First Income Tax Return after Completing Medical Residency

Personal Income Tax Return for Doctors in BC

Transitioning to medical practice from residency is a big step.

Completing the requirements of the program, writing certification exams, finding work, getting licensed, applying for hospital privileges, setting up CMPA coverage, etc.  There is so much to be done before you can start practicing.

Some things get pushed aside until it’s time to deal with them.

Income tax is often one of those things. And with April 30 approaching, it’s now time.

Tax Differences Between Residency and Practice

Practicing medicine after residency brings about a significant change in the way you are taxed and the way you prepare your tax return.

As a resident, you received a salary that had income tax and other deductions taken off your pay.  In January or February of the following year, you would get a T4 slip reporting the income you earned and the deductions withheld from your income. The information would be entered in your tax return, along with any miscellaneous income, deductions and tax credits. Chances are you would get a good sized refund if you had tuition tax credits, or you would have a small refund or balance owing.

This changes after residency for most new physicians. Unless you are a salaried employee, you are now considered self-employed. Tax is no longer withheld from your earnings, meaning you may owe a significant amount when you file your income tax return.

Other changes include:

  • Filing deadline – most people must file and pay their personal taxes by April 30. Self-employed individuals must still pay their taxes by April 30, but have until June 15 to actually file the return. If you haven’t been able to get all of your income and expenses sorted out by the end of April, make sure you pay an estimate of your taxes to avoid interest charges.  You will then have until the middle of June to get the tax return finished and filed.
  • Unlike employment income, which is summarized for you on a T4 slip, you have to keep track of your self-employed earnings yourself.
  • The expenses that an employee can deduct are very limited and are itemized in the Income Tax Act. Self-employed individuals can deduct all reasonable expenses incurred to earn business income, subject to some restrictions.

Filing the Tax Return

You have two options for preparing and filing your tax return. You can prepare and file the tax return yourself using tax preparation sites or software including Turbo Tax and UFile. Or you can use an accountant.

I’ll admit it – I’m biased.

Doing the tax return yourself is inexpensive – the cost of the software is low compared to the cost of an accountant. But it can also be expensive – deductions may be missed and you pay more tax than necessary.

If using an accountant, make sure that you choose one that has experience dealing with doctors. I recently started working with a physician who had used a chartered accountant to prepare his last 2 income tax returns. I found a number of missed deductions and planning opportunities.

You can keep your accountant costs lower if you itemize and summarize your income and expenses, instead of just handing over your bank statements, credit card statements, and envelopes full of receipts. The less work for the accountant, the lower the cost.

Income, Expenses and Tax Credits

Your income for tax purposes is calculated as your income less your deductible expenses. Income tax is calculated on your taxable income, and then reduced by your tax credits.

Tax credits and expenses/deductions are not the same.  A tax deduction reduces your taxable income, which reduces your tax at your marginal rate. A tax credit is a deduction from your taxes payable and is not dependant on your tax bracket.

A $1,000 tax deduction is worth $437 in tax savings to someone in the top bracket, but may only be worth $200 to someone in a lower bracket. A $1,000 tax credit is worth $200 to everybody, regardless of their income level.

Deductible expenses include business expenses, RRSP contributions, moving expenses and union dues.

Tax credits include tuition costs, student loan interest, and medical expenses.

Income

For the first tax return after residency, you will probably have income from a few sources.

Your residency salary will be reported on a T4 slip. You may also have T4A slips for honorariums and other income from other organizations (BCMA/Doctors BC, UBC, Divisions of Family Practice, etc.)

Your self-employment income will include, but not limited to, payments from MSP, clinics, health authorities, PITO,  etc.  Income should also include amounts that are received and deposited in January or February that are for work done in the previous year.

Employment income is taxed on a cash basis. If your paycheque is dated December 31, 2013, is included in your 2013 tax return. If the cheque is dated January 1, 2014, it is included in your 2014 income tax return.

Self-employment income is taxed on the accrual basis. It is taxed in the year it is earned, which may not be the same as the year paid. For example, the MSP remittance paid to you on January 15 consists mainly of billings for the period Dec 15 – 31. Although paid it January, it was earned in December.

Expenses

Deductible expenses are any reasonable expenses incurred to earn the self-employed income, subject to some restrictions.

Expenses include:

Advertising and promotion – all forms of advertising including print and social media.

Clinic overhead – the fees you pay for use of a clinic, or your allocated share of joint clinic expenses are deductible from your medical practice income.

Continuing medical education – cost of courses, travel to attend course, educational materials (text books, Up to Date subscription, journals, etc.)

Equipment and instruments – Equipment is not deductible all at once. Instead, 10% of the cost is deductible in the year purchased and 20% of  the undeducted cost thereafter. The rate for computers is 27.5% in the year of purchase, and 55% thereafter. Instruments costing less than $500 are fully deductible when purchased. The value of any furniture and equipment owned by you at the time you started practice can be deducted at the above rates.

Exam fees – Exam fees and ancillary charges (eg exam materials) to obtain professional status or to be licensed to practice a profession are eligible to be claimed as a non-refundable tax credit, including exams through the Medical Council of Canada, Royal College of Physicians and Surgeons,  and College of Family Physicians.

Home office – a percentage of home office costs including rent, mortgage interest, property taxes and utilities is deductible where the home office is your principal place of business or you only use the office to earn business income and you use it on a regular basis to meet your patients.

Insurance – CMPA for the period in practice.  Disability, critical illness and life insurance are not deductible expenses for income tax purposes.

For 2013, CMPA is a requirement in BC for employment as a medical resident. The portion of CMPA for the residency portion of the year is deductibles as union dues. From the time you start practicing, the CMPA premiums are deductible against your practice income.

Interest – interest on government student loans is eligible for a tax credit. No tax credit or deduction is available for interest on student loans refinanced by the banks, or student lines of credit. Interest on loans to buy equipment or a practice is deductible.

Licenses and dues – memberships in organizations related to the practice of medicine are deductible, including BCMA (now Doctors BC), College of Physicians and Surgeons, Royal College of Physicians and Surgeons, College of Family Physicians, etc.

Locum costs – travel and related costs for locum assignments are deductible. Where the locum is out of town, costs of accommodation and meals are allowable expenses.

Meals and entertainment – 50% of the cost of meals and entertainment for business purposes is deductible.

Medical library – when you start practicing, the current value of your medical library can be set up as an asset. It will be deducted at the rate of 10% in the first year, and 20% of the undeducted cost each year thereafter. Annual purchases of textbooks can be considered a cost of continuing medical education.

Moving expenses – the costs of moving at least 40 km to a new home to start a new job or business qualify as an expense for tax purposes. Moving expenses are only deductible against income earned in the new location. Allowable expenses include transportation and storage, travel, temporary living expenses, lease cancellation costs, selling costs of your old home, etc. More detailed information is available from the CRA website.

Practice search – travel, meals, accommodation and other costs incurred to find a new practice can be deducted.

Salary to spouse or family members – reasonable salary to a spouse or family member is a deductible expense. If paying wages to family members, you should open a payroll account with CRA for source deductions, and issue proper paycheques.

Telephone / Fax / Internet – deductible phone costs include office telephone and fax costs, charges for a dedicated line at home for work, business portion of home phone and internet costs, data plan for laptop or tablet, etc..

Uniforms or clothing – clothing specific to your practice such as a lab coat or scrubs are deductible. The cost of regular street clothing is not an allowable expense.

Travel and accommodation – travel for business purposes (by transit, vehicle, air, etc…) is an allowable expense. Make sure that you remove any costs for family members that accompanied you on trips.

Vehicle expenses – the business portion of automobile costs such as fuel, insurance, loan interest, lease payments or capital cost allowance, and repairs and maintenance. Business use does not include travel to and from your home to your primary place of work. Business use includes travel for banking, business meetings, courses, multiple practice locations, etc.

The above list is not fully inclusive. If in doubt about the deductibility of an expense, consult with an accountant.

Please contact me if you have any questions or need assistance with your tax return.

In my next post I will include a checklist and guidance on information needed by your accountant to help prepare your tax return.

 

John Moore, accountant for physicians and medical residents, Vancouver, British Columbia

 

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About John Moore

I am a Chartered Professional Accountant (CPA,CA) based in Vancouver, BC who helps doctors, dentists, lawyers and other business professionals keep more of what they earn. I provide tax, accounting and financial planning services for professionals and business owners.
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5 Responses to First Income Tax Return after Completing Medical Residency

  1. Jack Phan says:

    Great piece! Do you have any tax filing advice/suggestions for us who are newly incorporated in the first year?

    • John Moore says:

      Thanks! The allowable expenses apply to companies as well. I’ll have some posts in the future on maximizing the effectiveness of medical corporations, such as transferring medical library to company when incorporating, writing off medical expenses using a private health services plan, insurance alternatives, paying for vehicle use, etc.

  2. Charlie says:

    Amazing articles Mr. Moore! Very helpful and informative.

  3. S says:

    Great article! I will be finishing residency soon in the USA and coming back to Canada where I have my tuition tax credit unused.

    1)Can I use the tuition tax credit as soon as I start as a physician out of residency?

    2) If the tuition tax credit is 100,000$, how does that work exactly? Does it mean the first 100,000$ I make will not be taxed?

    Thank You

    • John Moore says:

      You should be able to use the carried forward tuition on the first return where you have enough income to owe tax.

      Unfortunately, it’s a tuition tax credit, not a deduction, so it doesn’t offset the income directly.

      Under our system of marginal tax rates, the tax rate increases for higher levels of income, so a tax deduction reduces the amount of income taxed in the relevant tax brackets.

      A tax credit is a reduction in tax, calculated at the lowest tax bracket levels. In BC, works out to 20%.

      For example, if you earned $200,000 in BC, the personal tax would be $66,000. If you had a deduction of $100,000, you would only pay tax on $100,000, which would be $24,000.

      On the other hand, a tuition tax credit of $100,000 would only reduce your tax by $20,000 from $66,000 to $46,000.

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