Joint Response by:
John Philpott B. Eng., CMC
CanAm Physician Recruiting Inc.
John A. Flaim, CPA, CA, CFP
Flaim Wolsey Hall, Chartered Accountants
Dear Honourable Member,
We would like to thank you for your time on January 12th and for the valuable exchange of information. The purpose of this letter is to outline the main points of our discussion with respect to the taxation of professional corporations and more importantly the potential repercussions to the social fabric of our communities with the Government possibly entertaining changes to how doctors are taxed within a corporation.
During the election campaign, the Federal Liberal party gave indication that it would be looking at the tax system with consideration given to tightening rules around professional corporations (PCs). There is a belief that PCs take advantage of the income tax rules.
The following are the main areas where PCs could enjoy favorable income tax treatment:
- The ability to claim the lifetime capital gains exemption on the sale of the shares of the company operating the practice
- Low corporate tax rates which may result in income tax deferral opportunities
- The opportunity to income split with family members
These advantages that may be perceived as substantial benefits that are not available to every citizen in Canada.
Changing the taxation rules for PCs, specifically for doctors, will have immediate impact on the social fabric of our communities and will result in unintended ramifications with long lasting effect.
The ramifications of such changes are outlined below using the impact in Nova Scotia to provide example where applicable.
Lifetime Capital Gains Exemption
With respect to doctors who have a PC, the lifetime capital gains exemption is not applicable. Doctors are not normally in a position to sell their practice as it has no or very limited value.
Low Corporate Tax Rates and Income Tax Deferral Opportunities
PCs provide the opportunity for low corporate income tax rates assuming that the gross income derived from the medical practice exceeds practice-related expenses.
In Nova Scotia for 2015 the combined corporate income tax rate is 14% composed of 11% Federal tax and 3% provincial tax. This tax rate is applicable for taxable income within the corporation up to a maximum of $350,000.
For example, if a doctor were to earn $350,000 after expenses in the company the corporate taxes would amount to $49,000 ($350,000 *14%). This leaves $301,000 in the company before the doctor takes a dividend from the company to fund personal expenditures.
The income tax deferral is only available if the doctor leaves funds in the company. Once funds are taken out of the company one is then taxed personally, just like any other taxpayer. The benefit is the PC provides the doctor with the opportunity to keep the funds in the company for the purpose of funding their retirement similar to a RRSP or pension. Doctors are self-employed and are not employees of the province so they do not have access to a pension plan from the provincial government.
In addition, doctors attend university for minimum 10 – 12 years to obtain their training and non-subspecialized certification. Subspecialized specialist spend 14 to 16 yrs in training. These time lines assume students get into medical school first time applying after their undergraduate degree, which rarely happens.
This generally results in doctors starting their working career much later in life (mid 30s) and to have significantly higher student loans than most Canadians who attend university to study a different trade or profession. Combine this with the actual cost to be a licensed physician, which includes thousands of dollars in fees for provincial licence, provincial associate fees, CMPA, compulsory CME (Continuing Medical Education) and basic life and Disability insurance, there is very little money left in PCs.
As a result, the doctor has a reduced number of working years to retirement, no access to provincial government pensions, and significant financial commitments like student loans. So the doctors tend to use their PC as their retirement vehicle. To the extent the doctor saves money for his retirement in a PC, this is a tax deferral and not a permanent tax savings. Income taxes will be paid by the doctor when the money is withdrawn as a dividend during retirement much like it is for RRSPs and registered pensions.
Opportunity to Income Split with Family Members
Unlike an individual taxpayer who receives a salary and cannot income split with family members, PCs provide an income splitting opportunity assuming the family members are over the age of 17. This is where a PC could take advantage of the income tax laws. The age limit of 18 was introduced in the late 1990s as part of the Kiddie Tax Rules. Prior to that time, one could income split with a minor at any age.
The Kiddie Tax was designed to keep parents from splitting investment income or dividends from the PC to their children to take advantage of the child’s lower tax bracket. Without the Kiddie Tax, this resulted in lower taxes being paid by the family as a group since the children usually were in a lower tax bracket than the parents.
Family Trust and spousal income splitting has been a significant attraction for recruiting new doctors to Canada. But it has also provided the ability to draw returning Canadian Doctors who departed Canada during the “Brain Drain” in the ’80s and ’90s. They see the ability to pay for the children’s university education through family trust and provide a spousal income to create a spousal RRSP.
If the government were to change the rules around PCs, they can propose changes at the small business rate level or at the income splitting level.
The Province of Quebec has decided to deal with the perceived abuse by allowing the low corporate tax rate only for those companies that have three or more full time employees or if they are operating in the primary or manufacturing sectors. In our view this is the wrong approach as very few businesses start off with having more than three full-time employees. Small businesses need time to grow and they need time to hire fellow Canadians and to reinvest in their companies to continue the path of growth.
Implementing such a policy at the Federal level could significantly stunt Entrepreneur and small business growth in a time where the country needs as much assistance in this area as possible. The Federal Liberal government has committed to create jobs and additional economic activity through making significant investment in Canada’s infrastructure. We believe that implementing a tax measure similar to the one proposed in Quebec would significantly undermine your efforts to build a stronger Canada and a strong middle class.
As an alternative to imposing federally the tax measures similar to the ones proposed in Quebec, a better alternative would be to the low corporate tax rate applicable to small businesses to generate more jobs and investment in the economy. As an example the government could increase the age on the Kiddie Tax from over 17 to 25 and over. Such an income tax measure would not target any one group in society as it would apply to all small businesses in Canada and not just those owned by doctors.
The low Canadian dollar vs. US dollar, similar to the ’80s and ’90s makes migration to United States very attractive. If you consider the high cost of living in Canada vs United States, GST vs. no US federal sales tax, continuous climbing province tax rates, and now you limited the benefits of PCs such as Incoming splitting, family trust, and deferred personal taxes. Canada will 100% guarantee see a new “Brain Drain” into the U.S. for all physician specialities.
In the last 10 years, federal governments have forced spending cuts in health to the point where subspecialist physician graduating in Canada cannot find permanent full-time work resulting in unacceptable wait times which is very evident in high tax provinces such as Nova Scotia. It is increasingly difficult for Canadian Physicians in general to find employment in areas suitable for spousal employment and the desirable family lifestyle.
Right now without making changes to taxation of PCs, Canada cannot compete with the U.S. for physician employment options and take-home pay for retirement investments. Sixty per cent of physicians in Canada are over the age of 40 and 40% are over the age of 60 (CIHI). They are looking at the number of years they must continue to practice in order to retire.
It would be a serious mistake in physician Recruitment and Retention for the Federal government to change any aspect of tax benefits of PCs.
Other points to note:
- Middle Eastern countries such as Saudi, UAE, Kuwait, and Qatar are already taking some of Canada’s most value experience physicians. They are offer tax free status, zero cost of living, full array of benefits, higher competitive salaries, access to top quality services which produces an easier practice environment.
- Attracting International Physician to Canada to address the future “Brain Drain” is a much more difficult than three years ago;
- License for International physicians (IMGs) is much more restrictive and demanding. FMRAC (Federal of Medical Regulatory Authorities of Canada www.fmrac.ca ) have and are implementing serious changes which will deter Doctors from considering Canada.
- CanAm is projecting the cost for International doctors to consider Canada to be at $10,000 before they are able to apply for a licence to practice.
- Immigration changes have significantly slowed recruitment. The processing time to obtain a work permit for a physician is gone from a few weeks to 6 to 9 months. Canada will see depart closures because we can no longer consider International physician to fill urgently need shift in such critical places as OR and ER. Even physicians who are on a work permit for a hospital cannot put up extra shifts in another location.
- Canadian Physician Associations will have a huge bargaining chip to increase salaries and benefits because of the inability to recruit international physicians in a timely manner. Simply stated without the benefits of PCs, doctors will go back to the institutions, ask to be hired as employees, ask for pension and benefits — and the entire provincial health system collapses because of the added cost of hiring health professionals as employees with benefits. Doctor’s work less — as they are on salary — they take longer vacations, and the system backs up — and the availability of health care becomes even more scarce.
Ultimately, these extra costs will have to be funded by either the Federal Government in transfer payments — or by higher provincial taxes — or cuts elsewhere in the system. Just look into the top heavy civil servants of Nova Scotia government where 58% of budget goes into paying civil servants salaries. They are imploding on pension plans alone therefore we can’t imagine adding high paying physician salaries.
Why Doctors Should Receive Special Status within the PC Structure
Unlike accountants, lawyers, and other professionals, our experience causes us to believe doctors are in a unique situation. For most businesses, even if there are corporate or personal income tax changes, they will stay in the province where they have built their clientele. Doctors are substantially more mobile and their services are always in high demand.
A doctor could easily mitigate higher federal income taxes (either corporate or personal) by moving to a province that has lower personal or corporate income taxes. We have seen firsthand the masse exodus of doctors from Nova Scotia to other provinces due to income tax changes that have already occurred provincially such as the reduction of the small business limit in Nova Scotia to $350,000 (from $500,000) and of Nova Scotia having one of the highest personal income tax rates in the country.
This allows provinces that can afford these services to entice doctors to move from a higher provincial tax jurisdiction to mitigate what would be a federal income tax change. The richer and more affluent provinces are also at risk as their doctors may choose to move to another country such as the United States where taxes are significantly lower. In a nutshell, this impacts the social fabric of our communities and the country as a whole.
Please also be aware that when doctors were able to incorporate in the 1990s, the provincial government of the day promoted these same tax advantages of income splitting and deferring opportunities to act as a compromise in dealing with the slower fee growth from the provinces for the services provided by doctors.
Thank you for taking the time to listen to our concerns. Please contact us with any questions or areas of clarification.
Yours very truly,
John A. Flaim, CPA, CA, CFP
Flaim Wolsey Hall, Chartered Accountants
3058 Oxford Street, Halifax, NS B3L 2W7
T: 902-431-7613 F: 902-431-2385
John Philpott B. Eng., CMC
CEO, CanAm Physician Recruiting Inc.
CanAm Health Management Consulting
T: 902-883-7426 F: 902-482-3434