helping you ensure that you have all the correct receipts, forms, and other paperwork to properly file your taxes and avoid any costly mistakes. And your advisor will be able to model the impact of those tax strategies on your financial plans.
For physicians, and those training to be physicians, so much of your experience around finances is unique, and the same applies for your taxes. Whether it’s during med school, residency, or once you start practicing, there are ways to reduce your tax bill and put those savings towards your goals.
And that's where MD Financial comes in with specialized guidance. We understand that physicians and their families have those unique needs, and so we've created that space and injected our expertise into resources, like this podcast, for physicians to learn how to effectively manage their finances with confidence.
SL: That’s exactly our goal here. Not to just tell physicians how to manage their finances but guide them through the process so that they can make informed decisions that will benefit them now and in the long run.
So, with that being said, let’s go through each stage of a physician’s journey, and what they need to know about their taxes at each stage. Let’s start with med school. What should medical student be aware of when it comes to taxes?
CA: So, if you're a medical student, you likely aren't working, so you might think you don't need to file an income tax return because you have little or no income. However, it may be worth filing anyway, because there are a number of tax credits that you may qualify for that can reduce the tax you pay.
The first of these credits is the GST/HST credit. This credit is designed to offset the amount of GST/HST paid by those that earn a low or modest income. All you have to do to qualify for this credit is file your tax return and the Canada Revenue Agency, or CRA will issue your first payment on the first payment date after your 19th birthday. If you live in Quebec and are at least 18 years old, you could also access the solidarity tax credit for low-income earners.
As a student, you can also claim some of your school expenses to receive credits, including your tuition. Beyond just the actual tuition cost, this claim can apply to application fees, fees for use of school facilities, like libraries and labs, even exam fees. For example, for med students specifically, your fees for the Medical Council of Canada Qualifying Exams are eligible. In Quebec, there is a separate but similar tax credit for your tuition and exam fees. Wherever you are studying, your school will have all the necessary information and forms for you to apply for these credits.
Your student loans may also qualify for tax credits if you have already made payments towards them. Whether it’s a loan under the Canada Student Loans Act, or a similar loan through your province or territory, you can claim a 15% federal tax credit for the interest paid on your student loans. However, in April 2021, the federal government announced that Canada Student loans would be interest-free until March 2023, so the tax credit for interest paid on student loans may not apply to all students at the moment. Once again, there is also a different credit for those studying or living in Quebec, but it adds up to the same benefits as the federal credit.
And both the tuition and interest credits, if you have them, can be carried forward to be claimed during a year where you have more taxes payable, and that credit could be a little more useful. The tuition credit can be carried forward indefinitely, and the interest can be carried forward for any of the following 5 years.
SL: There are also expenses outside of their education that students can claim, correct?
CA: Absolutely. There are moving expenses, medical expenses, and child-care expenses that may be help you reduce your taxes.
For example, if you have to relocate at least 40 kilometers for your studies or work, you can claim expenses like transportation costs and temporary living expenses. If you have any medical expenses that are not covered by any type of insurance plan, you can claim a 15% federal tax credit depending on the nature and cost. For residents of Quebec, medical expenses could be eligible for an additional non-refundable tax credit.
When it comes to child-care, you can claim expenses for daycare, babysitters, or full-time caregivers up to 8 thousand dollars for children under 7, and 5 thousand dollars for children 7 to 16. However, these expenses must only be deducted from the spouse with the lower income, so both spouses need to have income to claim them. Plus, in Quebec this credit is cumulative with the separate tax credit that they offer.
Oh, also, if you’re a medical student and you’re filing a basic tax return, you can get your filing done for free through the MNP accounting firm.
SL: Oh, wow that’s awesome. Now, I’m assuming that these credits also apply to residents.
CA: Yes, that’s right.
SL: Are there any unique expenses for residents that they can claim?
CA: Yes. So, remember that when you begin your residency you will also begin to earn a salaried income, so you will definitely be needing to file an income tax return during this time. This is also a great time to carry some of those claims from med school over if they are still within the time limit.
But just like med school, provided that you meet all the requirements, your tuition and school fees, the interest on your student loans, and those moving and childcare expenses are all still eligible for credits and deductions during your residency.
However, as a resident, you are also able to claim some new expenses you didn’t have during med school, like fees for joining unions, and associations. For example, if you paid a membership as a part of the college of physicians and surgeons of your province or territory that is required for you to practice, generally that cost is deductible. There are also a number of provincial residency associations that require you to pay dues which could also be deductible.
If you’re ever unsure on how to properly make a claim, a qualified tax specialist can help. And residents, like med students, are able to get their income tax return done for free through MNP.
SL: Fantastic. And I guess this brings us to when physicians transition to practice.
CA: Right. And this is where it gets a little bit more complicated, because depending on how you structure your practice and how you compensate yourself, how you file your income taxes and what you can claim may vary.
Typically, when you earn a salary from your employer, your taxes will be automatically deducted from your paycheck. However, for self-employed physicians, it works a little bit differently. Usually, you bill the provincial ministry of health using a fee-for-service system, and then collect a blanket amount of funds, known as your gross clinical payment. This income must cover all your professional overhead, including your income, the income of any support staff, and all your business expenses.
Also, as a self-employed physician, you are responsible for calculating and remitting your personal income tax. And for incorporated physicians, you are also responsible for your corporate tax return as well.
So, it’s really important at this stage to be clear on what business expenses are eligible to be claimed in order to reduce your tax bill.
SL: Alright, so what can physicians consider as business expenses?
CA: Generally, business expenses are defined as any expense that you incur in order to attract or earn business income.
Some common expenses you can claim that can save you a significant amount in taxes include things like the rent, utilities, insurance, and property taxes on the space you are using for your practice. And if you worked from home during Covid, don’t worry, there are home office expenses you can claim as well.
Office equipment and supplies is another common expense to claim. For physicians, this will include any necessary medical equipment, surgical supplies, and uniforms or scrubs for you and you staff.
There are also expenses that, while not as major as some of the others we mentioned, can add up to save you even more. For example, advertising and business travel, while won’t be as recurring as many of your other expenses, should also be included in your list of claims. You can even claim any fees for required licensing and continuing education.
SL: Right. So, there’s a lot of saving that can be done simply through claiming expenses through the different phases of a physician’s journey. But are there other tax saving strategies they can use?
CA: Absolutely. So, up to this point we’ve been focusing specifically on income tax for physicians, but there are a lot of other taxes that can affect your household finances, and ultimately your goals.
And this is where an advisor, particularly an MD advisor would be extremely helpful, because an MD advisor can look at a physician’s entire financial plan and find areas where they may not be saving as efficiently as they could be. Since they understand how this can affect other circumstances that are unique to a physician’s journey, they can help physicians find the best tax-saving solutions that work for them. And often times this involves finding ways to minimize taxes.
For example, one effective way to save up for your goals in a tax-efficient way is to use a Tax-free Savings Account, or a TFSA. This type of saving account gets its name because it’s one of the only savings tools that does not charge you tax when you withdraw funds.
If you do need to withdraw funds from your TFSA, which you can do for any reason, the amount can be replaced in a future year because the amount withdrawn will be added to your contribution room the following year.
You just need to be conscious of
over-contributing. There are limits to how much you are allowed to contribute to your TFSA every year. Especially if you have more than one TFSA, because you don’t get extra contribution room, and over-contribution can result in tax penalties.
SL: That’s good information. So, I guess the theme here is that taxes will follow you through every stage of your journey, and there are always solutions to help manage and minimize them.
SL: Alright. So, there’s just one more thing I want to talk about and that’s what to do if you run into some trouble with your taxes. For example, you are late paying your taxes, or you get a large tax bill that you cannot pay.
CA: Right. Planning and staying on top of your taxes is extremely important for everyone, because the CRA does not take either of these situations lightly. For physicians, this takes extra care because, as I mentioned earlier, if you are self-employed, you are responsible for your own calculations and payments.
So, to avoid paying your taxes late, it’s important to remember this: while the deadline for filing your tax return is June 15 when you are self-employed, any taxes owing are due April 30. So, plan ahead. The CRA will begin charging you a penalty of interest, compounded daily, on the balance you owe after April 30. And if you file your tax return after the deadline, you’ll be charged a late filing penalty too. For physicians, who typically earn a higher income, those penalties can add up quickly.
Now, in terms of experiencing a large tax bill, this usually only applies to new physicians in their first couple of years of practice. Remember, when you earned income as a resident, your taxes were deducted directly from your paycheque. But when you start practicing, you need to pay your taxes in quarterly instalments. How much you pay every quarter is based on the previous year's income. In your first year of practice, you won't have to make tax instalment payments because you didn't have an amount to base it on. Since you haven't paid the quarterly instalments in your first year, there could be a significant tax balance owing when you file your income tax return. You'll want to be prepared for this. So, plan ahead, and start saving a portion of your earnings to cover this as soon as you begin practicing.
If you have trouble making your tax payments or have an outstanding balance, it is important to contact the CRA right away. You can explain your situation, ask for clarification on your balance, and get all the information you need to start coming up with a repayment plan.
The main idea is to be as proactive as possible because any issues you have regarding your taxes could have negative effects on other areas of your finances, particularly when it comes to things like applying for a mortgage.
You might consider borrowing funds in order to pay your balance; however, you will need to compare the interest on the loan to the interest on your tax amount, and repayment time on your loan vs the CRA to see it this option is worth it for you. And again, that something that an advisor would be able to help you with.
SL: Those are some good points. Well, we are coming to the end of today’s episode, but before we let you go, are there any final words of wisdom that you like to leave our listeners with.
CA: Sure. I mean, I know we’ve gone through a lot of tax talk today, and it can be overwhelming. Taxes can be tricky for anyone, let alone physicians who have their own unique circumstances and considerations to take on. So, don’t feel bad if you are still a little confused. We just want you to know what to expect and what to look out for so that you can prepare and avoid unnecessary missteps.
More importantly, we want you to know where to go for help and guidance. Having a great accountant, and a trusted advisor, like the advisors at MD, who understand your needs and have the necessary skills in managing finances will help you stay on track. Whether it’s managing your taxes, or working towards your financial goals, trust the professionals to point you in the right direction and help you make the decisions that are best for you and your family.
SL: Great. This has been such an insightful chat. Curtis thanks again for joining us today. It’s been a pleasure having you.
CA: Thank you! I’ve had a wonderful time.
SL: And thank you listeners for being with us. We hope you enjoyed today’s episode and learned something new that will help you out come tax time. Once again, my name is Stephanie, and it has been a pleasure being your host today. Tune in next time for some more physician finance fun, where we will discuss the decision to incorporate your practice. Can’t wait for you to join us again. Bye for now.
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