March is here, and while it might not seem soon, April 30th will be here before you know it. When you are a self employed physician, you have specific financial opportunities and additional responsibilities related to your tax status. Here are some useful tips and information to help you understand your tax status as a self-employed physician:
(1) Reporting your Income & Expenses – For income tax purposes, self employed physicians report their income and expenses on Schedule 2125 Professional Statement of their T1 Individual Income Tax Return. The net income (after expenses) will be taxable to you regardless of whether you withdraw cash from the business. Incorporated physicians have more flexibility over the timing of income earned from a professional corporation and income reinvested allows for tax deferral.
(2) Canada Pension Plan Contributions – Self employed physicians are subject to mandatory Canada Pension Plan Contributions. The Canada Pension Plan Contributions are automatically calculated on your tax return. For 2015, the maximum contributions are $4,959.90, based on 9.95% on earnings up to $53,600 (less $3,500 exemption). Half of the Canada Pension Plan Contributions are deductible against income and the half are credited as a tax credit at 20.05%. Incorporated physicians who do not want to participate in Canada Pension Plan Contributions can pay dividends instead of salary.
(3) Tax Installments – Self employed physicians are required to make quarterly estimated tax payments. You should pay the minimum recommended CRA installments to avoid underpayment penalty and interest charges. It’s also a good idea to set up a separate account where you can set aside a percentage of your earnings throughout the year to pay your tax installments and any final balance owing.
(4) RRSP Contributions – You should consider making a Registered Retirement Savings Plan Contribution (RRSP). Contributions are deductible at the time of the contribution, no tax is paid on the earnings accumulated. Tax is paid on amounts withdrawn from your RRSP account. The maximum RRSP contributions are calculated based on 18% of your previous years self-employed physician income to a maximum of $24,930 in 2015 ($25,370 in 2016). Unused RRSP contributions are carried forward.
If you would like any additional information regarding the tax aspects of your going into business, or if you need assistance in satisfying any of the reporting or recordkeeping requirements, please give me a call.