Self-employed physicians in Canada have to report their professional income to the Canada Revenue Agency (CRA) using Form T2125 – Statement of Business and Professional Activities. Unlike physicians working as employees (issued a T4 Slip reporting Employment income), the responsibility to calculate and report professional income for the calendar year is required by self-employed physicians. There are two methods of accounting used to calculate professional income, the cash method and the accrual method. The method selected will affect the timing of income recognition. Under both methods, sooner or later, all income must be recognized and subjected to tax however the method or reporting will impact the timing of when income is included.
Cash Method of Accounting:
Income is recorded for the fiscal year when the cash (or current cheques) is received in your bank account.
Accrual Method of Accounting:
Income is recorded for the period during which it has been earned, i.e., at the time services are rendered even though accounts receivable for such services may not have been collected by the end of the year (as in, reported in income whether the actual payment is received or not).
For example, a self-employed physician renders service of $5,000 in December 2021, but will receive the amount in January 2022. As per the cash method, there would be no income recorded in the professional income for 2021 as the payment will be received in 2022. However, under the accrual method, the income is not received, but the service is rendered and thus, the payment would be included in the taxable income for 2021.
As a general rule, all taxpayers should use the accrual method of accounting unless the Income Tax Act provides otherwise in respect of specific items of income or expense. However, the majority of self-employed physicians use the cash method or a modified version of accrual method due to the complexity of accrual reporting noted in the paragraph below.
In practice, determining the accounts receivable value for the accrual method without using an accounting system is complicated, especially for physicians with multiple billings sources (OHIP, multiple hospitals/clinics, third-party billings). Additionally, amounts reported as accounts receivable under accrual method in a given year may not be collected in the subsequent year due to rejected claims and these items would need to be deducted as a bad debt when preparing your taxes for the following year.
For those physicians wanting to comply with the requirements, a simplified version of the accrual method can be used. They can report all income collected from February 2021 to January 2022, and so on for each year. By reporting the amounts collected between January to February of the following year, it is doubtful that any serious distortion of your income will occur relative to the real calculation of the accrual method (since the majority of a physicians income would be collected in the subsequent month i.e. January of the following year).
With the cash method, none of the complexities exist. The reason is the simplicity of the method, reporting all the deposits in your bank account during the calendar year. Most self-employed physicians lack the accounting knowledge to record income and find it difficult to file taxes. And thus, the cash method is popular among physicians.
Calculating Revenue with Medical Billing Software
If you are using Medical Billing Software (as in MDBilling.ca, CabMD, or Dr. Bill, etc.), it is important to understand the correct report needed to file your taxes. The report required is the cash reporting of paid claims for the period (as in “Payment Summary”, “Total Deposit”, “Paid Claims Report”). We have included an example of the MDBilling.ca Report showing total deposits by month.
For more information on Accrual/Cash Accounting Methods visit the CRA website: Accounting Method- Accrual/Cash Method
Need help calculating your income as a self-employed physician? Contact Elliott Stone, CPA, CA, founder of MD Physician Tax Services at [email protected].