Guide for Self-Employed Physicians

Self-employed physicians in Canada are obligated to declare their professional earnings to the Canada Revenue Agency (CRA). This is done using the Form T2125, which is the Statement of Business and Professional Activities. This is in contrast to physicians who are employed and receive a T4 Slip that reports their employment income. For those who are self-employed, it’s their duty to determine and declare their professional earnings for the year. There are two primary accounting methods to calculate this income:
- Cash Method of Accounting: Here, income is documented for the fiscal year when it’s received in your bank account. This means if you get paid (or receive a cheque) in a particular year, that’s when the income is recorded.
- Accrual Method of Accounting: With this method, income is documented for the period it’s earned. This means even if you haven’t been paid for a service, but have provided it, the income is recorded. For instance, if a self-employed physician provided a service worth $5,000 in December 2021 but will only be paid in January 2022, the cash method wouldn’t record this as 2021 income. However, the accrual method would, since the service was provided in 2021.
Typically, the accrual method is recommended for all taxpayers unless the Income Tax Act suggests otherwise. Yet, many self-employed physicians opt for the cash method or a modified accrual method. This is because the accrual method can be intricate, especially for physicians with multiple sources of billing. For instance, amounts reported as accounts receivable in one year might not be collected the next year due to rejected claims. These would then need to be deducted as bad debt in the subsequent year’s tax preparations.

For those wanting to adhere to the requirements, a simplified version of the accrual method can be adopted. They can declare all income collected from February of one year to January of the next. This approach ensures there’s no significant distortion in income reporting compared to the actual accrual method calculation.

On the other hand, the cash method is straightforward. It involves reporting all deposits made to your bank account during the year. Given its simplicity and the fact that many self-employed physicians aren’t well-versed in accounting, this method is quite popular.

For those using Medical Billing Software (like MDBilling.ca, CabMD, or Dr. Bill), it’s crucial to know the right report for tax filing. The required report is the cash reporting of paid claims for the period. For a deeper understanding of the Accrual/Cash Accounting Methods, one can visit the CRA website.