From: AlanBaggett@volcanomail.com   
      
   Ottawa’s new tax measures unfairly target many doctors : CRA SOTW   
      
   André Picard  The Globe and Mail   
      
   In the March, 2017, federal budget, Finance Minister Bill Morneau vowed to   
   close loopholes that were allowing the wealthy to avoid paying their fair   
   share of taxes.   
      
   Now, the government has unveiled measures that target private corporations, a   
   category that includes the majority of Canada’s physicians.   
      
   They are up in arms, and rightfully so.   
      
   Incorporation is the creation of a separate legal entity with its own   
   revenues, expenses and assets.   
      
   If a physician is incorporated, their fees (about 70 per cent of doctors are   
   paid on a fee-for-service basis) are paid to the corporation, and the company   
   covers overhead and expenses, including a salary paid to the physician.   
      
   This is how most small businesses operate.   
      
   A doctor who is not incorporated would run the practice personally, with all   
   revenues and expenses recorded on a personal tax return, and the net amount   
   being the salary.   
      
   About 60 per cent of Canadian doctors have opted to incorporate –   
   principally for the tax benefits. It is also a reminder they are independent   
   contractors, not state employees.   
      
   If a physician is incorporated in British Columbia, her small business is   
   taxed at the rate of 12.5 per cent on the first $500,000. If she is   
   unincorporated, the tax rate is 40 per cent once her net income exceeds   
   roughly $110,000.   
      
   Incorporation is only beneficial if a physician defers income. That’s   
   because income paid to the physician by the corporation is taxed at the   
   personal tax rate.   
      
   The reason physicians (and other small business owners) retain money in a   
   corporation is because they don’t have pensions or benefits like many   
   salaried employees.   
      
   Revenue Canada is proposing three major tax reforms: changing the way it taxes   
   private corporations on capital gains and on passive investments, and   
   eliminating income sprinkling.   
      
   Some corporation owners have used complex steps that involve selling shares to   
   another related company, so they can convert what would be taxed as salary or   
   dividends into capital gains. This is not legitimate, and a reasonable change.   
      
      
   Similarly, an earlier measure to limit corporations selling their services to   
   another corporation to limit the tax hit was also justified.   
      
   Ottawa also wants to limit corporations earning passive income. Money in the   
   corporation can be invested – for example, a doctor can buy the building   
   where the practice is located and charge rent to other tenants – and the   
   profits are taxed at the 15-   
   per-cent business rate. Ottawa wants to tax those earnings at the personal tax   
   rate. This doesn’t make much sense. Those earnings will be taxed at the   
   personal rate once they are withdrawn. All this does is prevent a corporation   
   from building up assets.   
      
   Finally, Ottawa is proposing a crackdown on so-called “income sprinkling.â€�   
   Business owners often pay salary to family members, or make them shareholders   
   and pay dividends.   
      
   This has tax benefits; consider that two people earning $100,000 will pay   
   about $18,000 less tax combined than one person earning $200,000. Dividends   
   are also taxed at a lower rate than regular income – to take into account   
   that tax has already been    
   paid by the corporation.   
      
   Under a proposal, these payments would be subject to a test of â   
   œreasonableness.â€� If you pay a family member a salary, they have to work.   
   And there are restrictions on paying dividends, especially to children.   
      
   The principal benefit of incorporation for a physician is to take advantage of   
   the lifetime capital gains exemption, which can shelter up to $835,716 in   
   lifetime income for each shareholder (usually spouse and children.) Ottawa   
   wants to limit the capital    
   gains accrued, especially when family members are minors.   
      
   This limits a physician’s ability to save for the future, which seems like a   
   short-sighted policy measure.   
      
   This is how people with small businesses pay themselves a pension after   
   retirement. It’s important for physicians because, unlike a store, the   
   corporation itself does not have much value. A store owner can sell the   
   business because it has a brand. Most    
   physicians are hard-pressed to sell their practices when they retire; many   
   can’t give them away.   
      
   For years, governments have urged physicians to incorporate, and even provided   
   tips on how to maximize their tax savings with measures such as income   
   sprinkling. They’ve touted this approach as an alternative to fee hikes.   
   (And doctors can’t hike    
   their fees to cover new tax hits.)   
      
   It is unfair to now claw back these benefits. It is also disingenuous –   
   scurrilous even – to paint physicians as wealthy tax cheats exploiting   
   â€œloopholes.â€�   
      
   Governments can, of course, change policy. But if they adopt measures that   
   make incorporation unattractive and impossible to accumulate retirement   
   savings, then they need to provide an alternative, such as salaries and   
   pensions.   
      
   That would mean a fundamental revamp of how physicians are remunerated. Are   
   governments willing to open that Pandora’s box?   
       
   Follow André Picard on Twitter: @picardonhealth   
      
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