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Proposed tax changes - what will that mean for us

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On 23/08/2017 at 8:05 PM, rmorelan said:

The part I don't get is the last paragraph sounds like exactly what a salaried person's pension effectively is. Normal Canadians have access to that all the time - tons of people have company or government sponsored pensions through their work. The money paid into the pension (which is in liu of other employment income) basically is tax sheltered until the employee retires. Doctors have been using for the most part the retained earnings to simulate a pension as the money is used for the most part for retirement. Laymen have tax effective tools - RRSPs and pension plans being the main ones that spring to mind - that usually small business owners don't or cannot use as effectively. Even company sponsored maternity leave or sick leave is in a sense a kind of tax deferral (your salary would be lower because the company has to budget for those expenses and it is factored into your market cost - which reduces your taxes now, only for you to pay taxes when you aren't working later while sick or on leave).  I wonder if the government said the funds could only be released if used during retraining/sick leave/family or maternity/paternity leave, or retirement (to stimulate a pension) if people would agree.   

I am not even sure comparing employees to small business owners is the right model anyway. Why are those even supposed to be equal in the first place? - businesses have risks associated with them that employees don't have with income varying often, and employees have benefits business owners don't. Business's also have long periods where little or no profit is made (effectively my entire training is time when my "business" is not profitable). Equalizing based solely on income ignores major differences between the two. 

 

 

 

I disagree with your last comment about equalizing based solely on income ignores major differences between the two - this misses the mark about the whole purpose of horizontal tax equity of tax fairness - people who are at the same economic position, should pay the same amount of tax. Although our tax system is far from perfect, its goal is tax integration - a person should be indifferent earning income via a corporation or via a salary. It is because of the various exploitations and aggressive tax planning that are not bona fide that have led to the ultra expansion of the tax code over time.

Pension is a locked-in vehicle - you do not have access to this until you retire. Locked-in vehicles have low dexterity. RRSPs and TFSAs are capped. Also the benefits of RRSPs as I have mentioned are limited if there are limited difference between retirement income and pre-retirement income. TFSAs are available to all Canadians so doctors or business owners whoever can take advantage of that.

The flexibility in moving passive income is what the government is after. Yea, pension is a quais investment vehicle and is tax-deferred during contributing years, but you don't have that discretion and flexibility to move during the 40 years that you're productive. Whereas, a doctor who is incorporated can move its after-tax business profits in any way he or she wants - sprinkle it as dividends, reinvest back into the business or invest in marketable securities and keep the income within the business. 

I think small businesses certainly are subjected to higher risk than the average employee - that is reflected in the tax rate of 15 percent. It should be re-iterated that the tax changes are on passive investment income NOT active business income. The lower tax rate remains applicable for people genuinely carrying on a business and using after-tax earnings and recontributing back into the business. The government has taken that into account (that as in the risk profile a business) and uses a 15 percent tax rate to incentivize small businesses.

I think there needs to be task force to harmonize the federal and provincial legislations regarding professionals. I think professional corporations are not the best means. 

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46 minutes ago, qnzjlo said:

I disagree with your last comment about equalizing based solely on income ignores major differences between the two - this misses the mark about the whole purpose of horizontal tax equity of tax fairness - people who are at the same economic position, should pay the same amount of tax. Although our tax system is far from perfect, its goal is tax integration - a person should be indifferent earning income via a corporation or via a salary. It is because of the various exploitations and aggressive tax planning that are not bona fide that have led to the ultra expansion of the tax code over time.

Pension is a locked-in vehicle - you do not have access to this until you retire. Locked-in vehicles have low dexterity. RRSPs and TFSAs are capped. Also the benefits of RRSPs as I have mentioned are limited if there are limited difference between retirement income and pre-retirement income. TFSAs are available to all Canadians so doctors or business owners whoever can take advantage of that.

The flexibility in moving passive income is what the government is after. Yea, pension is a quais investment vehicle and is tax-deferred during contributing years, but you don't have that discretion and flexibility to move during the 40 years that you're productive. Whereas, a doctor who is incorporated can move its after-tax business profits in any way he or she wants - sprinkle it as dividends, reinvest back into the business or invest in marketable securities and keep the income within the business. 

I think small businesses certainly are subjected to higher risk than the average employee - that is reflected in the tax rate of 15 percent. It should be re-iterated that the tax changes are on passive investment income NOT active business income. The lower tax rate remains applicable for people genuinely carrying on a business and using after-tax earnings and recontributing back into the business. The government has taken that into account (that as in the risk profile a business) and uses a 15 percent tax rate to incentivize small businesses.

I think there needs to be task force to harmonize the federal and provincial legislations regarding professionals. I think professional corporations are not the best means. 

Valid points! - so let's say the government would simply instead of their passive tax call back actually let us do exactly the equivalent. Let's say we did somehow in the corporation lock the money solely for retirement , ear mark it as such to be equivalent to a pension and limit its for use solely for retirement (which is what for the vast majority of doctors is actually the case). The government is equalizing based on it being an investment - that is in their favour. I am saying equalizing it terms of a pension which employees can get- a different kind of equality but maintains the current situation for most, doesn't bash a bunch of doctors by seizing back something that was given in liu of payment increases in the past, and keeps the spirit of things. Doctors can do all kinds of things with their corporation retained earnings - but they for the most part don't actually do that. They invest it for retirement, or for things like retraining and forms of leave they don't get covered for. A doctor aiming for the standard pension of 60-65% earnings of their last year's income (standard rate for employees in the government for instance) would need roughly 5 million dollars invested to make that happen (assuming 350K income which is common for many specialists, and a typical 4% withdraw rate). After the changes what is the vehicle left to fairly let doctors have the same access to same thing employees could? (there are such things as private pensions and a host of loop hole with respect to life insurance which also tap dance around some of these rules but some of those are actually true "loop holes" in my mind").   

I do get your point of tax equity for people of the same economic position - my point was that people in a small business with the same net revenue as someone on a salary from their employer aren't in the same economic position and that shouldn't be ignored. Worse for the economy as a whole as this can affect a lot of business removing the ability to smooth over income variability in good vs bad years re retained earnings invested passively (or rather in a more liquid form that things within a business) makes them more vulnerable to the business cycle movements.   

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Hi ralk,

Still have to disagree with you.

1. My wife did purchase shares in my corporation. Of course, this was early on when the corporation had little value.  Subsequently, through my work, the corporation generated profits, and as a shareholder, my wife should be able to share in those profits.

When Jeff Bezos started Amazon, or Mark Zuckerberg started Facebook, those initial privately held shares were worth very little.  Now those shares are worth a substantial amount of money. This is the goal of a corporation, to grow, create value, and generate profits for their shareholders.  

My wife did take a risk along the way, namely by supporting me along the way.  In turn, I allowed her to buy into my practice at an early stage, no different than an initial venture capitalist providing seed money and getting early shares of Amazon.  There was always a potential risk that my corporation could fail (whether due to infirmity of its creator), or could have lost money by being me getting fired or losing licensure to practice after the corporation had taken on the debt for a practice buy-in. I acknowledge that I am significantly less likely to fail as a subspecialist radiologist as compared to a new Mom and Pop store, but I am certainly not fail-proof.

My corporation acts similarly to other corps.  It pays for the building leases for our private clinics. Inside those private clinics is corp-purchased diagnostic imaging equipment and servers, with annual service contracts, and a rapid rate of depreciation.  We hire technologists, medical assistants, transcriptionists, and admin and clerical staff.  We purchase internet, water, electricity, parking, security, laundry, and all manner of other services from other corporations.  We compete directly with other private clinics.  The corporation generates revenue, out of which is paid a significant amount of overhead and tax.  Whatever is left from year to year can either be paid out to its shareholders, or retained in the corp.  

This is no different than any other corporation, so why again should it not be allowed to act as one, and issue dividends?

2. The federal government was fully aware that physician incorporation and subsequent income splitting/dividend sprinkling was going on from inception.  You really think the federal government was oblivious to provincial government negotiations with physicians? Now, after allowing their provincial governments to cap or minimize fee schedule increases by offering incorporation, they take away that incorporation.  That is a bait and switch, and an unfair tactic.  This is completely different than a Sears pensioner, because it is being done by the government. 

3. My whole point about household income is that if the household earns "X", it should be taxed the same as any other household earning "X", irrespective of how its constituents earned it. That is fair.  Equal taxes for equal income.  Right now, if I earn $150,000 working 80 hrs, and my wife earns $0 working 0 hrs, my household pays substantially more tax than your household where you and your wife both earn $75,000, both working 40 hrs.  Even though both households make $150,000 total, and both contribute 80 hrs of work to the economy, my household is discriminated against.

You are arguing that basing taxes on household income would disadvantage your household, because your taxes would rise to my level.  Well, doesn't that mean that your household is currently unfairly being under-taxed and subsidized relative to mine?  Why does my household have to pay more tax so yours can pay less?

Dividend sprinkling allows me to even that up by paying dividends to my wife so that her low tax brackets aren't wasted. If you take away my dividend sprinkling in the name of fairness, I would expect household taxation to come in as a replacement, in the name of fairness (which it won't).

4. Your example about passive income in a corp being relatively minor isn't correct.  I'll show you why passive investing in a corp is so powerful, because the initial amount the corp can invest is much higher.  This has a massive effect when compounded over time.

If you live in BC, and made $400,000 in 2016 as an unincorporated physician, you would pay $161,161 in provincial and federal taxes, and keep $238,839 in after-tax income.  If you spend $70,000 of that this year for living expenses, that leaves you $168,839 to invest. Compound that out for 30 years at 9% gives you $2.24 million.  If you sold all of that at once, that's a capital gain of $2.07 million. Half of that is tax free ($1.04 million), and you'd pay taxes on the other half, $1.04 million, at your individual tax rate.  Assuming you had no other income in BC that year, you'd pay $466,441 in taxes, and keep $573,559.  In total, you'd keep $1.04 million + $573,559, for a total of $1.61 million.

Let's see how an incorporated physician does.  The physician knows he/she needs $70,000 in living expenses, so for 2016 the corporation will pay a salary of $90,00 to the physician. On that $90,000 salary, a  physician in BC will pay $19,920 in provincial and federal taxes, and keeps $70,080 after tax, for that year's living expenses.

The corporation made $400,000 in 2016, and had a salary expense of $90,000, so it declares total taxable income of $310,000. The small business tax rate in BC for 2016 was 13%, so the corp pays 13% taxes on the $310,000, which is $40,300.  This leaves the corp $267,000 in retained earnings.  If the corp invested $267,000 for 30 years at 9% percent, it gives $3.54 million.  If the corp sold all of that at once, it's a capital gain of $3.27 million to the corp. Half of that is tax free, and can be issued to the physician shareholder as a capital dividend, which is tax free to the shareholder.  The shareholder gets $1.64 million in personal money, tax free.  The other half, $1.64 million, is taxed in the corp at interest income levels (47%), and what is left remains in the corp.  So, the other $1.64 million is taxed at 47%, which is $770,800 in corp taxes, and $869,200 remains in the corp, and can again be used for investment.

So, unincorporated physician gets $1.61 million in after tax, personal dollars to spend.

Incorporated physician gets $1.64 million in after tax, personal dollars to spend, AND the corp still has another $869,200 in after tax corp dollars, which could be reinvested or paid out at any time.  

The incorporated physician is much farther ahead because the corp had much more principal to invest passively.

Remember, this is not a loophole, even though there is a substantial difference in outcomes. This is an intentionally designed feature of incorporation, which was set up to reward small business owners.  A small business owner takes risks well beyond an employee, and there needs to be an incentive for these individuals to create and grow a small business.  The small business owner gets no sick leave, benefits, pension, vacation, nor any guarantee of financial success, compared with an employee.

5. Physicians are working longer hours where I'm at, and patients are older and sicker.  We keep people alive far longer than ever before, and the expectations and demands only increase. I don't know where you are at, but all physicians where I'm at are working longer hours, or at a higher intensity. Inpatient care has certainly ramped up.  

Surgeries that used to require multi-day stays are now done as outpatient or overnight cases. ICU patients are now managed in "step-down" or "high acuity" units. The hospitals are so overloaded with patients that it is now a common instance that a patient could be admitted through the ED, treated as an inpatient, and discharged home without ever getting a ward bed. A chest CT for PE 20 years ago came on film and with 60 images, and now has 700 images including all three imaging planes, MIP images, and bone and soft tissue algorithms, and the report better come out within an hour or two or the reading room phone starts ringing.

6. At a loss of $70,000 per year, let's again do the math for $70,000, invested annually, for 30 years.

5% return: $5.06 million

7% return: $7.46 million

9% return: $11.3 million

That income cut is somewhere between $5-11 million!  If losing $11 million doesn't anger you at some level, it should.  It is highly likely that you wouldn't be able to spend all that money even if you tried, which means that it is an endowment for future generations, either within that physician's family, or likely a worthy charity. That is money which could be used to help all sorts of individuals, perhaps fund an educational scholarship which would live on in perpetuity, or any number of other wonderful things, except you never had a chance, because the government decided it could use the money more effectively than you (which it almost never does).

As I said earlier, the key to this is being a humble 1 percenter.  Sorry that you have seen physicians complaining about fee cuts to anyone other than other physicians. It's no more appropriate than a movie star complaining to the general public about being underpaid despite earning millions.  Remember that if you see a physician driving a flashy car or living in a nice house, there is a decent chance the car is leased or the house has a big mortgage, so it is just the appearance of wealth, no different than anyone else who can borrow money.

Humble people with real earned wealth tend not to show it off. 

7. Finally, remember that these tax changes affect all small business owners.  I confined my discussion to physicians, because that's what I am.  However, small business is the main driver of the economy, and a source of employment for 70% of private sector employment. This is as unfair to those other small business owners as it is to us physicians.  

Ian

 

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Hi Dr Wong,

We're starting to talk past each other a bit here, and since I'm coming up on a full weekend on-call with limited internet access, this may have to be my last post for a while. Thank you for continuing to provide your perspective.

1. What you've described is a marriage, not an investment in the traditional or legally intended manner. All spouses buy into their partner's career plans in some form or another, and take on the risk that their partner's career might fail. That would be true whether you were incorporated or not. As a resident, I'm not incorporated, and it's true of my marriage. My wife has invested in me, in countless ways, despite me having negative value at the moment. She takes on the risk that I'll fail, same as your wife did with you. The presence or absence of a corporation does not change that.

When Amazon and Facebook started up, they had little guarantees of success and so had to fight for investments. And many people had the opportunity to provide that investment, with the risk that went along with it. These investors could sell these shares, at a price that could be set by the market. I'll note that Facebook has a very public list of early investors and I'll note that Mark Zuckerberg's wife is not among them. Investment in a marriage is different than investment in a company.

2. The provincial and federal governments are distinct entities. Even if they're aware of each other's arguments, that does not mean they agree with or endorse those actions. Even governments with similar party affiliations disagree. If we allowed the provincial government to lower our payments because of incorporation, which was only provided for by a third party in the federal government, without clauses written into our fee agreements based on that fact, then our negotiators screwed up and we screwed up by accepting what they negotiated. As you've said repeatedly, we're small business owners. Should small business owners not be held responsible for signing a poor contract with their pay provider, based on flawed arguments? If we're public employees I think you've got a point, but you can't claim we're small business owners taking on risk employees don't, but then expect to be given all the financial guarantees employees do from the entity paying us at the same time. Those are incompatible positions.

3. What I'm saying is that under the system you've proposed, I would end up being financially punished for being married. So would every dual-income household. That provides a strong incentive to not get married, and to get divorced for couples who are already married. I'd rather not have a financial incentive to divorce my wife. It's either that, or encouraging one partner not to work at all if they are to be married, which is a very poor incentive for the economy as a whole.

You've used the example of two people making $75k vs one person working twice as long for $150k. I'd argue two people working shorter hours is economically productive than one working long hours, as time off from work increases overall productivity of those worked hours. Again, for physicians specifically, long hours are associated with burnout, fatigue, and mental health problems. Additionally, you and I work in a different framework, where our partners would earn far less per hour in their careers than we do in ours. Under your system, I would have to work maybe 15 additional hours per week to surpass the gross income my wife would make in 40. So, it would make sense for me to work longer and my wife to stop working. But the net effect to the economy would be the loss of one productive worker and net 25 hours of productive work. I can say fairly confidently that what I do in 15 hours is not worth as much to others as what my wife does in 40. Furthermore, I'd rather not work an extra 15 hours per week and my wife would like to keep her career even with its additional work hours.

4 & 6. The figures here are different and the main one is scale. I'm not going to have $400,000 in gross income after overhead. To take advantage of RRSP contributions, I'll be taking out more than $70k per year. As such, my benefits from incorporation are much smaller. Yes, as income goes up substantially, the benefits of incorporation increase. And the benefit to incorporation isn't larger amounts to leave in the company, but rather the preferential capital gains tax for corporations at higher incomes and the ability to pay these out as dividends. What I'll point out and what others have mentioned in proposing these changes is that unlike most small business owners, as physicians we have guarantees of financial success. Once a billing number is established, when we work, we get paid for it. As such, we don't take on the risk that most small business do; even lawyers and dentists take on more financial risk if they start up their own businesses. Physicians live in this middle ground, where we have some elements of owning a business, but act a lot like employees in other respects. Your argument is that we take on the risk, so we deserve the rewards, but we don't really take on much risk. Again, for retirement savings purposes, I think there should be some benefit, as we don't get a pension. However, when it comes to dividends, we're not only making up that gap we're exceeding it, especially for high-income physicians.

5. Studies on physician work hours and overall compensation are rare and not always the best quality, but the trends have been for higher incomes and slight reductions in working hours. I'm afraid I don't trust anecdotes when it comes to these figures.

7. Agreed, this isn't just about us. Yet, we could be arguing to preserve preferences for these other small business owners, while accepting changes for us as physicians. I've yet to see many doctors making that point.

Edit - There's one part I forgot to mention, and I think emphasizes my main point about fairness. When you say "Sorry that you have seen physicians complaining about fee cuts to anyone other than other physicians. It's no more appropriate than a movie star complaining to the general public about being underpaid despite earning millions", I think the exemplifies what I was saying about physicians losing perspective about what is fair in our society. If we can only talk about fairness among those who have it as good as we do, then we've implicitly accepted that the rest of society - which is 99% of Canadians - do not think that our arguments about fairness are reasonable, including those we work with in healthcare who see exactly how hard we work.

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One suggestion that may be feasible as an out for current-day physicians is an equivalency discussion. That is making sure the after-tax position of the physician is the same as we transition from a corporate to salaried model. Of course, perfect equivalency is going to be theoretical. This is going to be a multi-lateral discussion whereby the traditional fee-for-service model will be transitioned into a salaried position. Doctors will become employees of the government as opposed to independent contractors and be eligible for all benefits, pensions as regular employees. It is important that the equivalency discussion take into account various specialities and various geographical nuances. As a base, maybe it is appropriate to offer an individual an average of its trailing 3-year income as a starting point and that the salary can be subject to adjustment within the next 3 years depending on performance. At the very least, doctors will be at least "indifferent" in the interim regarding incorporating v. salaried and be offers sweeteners like pensions and other benefits.

I imagine a quota system will need to be maintained to make sure doctors continue to work their share - similar to how Quebec installed a minimum quota for seeing patients as too many doctors are not "doing enough." Again quotas will be based on geographical differences, specialties as well as what peer comparables are doing in that area.

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12 minutes ago, qnzjlo said:

One suggestion that may be feasible as an out for current-day physicians is an equivalency discussion. That is making sure the after-tax position of the physician is the same as we transition from a corporate to salaried model. Of course, perfect equivalency is going to be theoretical. This is going to be a multi-lateral discussion whereby the traditional fee-for-service model will be transitioned into a salaried position. Doctors will become employees of the government as opposed to independent contractors and be eligible for all benefits, pensions as regular employees. It is important that the equivalency discussion take into account various specialities and various geographical nuances. As a base, maybe it is appropriate to offer an individual an average of its trailing 3-year income as a starting point and that the salary can be subject to adjustment within the next 3 years depending on performance. At the very least, doctors will be at least "indifferent" in the interim regarding incorporating v. salaried and be offers sweeteners like pensions and other benefits.

I imagine a quota system will need to be maintained to make sure doctors continue to work their share - similar to how Quebec installed a minimum quota for seeing patients as too many doctors are not "doing enough." Again quotas will be based on geographical differences, specialties as well as what peer comparables are doing in that area.

*insert sarcastic voice of comic book guy from the simpsons*: Yeah that's the place we want to take healthcare ideas from. Quebec. They're system is working sooooooo well *voice off*

If we stick everyone on salaries, you'll see wait times skyrocket. Nobody will be seeing close to the volume they see in FFS. If the government foolishly tried to mandate they did, you'd see a massive retirement/brain drain because nobody will take on that workload on a salary regardless of what some bureaucrat tells them. 

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Just now, NLengr said:

Yeah that's the system we want to take ideas from. Quebec. The province with the worst system in the entire country. 

If we stick everyone on salaries, you'll see wait times skyrocket. Nobody will be seeing close to the volume they see in FFS. If the government foolishly tried to mandate they did, you'd see a massive retirement/brain drain because nobody will take on that workload on a salary regardless of what some bureaucrat tells them. 

Let me caveat this. 

There is no simple out. But if someone maintains a fee-for-service calculation with the physician being paid the lower of (a) what it would be as if under FFS and (b) the salaried amount, then this will remove some of the incentive to shirk. Again please note that my suggestion suggests a retro- and prospective calculation of +/- 3 years. If you start shirking you will see your salary dip. I don't the technical feasibility of all this, but from a theoretical standpoint, this would be a good way to circumvent shirkers.

 

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14 hours ago, NutritionRunner said:

Registered Dietitians with PhDs teaching in accredited dietetic programs.  4 years undergrad + 1 year dietetic internship (unpaid) + 2 years Master's + 4 years PhD + 1-4 years post-doc.  That's more than 8 years (11 required, post docs aren't always needed).

With such schooling and accomplishments isn't it possible to be affiliated with a university and get a faculty position? I know that these are extremely hard to get, but one can argue that a full professor making ~$200K salary (with benefits and a generous pension at the end of their career) is getting a sweeter deal than some physicians running their own practice.

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41 minutes ago, qnzjlo said:

Let me caveat this. 

There is no simple out. But if someone maintains a fee-for-service calculation with the physician being paid the lower of (a) what it would be as if under FFS and (b) the salaried amount, then this will remove some of the incentive to shirk. Again please note that my suggestion suggests a retro- and prospective calculation of +/- 3 years. If you start shirking you will see your salary dip. I don't the technical feasibility of all this, but from a theoretical standpoint, this would be a good way to circumvent shirkers.

 

I agree with what you are saying about trying to keep everyone working at the same level.

Even if you came up with a system to make sure everyone worked the same amount, the issue still is you'll get a manpower shortage. Right now, most FFS docs to a ton of work after hours. They review results, call patients, look up information, do office work, return emails, attend meetings etc. If you put everyone on salary, all of a sudden all the after hours work would be happening during work hours, so the time that each individual physician would be seeing patients would need to decrease (a fair bit I would say). That means you need more physicians to provide the same volume of care. The alternative would be to somehow convince everyone to keep putting in 50-60 hours a week (unlikely to be successful) and then pay them 10-20 hours per week of overtime (at 1.5x base rate or more), which would be hugely expensive.

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2 hours ago, qnzjlo said:

 Doctors will become employees of the government as opposed to independent contractors and be eligible for all benefits, pensions as regular employees.

I'm enjoying the main thread and back-and-forth between Ian and Ralk and don't want to derail things, but I have to insert the obligatory rebuttal: "this has significant implications for physician autonomy and the doctor-patient relationship"   ;)

As you were.  Carry on...

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Hi ralk,

Last reply for me too then.  It's been good debating with you.  I hope that the other readers have a more nuanced perspective of both sides of this discussion.

1.  No, I have both a marriage, and a corporation.  You have a marriage, and the option to form a corporation.  These corporations were fully endorsed and vetted at both the provincial and federal levels.  Why do you think the federal government didn't just decide to abolish physician incorporation, instead of adding all these punitive measures while leaving the corporation concept intact?

As I've shown you earlier, my corporation is doing everything all other small and large business companies do.  

It is an important difference that they continue to allow physicians to form new corporations and continue running existing corporations, rather than cancelling them.  They've just neutered them to the point of financial non-viability.  This begs the question of why?  Fairness?  I've already given you many other examples of unfair tax behaviour that will never be addressed by the government.  Trying to raise money?  This $250 million doesn't even scratch the surface of our annual federal deficit.  Pandering to voters by continuing to target the 1%?  I believe this is the true reason.

Attached, is a link to a Dial testing survey conducted by the Liberal government during Bill Morneau's 2017 budget speech.  

----

A chunk of the speech talking about tax fairness registered as the best received, with most recipients cranking their dials toward the magic 100.

"This was the highest peak of the speech, regardless of gender or location," says Nielsen's report, compiled in the week after the budget.

"There was a very positive reaction with the announcement of taxing the richest one per cent more in order to cut taxes for the middle class, cracking down and closing loopholes and paying your fair share of taxes."

----

This was a sample of 54 Canadians, based in either Toronto or Montreal.  If you may recall, that budget speech gave a teaser of potential changes for incorporated individuals, but did not announce them, likely because the government was waiting on post-speech surveys such as this one, as well as clarification of potential lowered US corporate tax rates.

The middle class remains blissfully unaware that the top 1% already pay 20% of all the taxes, and because it is such a small base of individuals, you could tax them to oblivion and still not significantly lower taxes for the remaining 99% of the population.

2. If we take your tack, as far as holding up to a contractual obligation, then the government should not be able to unilaterally change the corporate rules without either consultation or concessions for those corporations that would be affected.

3.  Not at all.  As you've alluded to, I would expect all households to be taxed on household income.  The taxation would be revenue neutral, so the government continues to take in the same total tax dollars.  In this scenario, an 80 hr/0 hr couple is taxed the same as a 40 hr/40 hr couple, assuming same total income.  That would be fair.

The further a couple deviates from 40 hr/40 hr, the more it is punished by our current taxation regime.  

Remember that many physicians, and likely most with a heavy inpatient component cannot limit their hours to 40 hr/week.  By default, through the vagaries of patient and hospital care, they are going to be putting in 50-60 hr weeks as standard.  They are financially punished because they can never approach that 40 hr/40 hr couple.

4.  The figures are different because your initial numbers were off.  The whole point is that with investing, starting off with a larger principal makes a huge difference when compounded over a long period.  The capital gains tax for both the unincorporated physician and the incorporated physician's corporation were the same.  That's the concept of integration at work.

The unincorporated physician had much less principal to invest, because a large part of it was drained off at the highest personal marginal tax rate (remember, this person made $400,000 in 2016).

The incorporated physician had much more principal to invest, because the corp funds were taxed at the small business rate of 13%.  

If you were incorporated, you would no longer need to take advantage of RRSP contributions; leaving the money in the corporation accomplishes the same thing.  The corporate funds also have the flexibility to be used either as a retirement vehicle (a pseudo-RRSP), or for anything else, such as for capital purchases or income-smoothing.

5. You mention the risk component again here, where my risk as a physician is lower than other small businesses, but this does not invalidate the point that I am operating a small business.  As mentioned before, radiologists and radiology are in no way a risk-free field.  Radiologists are at risk of being supplanted by artificial-intelligence and machine interpretation.  We have a constant risk of being outsourced to other readers (our hospitals in BC have been propositioned by non-BC radiologist groups to provide cheaper outside reads).  There is a constant risk of physical disability (during internship, one of the radiology attendings suffered a retinal detachment during residency, career over). My private clinic could be out-competed by another clinic or group. Other physicians or non-physician providers could engage in "turf wars" and compete for medical imaging and interventions.

As well, Canada has other corporations which face limited risk.  Does this somehow invalidate their existence as corporations?  How about a corporation which has a sole contract with the government, or a crown corporation?  Pretty hard for it to fail.  How about a corporation in a monopoly or oligopoly situation?  Similarly difficult for it to fail.  As Warren Buffet has said, you are looking to build a corporation with an enduring moat to competition.  Our moat as physicians is the high level of training and licensure required to practise medicine safely.

6. I haven't seen those surveys, but I can tell you from the inpatient side, there's no way that inpatient-based physicians at any of the sites where I've worked or trained are working less hours than previously.  

Perhaps those surveys are skewed by the substantially increased numbers of female physicians over the last 20 years, and these physicians disproportionately work less hours than male physicians, and self-select into more lifestyle-friendly specialities like FM, peds, psych, etc.  

If so, this is even more worrisome from a workforce perspective, because the current generation of male-dominated doctors in their 50's and 60's who are willing to work those 60 hours weeks are soon to retire.  These tax changes will only accelerate that retirement.

Ian

 

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As a slight tangent, but possibly relevant to the context (incorporated or not) - I came across this data earlier today - it gives the proportion of incorporated physicians by income level as well as the household gross income by that given level (the article was supporting the proposed tax changes).  At the lowest income level (mode earning level), substantially more doctor are incorporated and after that it's about a 50/50 split.  However, family/household income for incorporated physicians was substantially higher (e.g. 1.4 Mill vs 700K at >500K level).  The author admitted not controlling very carefully for the household income - i.e. it's possible that incorporated physicians at higher income levels had higher earning spouses and children, etc..

Edit:  On the topic of of "top 1%", as of 2011 that level was ~>190k/year, which by individual reported income graphic below suggests that most physicians  don't attain (also my understanding fees haven't gone up substantially in the past 6 years, so the relative proportion shouldn't  have changed assuming uniform movement).  The "top 5%" had individual incomes of about ~>100K/year which is where physicians actual incomes seem to lie - which is of course much higher than the average.  However, just for comparison in 2011 at tenured prof on avg earned about ~120K/year excluding benefits (pension, etc)...  All this to say that communicating the message of the difference between gross income and take home income minus say retirement savings is important.  

 

 

DocsMiddleClass-numberDoctors-REDO3.png

Averages.png

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All hail Trudeau.

 

Pathologists have dealt with being employees for years. Stuck working until a government-decided retirement age, unable to invest their funds wisely, being stuck in HOOPP (which is directly tied to the Home Capital sinking ship), and worst of all, having NO AUTONOMY = patients get HARMED and DUMBASSES are recruited for independent practice.

 

If these tax changes go through, lots of younger millennial docs will accept employee status for financial reasons. Wise individually, STUPID PROFESSIONALLY.

 

And Ian, though I would be very worried about a huge slowdown were we to employ physicians rather than allow them to work independently, that outcome is mitigated by the govts planned REDUCTION IN STANDARDS. YOU HEARD IT HERE FIRST: the govt will open the floodgates to FMGs, give hospitals incentives to hire them over canadians, and will work them to the damned bone. Path was first. Everyone else, except maybe the supertrained surgeons who patients expect no less from, is on the block here. 

 

Dont like being forced to work up to bureaucrat-determined metrics? Tough luck. We'll get another. From Pakistan, Syria, China, wherever. Walder Frey style.

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As the rhetoric gets stronger, I am really starting think that this proposal is an attack, to some extent on physicians and other professionals and not an abstract economics exercise.  Although, the economics reasoning behind the proposals seems to be sound, it ignores the practicalities of how small business incorporation is used within Canada, as a vehicle for retirement in particular, and also the recognized previous compromise in fees negotiation by Ontario physicians (which I'm sure Morneau is aware of).  Of course, one could argue that the economics principles are paramount, as well as the purview of the federal government, rather than what is occurring in practice for small business owners in provinces.  

But, it's the example in Morneau's proposal is truly deceptive - since the consultant (think MD here) and employee (e.g. civil servant), both earning nominally 220K, are two very different entities when it comes to income.  As many have mentioned, in the case of physicians, it doesn't help that the public equates gross earnings with with take home income, and in this particular case, as also many have mentioned, the great differences in benefits are completely neglected, which particularly apply to working females.  Morneau is far too knowledgable to have made such an elementary error in reasoning, and the subtext is simply that consultants (think MDs here) aren't paying their fair share.    

A recent blog post by a UBC economics prof, who apparently worked for Morneau, suggests that that the maligned supposed 73% new tax rate is based on "immaculately conceived principal" and seems to be broadly correct, although the prominent TFSA in the examples doesn't seem as if it could really be used as a substantial retirement vehicle.  

However, it seems one could also easily state that the employee in Morneau's example is receiving "immaculately conceived benefits".  Others have costed out those benefits at around 90K which means that the 220K income is more like a 300K total income.  This may be a little high, but I think it should include pension and maternity leave for women at a minimum.  Regardless, putting the total incomes on the same scale, does give an idea of the total difference between the employee and business owner which should clearly be considered when it comes to taxation.   

In the case of physicians, to have the equivalent of 300K net income, seems to mean at least 400K in gross earning for any physician that needs their own space.  So a physician billing 400K is earning the same when all benefits are considered as a civil servant say, earning 220K.  What would the public think if civil servants had incomes reported as 400K?  

Of course, the civil servant earning 220K is into the top 1% income earners, but a physician with 220K gross earnings are significantly different entities.  It's deceptive to lead people to believe that they're much more similar than they are.  

 

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38 minutes ago, calcan said:

As the rhetoric gets stronger, I am really starting think that this proposal is an attack, to some extent on physicians and other professionals and not an abstract economics exercise.  Although, the economics reasoning behind the proposals seems to be sound, it ignores the practicalities of how small business incorporation is used within Canada, as a vehicle for retirement in particular, and also the recognized previous compromise in fees negotiation by Ontario physicians (which I'm sure Morneau is aware of).  Of course, one could argue that the economics principles are paramount, as well as the purview of the federal government, rather than what is occurring in practice for small business owners in provinces.  

But, it's the example in Morneau's proposal is truly deceptive - since the consultant (think MD here) and employee (e.g. civil servant), both earning nominally 220K, are two very different entities when it comes to income.  As many have mentioned, in the case of physicians, it doesn't help that the public equates gross earnings with with take home income, and in this particular case, as also many have mentioned, the great differences in benefits are completely neglected, which particularly apply to working females.  Morneau is far too knowledgable to have made such an elementary error in reasoning, and the subtext is simply that consultants (think MDs here) aren't paying their fair share.    

A recent blog post by a UBC economics prof, who apparently worked for Morneau, suggests that that the maligned supposed 73% new tax rate is based on "immaculately conceived principal" and seems to be broadly correct, although the prominent TFSA in the examples doesn't seem as if it could really be used as a substantial retirement vehicle.  

However, it seems one could also easily state that the employee in Morneau's example is receiving "immaculately conceived benefits".  Others have costed out those benefits at around 90K which means that the 220K income is more like a 300K total income.  This may be a little high, but I think it should include pension and maternity leave for women at a minimum.  Regardless, putting the total incomes on the same scale, does give an idea of the total difference between the employee and business owner which should clearly be considered when it comes to taxation.   

In the case of physicians, to have the equivalent of 300K take home income, seems to mean at least 400K in gross earning for any physician that needs their own space.  So a physician billing 400K is earning the same when all benefits are considered as a civil servant say, earning 220K.  What would the public think if civil servants had incomes reported as 400K?  

Of course, the civil servant earning 220K is into the top 1% income earners, but a physician with 220K gross earnings are significantly different entities.  It's deceptive to lead people to believe that they're much more similar than they are.  

 

When are the negotiations again for the Alberta Medical Association and the OMA? 

I really hope both provincial organizations didn't sign anything with their respective governments. The right to incorporate was given, in exchange for not increasing fees. Now we've just been bashed by decreases in fee cuts and afterwards, the federal liberal government just wants to take away incorporation.  Basically they've ripped us a new one twice.  We have absolutely no power at all in increasing our fees. 

I feel like we have no negotiating power at all. When did we become so docile? Any decreases in teacher's pay and we hear about it in the news for weeks. 

You know who this hurts the most? It's not the old docs, who can just retire.  It's the new physicians, we who are inheriting this mess of a healthcare system, with aging boomers and financially irresponsible governments.  It's our current medical students, who are hard-working and struggling to match so they can provide care, and then once they realize the financial incompatibility of running a successful practice that leads to more burnout and depression.  

I feel we need to do/support these things: 

1) If you take away the right to incorporate, they need to increase fees for all specialties. No more in-fighting about who deserves a raise and who doesn't, we all need to bargain collectively to raise the fee, otherwise everyone's income takes a hit.  This fee increase needs to at LEAST make up for the lost money for loss of incorporation. 

2) Medical school I think needs to be cheaper.  I don't understand the point of a 120 K tuition and debt burden for a degree that is effectively useless. Before, with an MD and one year you could practice general medicine (GP) until the CCFP decided that family medicine needs to be a specialty.  Look at Robert Chu. If you don't match, you can still graduate with an MD, and spend even more borrowed money to re-attempt the match. So why are we paying so much for a degree that means so little? 

3) Med students should really be educated about opportunities in the states. We should be teaching our med students the pathways to get into medicine in the states, or any other country.  We need to re-establish mobility for the profession, so that if you don't like current working conditions you can take your hard-earned skills and leave. If you can't strike, you leave - plain and simple. 

Overall, I'm gearing up to write the USMLEs. I didn't write them during med school because I really thought things would get better. Right now docs may be even further delaying retirement because of their lost income, meaning less OR time and positions for new grads.  Usually I'm an optimist, but I'm also trying to be rational. I worry about med students coming in - I don't want them to be as jaded and burnt out, but this environment is making it impossible to be both optimist and happy. 

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In the 70s with separatism, physicians noted with their feet and there was a large exodus of physicians from Montreal to Toronto. They left with their children who are grown up now and no longer part of Quebec. The children moved on to greener pastures throughout Canada and USA. 

It can happen again. US is not far. Indeed, cross border practices are a possibility. When the government tries to screw smart people over, the smart people will do what they have to do as to survive and to thrive. We and those who come after us are not fools. We will somehow adapt and do what is in the best interests of our families and ourselves, professionally and financially. The politicians are shortsighted.

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"2) Medical school I think needs to be cheaper.  I don't understand the point of a 120 K tuition and debt burden for a degree that is effectively useless. Before, with an MD and one year you could practice general medicine (GP) until the CCFP decided that family medicine needs to be a specialty.  Look at Robert Chu. If you don't match, you can still graduate with an MD, and spend even more borrowed money to re-attempt the match. So why are we paying so much for a degree that means so little? "

For the vast majority its a ticket to a residency that leads to a well-paying career... so not meaningless by any means.  

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As I see it, Morneau is determined to target among others the physicians (minority by the graphic above - albeit dated) that are incorporated and earning at least 200+ in declared net income and using strategies like family income splitting to lower the taxes (especially at the higher end).  He is equivocating many things at once - from an editorial in the globe yesterday:

"The average income in Canada is estimated to be about $49,000 this year. An incorporated professional earning $300,000 with a spouse and two adult children can save about $48,000 in taxes by using just one of these loopholes. What that means is an incorporated professional could be taxed at a lower rate than a salaried nurse practitioner or police officer making much less a year."

When I read this paragraph, it's hard for me to not believe he's not really meaning physician when saying professional, without saying so.  To me, the gross/net income distinction is really probably blurring to many in the public (not to mention benefits) and then on top of this by jumping from average Canadian (at 49K)  to nurse practitioner and police officer in his comparison (which is basically stating that physicians are lowering taxes by the same amount as the salaries of average Canadians).   
 Both nurse practitioners and police officers earn about 100K (double the average income - but not mentioned by Morneau) plus benefits (including paid vacation,..).  The training period and costs for both nurse practitioners and police officers are considerably lower than for physicians so it's reasonable that physicians would earn more.  And anyways, from the graphic above, the mode physician net income is in the 100-200K range Excluding benefits (maternity leave, pension..), although it's slightly out of date.    

Incorporation and all the tax strategies are imperfect mechanisms to give independent professionals "benefits" that are similar to salaried employees.  The objections for the most part have some truth.  But once this legislation goes through, there won't be any way to regain what was lost, and it won't just be the physicians at the high end of the scale that are affected.  

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I find it quite telling that most of the articles defending the proposals come from academics and government types, while the ones pointing out how egregious these proposals are come from people who, ya know, actually run small businesses.

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Funny how the Ontario liberals and the OMA managed to reach a deal right before the federal government ramped up the conversation surrounding this. 

Had the OMA and provincial liberals continued their impasse, the new contract would have probably included an updated fee schedule which kept these changes in mind. 

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I'm curious, Ian Wong, if you believe you would be better off practicing in the US? Let's say you could bill an equal amount, currency-adjusted, in either the US or Canada, where would you be better off? If I understand correctly, the benefits of incorporation in the US relatively aren't as great, but taxes are generally lower depending on the state. I get there's a lot of variance in how much you're paid geographically, but what about a state like Washington that's similar in climate to BC, but with no personal state income tax?

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7 hours ago, ploughboy said:

I find it quite telling that most of the articles defending the proposals come from academics and government types, while the ones pointing out how egregious these proposals are come from people who, ya know, actually run small businesses.

It basically seems to be mostly a split among salaried/non-salaried groups.  Canadian Nurses Association came out today in support of the proposed changes.  Bottom line, is the physicians as small business owner with gross income isn't going over that well in the public - public just sees high billing numbers and equates that with salary - thus very wealthy doctor.

 I think the CMA should start by reporting average net incomes directly, rather than gross incomes with average overhead (that average percentage of gross could still be reported but the other way) since gross incomes just make doctors look like they're earning more than they are.  And then there needs to be greater publicity that physicians receive essentially no benefits (pension, maternity leave, vacation..etc) along with up to date total debt loads of graduating students.  At the very least, this would give a clear picture to the public what the actual physician incomes are like.  And then mention the small business they run... Provinces will obviously want to publicize billing numbers, since it makes doctors seem as if they're earning much more money to many in the public.  

Edit: For example - Family Medicine in CMA (and the media) is reported as about 250K/yr with avg overhead of  28%.  So the CMA should report average net income of 180K/year (no benefits) (72% of total gross).  All of a sudden the nurse practitioner salary and physician income aren't looking as different, especially considering much greater debt and schooling time.  On top of that, the nurse practitioners have much more attractive benefits.   It doesn't do doctors any good for the public to perceive that they earn more than they do.

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