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Tax tips for physicians

For use in preparation of 2020 tax returns

As a physician, one of the most significant expenses you incur during your professional career is federal and provincial income taxes. 

But if you take advantage of all available deductions and tax credits, you can minimize the taxes you pay and maximize your cash flow and financial position.

 

Federal income tax brackets

2020 taxable income

Federal tax rate

2021 taxable income

Federal tax rate

$0–$48,535

15%

$0–$49,020

15%

$48,536–$97,069

20.5%

$49,021–$98,040

20.5%

$97,070–$150,473

26%

$98,041–$151,978

26%

$150,474–$214,368

29%

$151,979–$216,511

29%

$214,369 and up

33%

$216,512 and up

33%

This guide can help you understand which tax credits, expenses and other deductions may be available to you. It also covers the government benefit programs you may be eligible for, and much more.

 

What's new for 2020?

A. Deductions and credits related to your practice

  1. Salaries paid to spouse or children
  2. Union, professional and other dues
  3. Malpractice premiums
  4. Employment insurance premiums
  5. Moving expenses
  6. Canada employment tax credit
  7. Vehicle use

B. Family, child-care and caregiver deductions and credits

  1. Claim your spouse’s or common-law partner’s unused tax credits
  2. Claim the spouse or common-law partner amount
  3. Claim an amount for an eligible dependant
  4. Canada caregiver tax credit
  5. Child-care expenses

C. Pension and savings plans deductions and credits

  1. RRSP contributions
  2. Canada Pension Plan contributions

D. Other tax deductions and credits

  1. Carrying charges
  2. Home buyers’ amount
  3. Medical expenses
  4. Disability tax credit
  5. Charitable donations

E. Other tax considerations for practising physicians

  1. GST/HST
  2. Incorporation

Conclusion

 

What’s new for 2020?

Government COVID-19 support

If you were eligible for any of the COVID-19 government support measures, be aware that most of these are taxable in the year received. They include:

  • Canada Emergency Response Benefit (CERB): Taxable in the year received. Income tax was not withheld at source. You could have a tax amount owing for 2020, due in April 2021.
  • Canada Emergency Wage Subsidy (CEWS): Generally taxable in the fiscal year accrued or received. Income tax was not withheld at source. Employers who received the CEWS could have a tax amount owing.
  • Canada Emergency Business Account (CEBA): As a repayable loan, the CEBA is not taxable — however, if you aim to qualify for the loan forgiveness, that amount is taxable. The deadline for principal repayment is still two years away.

Working from home

If you worked from home, you may qualify for home office expenses.

  • If you’re self-employed: Anyone who is self-employed and uses their home as their place of business has always been allowed to deduct home office expenses, as a portion of their home maintenance expenses. This deduction is not new for 2020.
  • If you’re an employee: To deduct home office expenses, employees who work from home have historically needed a Form T2200, completed and signed by their employer. For 2020, because of the number of Canadians required to work from home due to COVID-19, the Canada Revenue Agency (CRA) has made some simplifications:
    • Flat rate method: This simplified method does not require a Form T2200 from your employer. Employees who worked from home more than 50% of the time over at least four consecutive weeks can deduct $2 per day for each day worked from home (not limited to the four-week period), up to a maximum of $400.
    • Detailed method: If you want to make a claim based on the actual home office expenses you paid, you will need a signed Form T2200 — or T2200S, a simplified version created in response to COVID-19.
    • For more information on both methods, see the CRA website.

 

A. Deductions and credits related to your practice

1.

If you’re self-employed: You may want to consider paying a reasonable salary to a spouse or child for their services in helping you earn your self-employment income. This could result in income-splitting advantages if that family member is in a lower marginal tax bracket than you are. We recommend that you speak to your tax advisor before implementing any income-splitting strategy.

 

2. Union, professional and other dues

If you’re an employee or self-employed: Amounts paid for memberships in medical associations or the college of physicians and surgeons of a province or territory are generally deductible for tax purposes provided they are required to maintain a professional status recognized by statute. Union dues are also generally deductible. You do not need to file your official receipts from the association or union with your tax return, but be sure to keep them in case the CRA asks to see them.

If you’re self-employed: Other payments for memberships in professional organizations may be deductible as a business expense. If in doubt, ask your tax advisor.

 

3. Malpractice premiums

The cost of medical malpractice insurance, which is necessary in order to maintain your professional status in Canada, is generally tax-deductible.

If you’re self-employed: Deduct the annual membership fee you pay to the Canadian Medical Protective Association (CMPA), less any rebate from a provincial reimbursement or other program, as an expense when calculating your net professional income.

If you’re an employee: Deduct your CMPA fee (less any rebate) on the line “Union, professional and other dues” on your tax return. Note, however, that in certain provinces and in the territories, salaried physicians will need extra documentation from their employers to claim the CMPA fee on their tax return. If you live in Yukon, Northwest Territories, Nunavut, Nova Scotia or Prince Edward Island, you will need your employer to fill out Form T2200, indicating that CMPA membership is a condition of employment and that you are not reimbursed for the fees.

Reimbursement arrangements: In all jurisdictions in Canada, provincial and territorial governments and medical associations or federations have negotiated reimbursement agreements to offset some of the cost of liability protection. These long-standing arrangements reflect an agreement between physicians and governments to include some of the cost of liability protection in the overall compensation of physicians. To find out more, contact your provincial or territorial medical association.

We recommend that you discuss the deductibility of your CMPA premiums with your tax advisor.

 

4. Employment insurance premiums

Employment Insurance (EI) contributions qualify for non-refundable federal and provincial tax credits.

For 2020, the maximum annual EI premium amount was $856.36 (based on maximum insurable earnings of $54,200).

If you’re an employee: You are required to make contributions to EI. You’ll see these deductions on your pay stubs and on the T4 slip you receive from your employer every year.

If you’re self-employed: You are not required to make EI contributions. However, recent changes in the EI rules allow self-employed taxpayers, as defined in recent measures, to voluntarily enter into an agreement with the Canada Employment Insurance Commission to become eligible for special benefits, such as parental benefits.

 

5. Moving expenses

If you’re an employee or self-employed

If you relocated at least 40 kilometres to be closer to a new work location in the past year, you may be able to deduct allowable moving expenses against employment income earned at the new location.

If you have allowable moving expenses that can’t be deducted in the current year because you haven’t earned enough income, you may be able to carry them forward and apply them against income in another tax year. Retain your receipts in case the CRA asks for them.

Eligible moving costs include the following:

  • travel costs, transportation costs for belongings, meals during travel and lodging for a reasonable period while you are waiting for the new residence (usually up to 15 days)
  • lease cancellation costs and the costs of selling a former residence, including advertising, notarial or legal fees, real estate commissions and mortgage penalties (i.e., if the mortgage was paid off before maturity)
  • any taxes paid on the transfer or registration of title to a new residence (exclusive of any goods and services value-added tax), together with legal fees associated with the purchase of the new residence, if you or your spouse or common-law partner has sold your old residence
  • costs of utility connections and disconnections and of revising documents to reflect your change of address
  • mortgage interest, property taxes, insurance premiums and utility costs (up to a $5,000 maximum) paid on your vacant old residence if you were unable to sell it, provided you made reasonable efforts to sell it

The rules for moving-expense deductions can be complex. You can find more information on the CRA website, but we suggest that you talk to a tax advisor before including these deductions on your tax return.

 

6. Canada employment tax credit

If you’re an employee: You can claim a federal non-refundable employment tax credit to help you cover your work-related expenses. You can claim a credit equal to 15% of your employment income for the year, up to a maximum of $1,245 for 2020. (The maximum amount is indexed for inflation every year.)

 

7. Vehicle use

Employees: If your employer requires you to use your own vehicle away from your ordinary site of employment (e.g., your department at the hospital) and you did not receive a reimbursement or tax-free allowance to cover your costs, you may be entitled to claim a deduction for the portion of your vehicle expenses incurred to earn employment income. For example, some family medicine physicians are required to use their vehicles to perform house calls away from their “home” hospital or clinic and have completed the necessary documentation to claim a pro-rata share of vehicle expenses.

If you qualify, you can claim the employment portion of all of the vehicle’s operating costs including gas, oil, repairs, maintenance, insurance, licence fees, cleaning and depreciation. Interest on car loans and leasing costs are deductible within certain limits. You will need to track and record the number of kilometres used for employment purposes and the total number of kilometres driven in a calendar year.

Required forms: You will need to file Form T777 with your tax return, and your employer will have to sign Form T2200 to confirm you were required to use your automobile for work.  Although you are not required to file Form T2200 with your return, be sure to keep it in case the CRA wants to see it.

Self-employed: Self-employed physicians would simply claim the proportion of their vehicle expenses related to work-related travel as part of their business expenses, and not have to obtain a T2200.

 

B. Family, child-care and caregiver deductions and credits

1. Claim your spouse’s or common-law partner’s unused tax credits

If your spouse or common-law partner has little or no income, they may have tax credits, including provincial credits, you can use when completing your tax return. The tax savings can be substantial.

Schedule 2 of your income tax return outlines the non-refundable tax credits that can be transferred from one spouse to the other.

  • How is a common-law relationship defined?

Two individuals living in a conjugal relationship are usually deemed to be common-law partners if they have cohabited continuously for at least one year or have a child together (whether natural or by adoption). It is your responsibility to declare your status properly. Failure to do so may result in lost benefits, assessed interest charges and potential future penalties for making false returns.

 

2. Claim the spouse or common-law partner amount

If you were married or in a common-law relationship at any time during 2020 and either you or your spouse or common-law partner earned less than $13,229, the other spouse or common-law partner may claim a non-refundable spouse or common-law partner amount for federal tax purposes.

Amount: For 2020, the amount of this credit is calculated by subtracting the spouse’s or common-law partner’s net income from $13,229 and multiplying the remainder by 15%. This can translate into federal tax savings of up to $1,984 ($13,229 x 15%). Generally, a similar provincial credit will also be available.

 

3. Claim an amount for an eligible dependant

If at any time during the year you were single or separated from your spouse or common-law partner and you supported an eligible dependant, you may qualify for the same additional maximum $13,229 federal tax credit available to married or common-law taxpayers who support their spouse.

  • Note: A taxpayer who has been married during the year can claim the $13,229 amount only once. That is, you may be eligible to claim the personal amount for a spouse and for another dependant under the eligible dependant rules, but you cannot make both claims in the same year.

 

4. Canada caregiver tax credit

If you are supporting an eligible family member who has a physical or mental impairment, you may be entitled to claim the Canada caregiver credit. This federal non-refundable tax credit can be claimed by a caregiver for a dependant with a physical or mental impairment who is an eligible relative, such as a spouse, common-law partner, child, parent, grandparent, sibling, uncle, aunt, niece or nephew. There is no requirement that the dependant live with the taxpayer. The caregiver credit does not permit a claim for dependants without physical or mental impairments.

Amount: For 2020, the caregiver credit provides a maximum credit of $7,276 per infirm dependant but is reduced dollar-for-dollar by the dependant’s net income over $17,085. Also, depending on your relationship to the dependant, you may be eligible to claim an additional caregiver credit of $2,230; for details, see the CRA website.

If you claim a spousal amount or eligible dependant amount, only you can claim the caregiver credit for that dependant. In other circumstances, however, it may be shared by multiple caregivers who are supporting the same dependant, as long as the total claim does not exceed the maximum amount for that dependant.

 

5. Child-care expenses

With certain restrictions, you can deduct the cost of daycare, babysitters, boarding schools and camps, to a maximum of:

  • $8,000 a year for children under 7 at the end of the year
  • $5,000 a year for children age 7 to 16
  • $11,000 a year for children who qualify for the disability tax credit
  • $5,000 for children over 16 who do not qualify for the disability amount but who have a mental or physical impairment

The deduction must be claimed by the spouse or common-law partner with the lowest net income, except when this person is at school, disabled, separated from their spouse or in prison. Also, the deduction cannot exceed two-thirds of that person’s earned income.

In practice, the CRA generally does not attach specific child-care expenses to specific children. That is, as long as total child-care expenses do not exceed the defined limits per child multiplied by the number of children, all eligible child-care expenses are generally allowed. To maximize your base for child-care deductions, make sure to report on your tax return all your children who are 16 years and under, and those with infirmities.

Nannies: Many busy physicians, including those in two-physician families, employ nannies and other domestic workers to provide child care and other services. The cost of full-time nannies may qualify as eligible child-care expenses. Also, the CRA has previously commented that the employer’s share of Canada Pension Plan (CPP) and employment insurance (EI) premiums on the salary of a nanny may be eligible for the child-care expense deduction, provided the salary or wage paid meets certain criteria. If you have incurred any such costs, see your accountant or tax advisor.

What is not an eligible child-care expense?

  • Payments for medical or hospital care do not qualify as eligible child-care expenses. Instead, these payments may qualify as medical expenses (if eligible).
  • As a general rule, you cannot claim fees for skating lessons, music lessons or other recreational/educational activities. Depending on the circumstances, certain children’s activities may be accepted by the CRA if you can demonstrate that the primary purpose of the activity is to provide child care, thereby enabling you to work. Be sure to speak with your tax advisor for further details.

Make sure you keep proper receipts for child care, so your claims aren’t denied upon review or audit by the CRA.

 

C. Pension and savings plans deductions and credits

1. RRSP contributions

A registered retirement savings plan (RRSP) is a plan registered with the CRA that is designed to encourage you to save for your retirement. RRSP contributions can be deducted from your taxable income, to the extent that you have the available contribution room. The money in your RRSP grows tax-free and is taxed only when you withdraw it from the plan. In other words, benefits include both tax savings (i.e., tax deductions for contributions) and tax deferral (i.e., growth and earnings are taxed only upon withdrawal from the plan).

Contribution limit: The RRSP contribution limit is 18% of your previous year’s “earned income” up to a maximum of $27,230 in 2020. The maximum contribution will be $27,830 for 2021 and will be indexed in future years for inflation. Your contribution room may have to be reduced by any pension adjustments. You may also have unused contribution room from prior years that you can carry forward indefinitely and use in future years.

Contribution deadline: For 2020 RRSP deduction purposes, the contribution deadline is March 1, 2021.

Age limit: The age limit for RRSPs is 71, meaning you must convert your RRSPs to a registered retirement income fund (RRIF) by the end of the year during which you reach 71. You can continue contributing to your RRSP until the plan is converted to a RRIF, provided you have enough RRSP contribution room.

Other benefits of RRSPs

The benefits of an RRSP also include estate planning and income splitting in retirement, the latter via spousal RRSP contributions or possibly with pension income splitting. Provided certain conditions are met, you may also be eligible to withdraw funds from your RRSP without incurring tax to purchase a qualifying home (as part of the Home Buyers’ Plan) or to finance your post-secondary education (as part of the Lifelong Learning Plan). Generally, you have up to 15 years to repay these funds to your RRSP. If you have not already done so, discuss retirement planning and the benefits of RRSPs with your financial advisor.

 

2. Canada Pension Plan contributions

Canada Pension Plan (CPP) contributions qualify for non-refundable federal and provincial tax credits. For 2020, the maximum employee CPP contribution was $2,898 (based on maximum pensionable earnings of $58,700).

  • If you’re an employee: You are required to make contributions to the Canada Pension Plan (CPP). You’ll see these deductions on your pay stubs and on the T4 slip you receive from your employer every year.
  • If you’re self-employed: You must contribute both the employee and the employer share because employers must match the employee’s CPP contributions.

 

D. Other tax deductions and credits

1. Carrying charges

Expenses you incur to earn investment income (in non-registered accounts) are deductible for tax purposes. Examples include investment management fees, fees for investment advice, and interest paid on money borrowed for income-earning investment purposes.

 

2. Home buyers’ amount

  • If buying your first home: First-time homebuyers buying a qualifying home can claim a federal non-refundable first-time homebuyers’ tax credit equal to 15% of up to $5,000 in the year of purchase. This can result in a tax savings of up to $750. To qualify as a first-time homebuyer, you and your spouse or common-law partner must not have owned or lived in another home owned by either of you in the current or four preceding calendar years and must occupy the home as a principal residence within one year of the purchase date.

The home must be a qualifying home, which includes single-family houses, semi-detached houses, townhouses, mobile homes, condominium units and apartments. When two people jointly buy a qualifying home, the total credit claimed cannot exceed $5,000.

  • If buying an accessible dwelling: The credit is also available (with no first-time requirement) for homebuyers who are eligible for the disability tax credit and for those buying a home for the benefit of a relative who is eligible for the disability tax credit, if the home is acquired to enable the person to live in a more accessible dwelling.

Similar incentives are also available in certain provinces, including Saskatchewan, Quebec and Nova Scotia.

 

3. Medical expenses

If you, your spouse and your dependent children incur significant medical expenses (including dental and eye care expenses) that are not covered by an insurance plan, you may be able to claim them as a non-refundable medical expense tax credit.

Amount: For 2020, you can claim a 15% federal non-refundable tax credit on qualifying medical expenses in excess of either $2,397 or 3% of your net income, whichever is less.

The CRA also allows you to deduct medical expenses for any 12-month period ending in the year of the tax return. You may claim medical expenses for yourself, your spouse or common-law partner, and your or your spouse’s or common-law partner’s children who are under 18 years old before the end of the taxation year. In certain circumstances, you may also be able to claim a credit for allowable medical expenses you (or your spouse) paid for another eligible dependant.

Certain restrictions apply, so we recommend you talk to your tax advisor. 

What medical expenses are eligible?

In the last few years, the CRA has made many changes to allowable medical expenses, including allowing the following:

  • phototherapy equipment for treating psoriasis and certain other skin conditions
  • medical marijuana and marijuana seeds, for those who have a prescription and purchase from a legal and licensed facility
  • vehicle modification to enable wheelchair users to drive
  • reproductive technologies for patients who did not have a medical condition that prevented conception
  • the cost differential for gluten-free products for people with celiac disease (provided a medical practitioner certifies in writing that a gluten-free diet is required)
  • the cost of buying and caring for a service dog or other service animal for people who are blind or profoundly deaf; have severe autism, diabetes or epilepsy; or have a severe and prolonged impairment that markedly restricts the use of their arms or legs

You can find an extensive list of eligible medical expenses on the CRA website.

 

4. Disability tax credit

Canadian taxpayers suffering from a severe and prolonged impairment may be eligible to claim a disability tax credit on their personal income tax return.

Amount: For 2020, the federal non-refundable tax credit is 15% of $8,576.

A person is eligible for the disability tax credit when the following requirements are met:

  • the person has a severe and prolonged mental or physical impairment (the impairment has lasted or is expected to last at least one year),
  • the impairment markedly restricts the person’s ability to perform a basic activity of daily living, or the person must dedicate a certain amount of time to life-sustaining therapy, and
  • a doctor or other accepted medical professional has certified in writing that the two conditions above are true.

If you have a mental or physical impairment, contact your tax accountant and medical professional to discuss whether filing a disability tax credit claim makes sense for you.

 

5. Charitable donations

Your first $200 of eligible donations to qualifying charities qualify for a federal non-refundable tax credit of 15%. Any contributions over and above that amount entitle you to a non-refundable tax credit of 29%. This tax credit rate increases to 33% if you have enough taxable income to be subject to the top 33% federal income tax rate.

Combine your claims: If you and your spouse or common-law partner make separate charitable contributions, consider claiming all your donations on a single return. This way you will qualify for the lower tier (15% rate on the first $200) only once, as opposed to twice if donations are claimed individually, and more of your contributions will be eligible for the higher-tier tax credit.

 

E. Other tax considerations for practising physicians

1. GST/HST

The GST, or goods and services tax, is the federal value-added tax of 5%. In some provinces, the provincial sales tax is combined with the 5% federal GST and called the HST (harmonized sales tax).

Given that most services provided by physicians are considered exempt services under the Excise Tax Act, physicians are unable to claim input tax credits for the GST/HST they pay on purchases and services, which may result in an increased cost of operations. You may want to review your contractual and billing arrangements to make sure you’re satisfied with the tax status of those services or consider restructuring them to reduce the amount of unrecoverable GST/HST that may be payable. For further advice, we recommend you talk to your tax advisor.

GST and on-call stipends

In 2016, the CRA commented that a stipend paid by a hospital to a medical specialist for agreeing to stay close to the hospital and be available on an on-call basis is a taxable consideration for the supply of property to the hospital rather than for a supply of an exempt medical service. Although any consideration that can be directly linked to a specific patient may be exempt, this interpretation appears to suggest that the bulk of on-call stipends may attract GST/HST.

On-call stipends for physicians are not uncommon, which means that this ruling may have a significant effect on those physicians. In addition, the amounts of the on-call premiums, either alone or in combination with other GST/HST-chargeable activities (e.g., director stipends, teaching or researching roles, preparation of legal reports to insurance companies, block and annual fees, expert medical opinions, cosmetic surgical and medical procedures, etc.) may exceed the $30,000 GST threshold (over a period of four consecutive quarters), at which point the physician may be required to register and collect GST/HST.

  • Note: GST and HST rules are complex and, in many cases, subject to CRA interpretation. We recommend you consult with a tax advisor to help you determine any obligations that might apply to you.

 

2. Incorporation

As a physician, you’ll typically have a heavy tax burden that could make it difficult to reach your long-term financial goals. Incorporating your medical practice can help you defer some of your immediate tax burden and potentially speed up your retirement savings. There is a lot to consider when deciding whether to incorporate or not. For example, while incorporation is one way to increase your wealth, it can also make your financial picture more complex.

For more information on the challenges and opportunities of owning a medical professional corporation in Canada, please see MD Financial Management’s four incorporation guides, which provide a focused look at how incorporation affects your financial plan at different stages of your medical career:

 

Conclusion

We hope you’ve found this guide helpful. However, please remember that tax planning is a complex process and that the information in this guide does not replace advice from a professional tax advisor. We suggest that you talk to a tax professional to ensure you’re taking advantage of all the tax benefits available to you.

 

The tax legislation, tax rates and credit amounts in this guide are based on information available as of January 1, 2021 (except where otherwise noted).

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.