January is the start of a new calendar year. It is also the start of a new tax year, which means that it will soon be time to file tax returns for the previous one.
Tax returns for most Canadians are due by April 30. Medical residents with moonlighting income (or who have spouses with self-employed income) have until June 15 to file their tax returns, but must still pay their taxes by April 30 to avoid interest charges.
Income tax is a huge, complex topic. The scope of this discussion is restricted to some items of interest that may directly impact current medical residents in the filing of their 2014 personal taxes. It is impossible to cover every potential situation. Information on more complex issues such as preparing your first income tax return after residency or incorporation are available on this site.
Income Tax Framework
Canada uses a progressive tax system where income is taxed at progressively higher rates. Only income within each tax bracket is taxed at the applicable rate.
The 2014 tax brackets and rates for BC are as follows:
Tax credits and deductions are used to reduce income tax. A deduction is applied directly against income, reducing income tax at the rate for the taxpayer’s current tax bracket. A tax credit is applied against income taxes at the lowest tax rate. For example, a person with income of $75,000 will reduce their tax by $297 for every $1,000 of deductions and a person with income of $136,000 will reduce their tax by $407 for every $1,000 of deductions. A tax credit of $1,000 is worth $200 to a taxpayer regardless of their income level.
Annual Union, Professional, or Like Dues
Dues for membership in a trade union, and professional liability insurance premiums and membership dues required to maintain a professional status are deductible. This includes fees paid to PARBC (itemized on the T4 slip for your resident salary), College of Physicians and Surgeons, and CMPA. Doctors of BC / BCMA dues and other optional memberships are not deductible under this provision.
If you moved at least 40 km closer to start residency, the related expenses are deductible against your resident salary. Eligible moving expenses include:
Transportation and storage costs for household effects;
Travel expenses including vehicle costs, meals and lodging;
Temporary living expenses including meals and accommodation for up to 15 days near old and new residence;
Lease cancellation costs;
Cost of selling old home including legal costs, real estate commission and mortgage prepayment penalty;
Legal fees and property purchase tax on purchase of new home (if sold old home);
Incidental costs such as revising legal documents with new address, obtaining new driver’s license, and utility connection/disconnection charges;
Costs to maintain old home while trying to sell it up to a maximum of $5,000.
Ensure you keep all receipts. Moving expenses are one of the most commonly reviewed deduction claims.
Meals and travel costs can be claimed based on actual costs, or using flat rates under the simplified method. Using the simplified method, meals are claimable at $17/meal up to a maximum of $51 / day per person without receipts, although CRA has stated that it may still ask you to provide some documentation to support the claim. Vehicle mileage is claimable at different rates depending on the province in which travel begins. For example, driving from Alberta to BC is claimable at $0.455 / km whereas driving from Ontario to BC is claimable at $0.575 / km.
Registered Retirement Savings Plan (RRSP)
An RRSP encourages saving for retirement by providing a deduction when an RRSP contribution is made, and tax-free investment growth until the funds are withdrawn from the plan. Your RRSP contribution limit is equal to 18% of your previous year’s earned income (up to $24,270 for 2014) plus any unused contribution room from prior years. Unused contribution room can be carried forward indefinitely.
An RRSP contribution made by March 2, 2015 will be deductible on the 2014 personal income tax return.
RRSP contributions do not have to be deducted in the year they are contributed, but can instead be carried forward and deducted in a later year where the deduction may be more advantageous. If your resident income is $75,000, the RRSP deduction is only worth 29.7%. However, if you saved the RRSP deduction until you started in practice, the deduction could be worth up to 45.8% if you are earning over $150,000.
Child Care Expenses
Annual childcare expenses up to $7,000 are deductible for each child under 7, and up to $4,000 for children aged 7 to 16. Eligible expenses include pre-school, daycare, baby sitters, and day camps. The deduction must be claimed by the spouse with the lowest net income except where the spouse is at school or disabled.
Ensure you have good documentation to support this claim. Child care expenses are another commonly reviewed deduction.
Common Tax Credits
Tuition Fees, Education Tax Credit and Textbook Tax Credit
Most residents should be familiar with the tuition, education and textbook tax credits from medical school.
Unused tuition and education credits can be carried forward indefinitely until income is sufficient to use them up. If you have not filed tax returns while in medical school because you had no income, you will need to file returns for each year with tuition in order to generate your unused tuition credit available for the current year.
The tuition and education credits are tracked both provincially and federally, and the amounts are not necessarily the same. If you relocated to BC to start your residency, your unused provincial credit is reset to match the available federal credit.
Exam fees paid for the MCCQE I and II, CCFP exams and FRCPC / FRCSC exams, including credential assessment fees are claimable as tuition in the year they are paid. Related costs including travel and prep courses are not eligible.
CRA will not allow exam fees for the United States Medical Licensing Examination to be claimed as tuition. In addition, fees paid for the Canadian Resident Matching Service and related costs do not qualify.
The textbook tax credit is based on the number of months in attendance at a postsecondary institution, not the actual cost of your textbooks. No deduction or tax credit is available for the medical texts or instruments you have acquired while you are still a resident. However, when you commence practicing, you can transfer the items to your medical practice at their fair market value and claim a deduction for annual depreciation.
Student Loan Interest
For income tax purposes, a tax credit is available for interest paid on government student loans, but not on student loans refinanced by a bank. Many accountants advise that student loans should not be refinanced because of the availability of the tax credit. However, the higher interest rate on government student loans actually makes these loans more expensive than bank loans, even after taking the tax credit into consideration.
Government student loans in BC bear interest at prime plus 2.5%, and are eligible for a combined federal and provincial income tax credit of 20%. Most banks will offer financing to medical residents at the prime rate. Compared to the current prime rate of 3%, the tax credit adjusted rate for the government student loans is 4.4%.
You should consider refinancing your government student loans with a line of credit to reduce your interest costs only if you plan to practice in an urban setting. Both the BC government and the federal government offer student loan forgiveness programs to physicians and medical residents who practice in qualifying remote locations. The forgiveness applies only to government student loans, not student loans financed through a bank line of credit.
Monthly or longer public transit passes for yourself, spouse and children are claimable. Short-term passes are eligible if each pass entitles you to unlimited travel for at least 5 consecutive days and you buy enough of these passes for travel for at least 20 days in any 28 day period.
First Time Home Buyers’ Credit
You or your spouse can claim an amount of $5,000 for the purchase of home in 2014 where neither you nor your spouse owned and lived in another home in the year of the home purchase or in any of the four preceding calendar years.
Amounts for Children
A number of tax credits exist for taxpayers with children:
- Child Amount – tax credit for each child under 18 who ordinarily lives with you during the year.
- Children’s Fitness Amount – up to $1,000 per child under 16 years of age at the start of the tax year for eligible physical activity. Eligible expenses must be for ongoing (at least 8 consecutive weeks or 5 consecutive days) supervised programs requiring a significant amount of physical activity.
- Children’s Arts Amount – up to $500 per child under 16 years of age at the start of the tax year for eligible programs of artistic, cultural, recreational or developmental activity. Eligible expenses must be for ongoing (at least 8 consecutive weeks or 5 consecutive days) supervised programs including enrichment or tutoring in academic subjects, fine arts, music, performing arts, language training, wilderness training, and learning about a culture.
Family Tax Cut
Income splitting is the transfer of income from a high tax rate individual to a lower tax rate individual, resulting in a lower overall income tax. Announced in October 2014, the family tax cut allows for limited income splitting. The savings is up to $2,000 for eligible couples with children under 18, based on the net reduction in federal tax that would be realized if up to $50,000 of an individual’s taxable income was transferred to the lower income spouse.
Income earned from moonlighting is considered business or self-employment income. Unlike employment income which has a very limited allowable deductions, all reasonable expenses incurred to earn business income are deductible (subject to some restrictions). Expenses can include, but are not limited to, supplies, travel, training, membership fees, cell phone costs, etc.
Some hospitals may report the income to you on a T4A slip, but not all moonlighting income is being reported that way. It is your responsibility to track your income to ensure that everything is recorded correctly in your tax return.
Unlike your resident salary, income tax is not withheld from your moonlighting income. Be prepared to owe taxes in April when you are moonlighting.
The United States requires all US citizens and green card holders to file income tax returns and to report holdings in foreign financial accounts where the aggregate value exceeds USD $10,000 at any time in the calendar year. It doesn’t matter that you haven’t lived in the US since you were 2. If you are an American citizen, you have to file US tax returns. The cost of non-compliance can be huge. For example, failing to file a foreign bank account report (FBAR) can carry a penalty of $10,000 for each non-willful violation.
Fortunately the US has implemented a voluntary disclosure program, the Streamlined Program, for non-resident Americans who have not filed US tax returns or reported their foreign assets. Taxpayers using this program will not be assessed penalties for failure to file. Qualifying taxpayers will have to file three years of tax returns and 6 years of foreign financial account reports, certify that the non-filing was not willful, and remain compliant in the future.
How to File
You have two options for preparing and filing your tax return – do it yourself or use an accountant.
There are many tax preparation products available to assist you including TurboTax, Ufile, and Simple Tax. They are simple and inexpensive to use and are suitable when all you have is a T4 slip and a few expenses.
Using an accountant can save you time, aggravation, and additional taxes. Accountants can make tax saving suggestions and decisions that cannot be anticipated by software.
Please contact me if you would like assistance with your 2014 personal income tax return. I offer reduced rates to current medical residents.