Insights – Taxes for Medical Doctors.
Keeping an eye on Canadian tax and business developments for Medical Doctors.
2024 Federal Budget: How the Changes Affect Medical Doctors
On April 17, 2024, the Minister of Finance presented the Budget 2024: Fairness for Every Generation. This blog post briefly summarizes all the tax announcements from the Federal Budget 2024 relevant to physicians.
2024 Federal Budget
Capital Gains Inclusion Rate: Budget 2024 proposes to increase the inclusion rate (the portion of capital gains on which tax is paid) for capital gains realized. The new rules will apply to capital gains realized on or after June 25, 2024.
- For individuals with more than $250,000 in capital gains in a year, the capital gain inclusion rate will increase from one-half to two-thirds. Individuals will continue to only pay tax on 50 percent of any capital gains up to $250,000 per year. Capital gains from principal residences will remain tax-free to ensure Canadians do not pay capital gains taxes when selling their home. These proposals are expected to have limited impact on physicians unless they realize a significant one-time gain in a year i.e sale of cottage and dispositions on death.
- For corporations and trusts the inclusion rate will increase to two-thirds for all capital gains (no exemption up to $250,000). We note that these proposed inclusion rate changes likely disincentivize incorporated physicians, resulting in degrading the integration principles. Incorporated physicians should consider whether acceleration to trigger capital gains before June 25, 2024, is appropriate.
Taxes Payable by Individuals at Various Income Levels — Ontario 2023
If you are a Canadian resident, you are taxed on your worldwide income from your employment, self-employment - professional income, and income or taxable capital gains from any investments or property you may own. You are not taxed on gifts you receive and certain miscellaneous types of income. If your income is sourced in another country, you will normally receive a tax credit in Canada to avoid double taxation.
Not all income is treated equally. For example, only 1/2 of capital gains are included in income. Most Canadian source dividends qualify for the gross-up and dividend tax credit mechanism that reduces the tax payable on the dividends for resident individuals. Certain employment benefits are received free of tax. Employee stock option benefits are currently one-half taxed in most cases.
Timing affects all revenue and expense items, professional income is generally taxable on an accrual basis, employment income when received, and capital gain and losses when realized or sold. The reporting of professional income is often a confusing concept for medical doctors since under the accrual method, you report income you earn during the calendar year, no matter when you receive it.
Personal Income Tax Brackets – Ontario 2023
Canada’s income tax system levies federal and provincial taxes on individuals. Canada uses a progressive (graduated) income tax system where your earnings are taxed at higher rates (tax brackets) as your income increases. Tax brackets determine the rate of tax paid for each additional dollar of income within the defined bracket/threshold. Those with lesser incomes pay a lesser percentage of taxes on the income earned in lower tax brackets, while those earning higher incomes in higher tax brackets have to pay a higher rate of tax.
In addition to federal income tax, provincial taxes are imposed by the province or territory in which you reside or carry on business or professional activities. Therefore, a physician working in multiple provinces or territories will be required to allocate their professional earnings between the various provinces or territories. Provincial tax rates, tax brackets, and credits vary by province and are calculated using the taxable income calculated under federal income tax rules on schedules accompanying the T1 Individual tax return.
Cloud Accounting Software for Medical Doctors
Incorporated physicians have traditionally used spreadsheets and manual procedures to prepare payroll and track their income and expenses. For many incorporated physicians with earnings through a group clinic or hospital cloud accounting and payroll solutions can reduce errors, save time, and avoid CRA penalties/interest.
Xero the industry-leading online accounting software provides an easy-to-use, cost-effective, and efficient accounting system for small and medium-sized businesses. Physicians without any accounting knowledge can use Xero accounting system, resulting in significant benefits through reduced errors, quicker turnaround, and lower client fees. Physicians become more financially literate and involved in their finances. Through a collaborative approach, clients see the same information in real-time and become involved in the process rather than just sending us documents and having us produce information.