Tax Considerations for Independent Physicians

As March progresses, it’s essential to remember that the tax deadline of April 30th is approaching. For physicians who operate as self-employed professionals, there are unique financial advantages and tax-related responsibilities to consider. Here’s a concise guide to help you navigate your tax obligations:
- Income & Expenditure Reporting:
- Self-employed doctors need to declare their earnings and expenses using the Schedule 2125 Professional Statement on the T1 Individual Income Tax Return. The net profit (after deducting expenses) is taxable, irrespective of whether you’ve taken out money from the business. Physicians with an incorporated status have greater control over when they earn income from their professional corporation. Moreover, reinvesting income can lead to tax deferrals.
- Canada Pension Plan (CPP) Contributions:
- Mandatory CPP Contributions apply to self-employed doctors. These contributions are automatically computed on your tax return. For the year 2018, the highest contributions stood at $5,187.60, calculated as 9.9% on earnings up to $55,900 (excluding a $3,500 exemption). Half of these CPP Contributions can be deducted from income, while the other half is credited as a 20.05% tax credit. Incorporated doctors who prefer not to join the CPP can opt to receive dividends instead of a salary.
- Tax Installments: Quarterly estimated tax payments are a requirement for self-employed physicians. To steer clear of penalties and interest due to underpayment, it’s advisable to pay the minimum installments recommended by CRA. It’s also wise to maintain a separate account to allocate a portion of your earnings throughout the year. This account can be used to cover your tax installments and any outstanding balance.
- RRSP Contributions: Think about contributing to a Registered Retirement Savings Plan (RRSP). These contributions are tax-deductible when made, and no tax is levied on the accrued earnings. However, withdrawals from your RRSP account are taxable. For 2018, the maximum RRSP contributions were determined based on 18% of the income you earned as a self-employed physician in the previous year, capped at $26,230 (equivalent to 18% of $145,722 income in 2017). Any unused RRSP contributions can be carried forward.