If you’re a medical specialist, you may be seeking tax tips for doctors. Finding tax tips for doctors that will save you money can be a difficult task. Doctors have various financial opportunities and additional responsibilities relating to their personal taxes, so it’s important to consult a professional accountant to get the best tax advice for doctors. Here are five tax tips for doctors.
Registered Retirement Savings Plan (RRSP) for Doctors:
As a sole proprietor or employed doctor an RRSP can be a good way to save for retirement. Contributions to an RRSP are deductible from your income, and a lower income can mean a lower tax bill. Funds in an RRSP grow tax-deferred until such time as they are withdrawn. When you retire and are ready to withdraw funds from your RRSP you may be taxed at a lower marginal tax rate than you are today. Contributions to an RRSP are limited to your RRSP contribution limit for any given taxation year. This contribution limit increases, to a yearly maximum, each year based on the amount of income you earn
Tax Free Savings Account (TFSA) for Doctors:
A TFSA is another great way to save for the future. While contributions are not tax-deductible, the earnings and capital gains earned in a TFSA are not taxable. You can also withdraw the funds from a TFSA without attracting any tax. Another interesting feature of the TFSA is that money can be re-contributed to the account following the year that the funds were withdrawn as long as doing so does not push you over your available contribution limit.
Prescribed Rate Loans to Family Members:
If you make an interest free loan to your spouse or children, any income earned or capital gains realized on the borrowed funds will be attributed back to you and be taxed on your personal tax return. A way to work around these attribution rules is use a prescribed interest rate loan. If the loan is made to your lower income spouse or child and charges interest equal to the prescribed rate of interest (currently 1% but this amount is reviewed by the CRA quarterly) then income and capital gains earned on these funds will be taxed in the hands of the spouse or child. This type of planning works well when the rate of return is higher than the prescribed rate of interest charged on the investment loan. As an added benefit investment income and capital gains will be taxed at the lower marginal tax rate of the spouse or child.
Incorporation of Doctor’s Practices:
Practicing medicine is a lucrative career which can result in a heavy tax burden. One way you can defer and possibly lower your personal tax bill is through incorporation. Operating your medical practice through a corporation can result in the deferral of personal income tax. By the time you personally receive the income earned through a corporation, it will have been taxed at two levels. First at the corporate level and secondly at the personal level when the income is distributed to you. Since you determine the timing of distributions made by the corporation and if you do not need the money can defer the second layer of tax until you choose to withdraw it from the corporation. Generally, the longer you can leave the money in the corporation the greater advantage to deferral. Incorporation can be a great option if you do not need to spend all of the income you earn.
Income Splitting for Doctors:
Doctors who operate their medical practice through a corporation, or as a sole proprietor, may pay reasonable remuneration to their spouse or children for work done by them in the course of earning business income. This could result in tax savings if the family members are in a lower marginal tax bracket. Remuneration paid to family members must be reasonable based on the actual services they provide to the medical practice. It is important to note that income splitting using dividends paid from a corporation to the spouse or adult children of a doctor may not be possible due to the expansion of the Tax on Split Income (TOSI) Rules brought into effect in 2018. The TOSI rules are complex and thorough analysis should be conducted before implementing any planning in this area.
Gallo LLP Chartered Professional Accountants can help you with all your tax preparations and returns. If you’re a doctor needing professional accounting advice, contact Gallo LLP today!