Town Hall: Proposed Tax Changes Summary

Doctors Manitoba Town Hall Talk – Presented by Matt Maruca
September 28, 2017
Theatre A of the Max Rady College of Medicine

 

What was this talk?

  • Broad overview on what is happening regarding the tax changes.
  • Doctor’s Manitoba strived to have no ideology or partisanship in this talk. I personally thought they did a good job of that.

Why were we having this talk?

  • Because of the proposed tax changes that came out July 18, 2017.
  • The government set a 75-day consultation period that expires Oct 2. If you have concerns, DoctorsMB encouraged us to contact our Member of Parliament before Oct 2.
  • You can find your MP on elections.ca using your postal code.
  • The proposed tax changes by the government could potentially affect doctors’ earnings by changing their ability to do the following three things:
    1. Income Splitting
    2. Passive Investing
    3. Capital Gains

The following are the highlights/explanations presented by Mr. Maruca regarding income splitting, passive investing and capital gains.

How Doctors Are Paid
  • Doctors earn money in one of two ways:
    1. Employee Income
    2. Business Income
    – Most doctors have a business income, which they receive from their own Medical Corporation.
    – Note that any doctor paid via the Fee-for-Service model, is earning business income.
  • Medical Corporation (MC): when a doctor incorporates, they form a medical corporation. Once incorporated, all money earned by the doctor’s practice goes into the MC.
    – Employment income cannot go into the MC; meaning if a doctor is also on salary at an organization, that money is taxed normally.
    – The tax changes proposed by the government will only apply to the business income of doctors; i.e. doctors who are incorporated and have a MC.
Why would a doc incorporate?
  • Lower Business Tax rates:
    – Provincial Tax on business earnings of $450K or less is 0%.
    – Any earnings over $450K is taxed at 12%.
    – For the average employee the Provincial Tax is 17.4%.
    – Federal Tax on business earnings of $500K or less is 10.5%.
    – Any earnings over $500K is taxed at 15%.
    – For the average employee the Federal Tax is 33%.
    – Example:
    – Incorporated doctor makes $250K; they bring home $223, 750
    – Average Employee makes $250K; they bring home $148, 909
  • Income Tax Deferral:
    – A medical corporation controls how and when it pays out money.
    – Meaning a doctor can pay out earnings at a later date to decrease their tax burden.
    – Most doctors pay themselves out of their medical corporation at a much later date, such as when they are no longer practicing and not earning money. This puts them at a much lower income tax bracket.
    – What happens to money sitting in a MC?
    – Money that is not paid out can be invested and earn passive income.
    – There is no specific proposal but government is contemplating a tax on passive income earned by money that is left inside the medical corporation (i.e. the money sitting in the medical corporation will be taxed).
  • Income sprinkling:
    – Is a fancy term for spreading money around.
    – Government’s Proposal: Dividend or salary payments to adult children must meet a “reasonableness” threshold; such as was there a labour or capital contribution? How much? Was the compensation proportionate?
    – Would be monitored by CRA Audits.
    – Unclear what exactly defines a capital contribution. Could childcare be considered a contribution to the medical corporation?
  • Capital Gains:
    – Money made on the sale of certain investments/assets.
    – Only a portion of a capital gain is subject to tax (only half is taxed)
    – Medical corporations can pay out money as a capital gain instead of dividend or salary (which are 100% taxed). This is how some doctor’s pass on their practice to their children.
    – Government Proposal: eliminates the ability of medical corporations to pay out salary or dividend as a capital gain.
    – Capital Gains are not as common within Med Corporations.
A member of the audience brought up the question of whether these tax breaks were offered to doctor’s in the 1990’s in lieu of increasing tariffs.

– Mr. Maruca explained that this was not the case in Manitoba. He said that in 1999, Manitoba doctors received significant increases in tariffs, as well as the ability to incorporate. However, the ability to incorporate was never officially offered to Manitoba doctors as a “trade-off” or alternative form of compensation.  It may have been a measure used by government to remain competitive with other provinces.

A member of the audience asked if salaried doctors receive benefits.

– Mr. Maruca replied that salaried doctors do receive benefits; however the level of benefits received varies greatly.
– Mr. Maruca also explained that very few doctors receive paid maternity/paternity leave through their employer.

Suggested Resources: DoctorsMB website, MD Financial, CMA, Elections.ca (“Who is my MP?”)

 

This is the conclusion of the presentation from Doctor’s MB regarding the tax changes. I did my best to only incorporate the information that was presented and not introduce any new information. If you have further questions, I suggest you check-out the suggested websites above, as well as do a Google search for any news articles regarding the issue.

Hope this helps,

Thank-you,

Alex Sharp
MMSA Med 1 Rep, Class of 2021