Capital Gains

[shikimate]

I am surprised nobody here is talking about it. It's going to affect almost everyone's future in this forum, assuming you are all med students.

Without delving into the details (enough has been discussed on PFI already). I'll offer some unsolicited advice for med students of today:

1) cost control - inflation and high interest rate will be stickier than you think. Cost control is a key in med school. Remember interest compounds, so next year's interest contains interest on this year's interest.

2) aggressive payback - time to stop daydreaming and ready for conflict (between you and debt). Whatever specialty you choose, make a plan for the first 5 years of your practice to aggressively work and pay off your debt. Take advantage of geographic arbitrage, incentives, and other programs to help your debt. 

3) delayed gratification - most people understand that cottage and boat are luxury and such gratification could be delayed. But in this day and age, delaying children might create the biggest benefit to your cashflow.

4) rethink fellowship and training - remember, each year of fellowship/MSc/PhD/research carries an opportunity cost. Also remember these things occur early in your career, so their compounded effect 30 years down the road can be big.

[Bambi]

Capital gains: I believe the hit is slightly higher than an extra 8% tax. And to think, back in 1971, capital gains tax did not exist in Canada, lol. I am young in the practice, less than 5 years, so the capital gains tax does not affect me - yet. No real investments other than a small RRSP and no need for a professional corporation at this stage as all my money, my after tax money, which is my only money, has gone on aggressively paying off my large LOC, my mortgage, family cars, normal living expenses, vacations. I understand but disagree on delaying children, especially being female where age is an important factor. This is a balancing act that requires good judgment and good timing and once you start, you do not want to space the children too far apart for many reasons. 

As for fellowships, shikimate is 100% correct. Moreover, if I had done a fellowship in my surgical specialty, I would be doing the same assembly line job for decades, constant monotonous repitition

[indefatigable]

The capital gains increase are misunderstood.  I don't think it will have a that much of an impact on the average physician including most family physicians.  For family physicians, there are much more important considerations with respect to actual income generation during practice.  For very high net worth incorporated physicians with substantial holdings in corporation (or personally) who decide to realize significant capital gains in a given year they will pay more tax, but still proportionately much less than a salaried income earner.  The biggest tax hits will occur during intergenerational wealth transfe, selling second or third homes under the new rules and during retirement.

In capital gains, inclusion rate is a percentage of the realized gain - e.g. suppose stock X doubles in price over 20 years at which point one decides to sell.  If one initially purchased 100K of shares then the realized gain is 100K.  Now as a personal amount this wouldn't even reach the threshold for a tax increase (which is 250K).  For a corporate holding company selling assets the inclusion amount has now increased to 66K from 50K i.e. a difference of 16K which is now taxable (at the combined provincial federal corporate tax rate) so the corporation would probably be looking at tax bill of around 33K vs 25K after selling 200K worth of shares.   I get that paying more taxes suck, especially when this would most likely mean less retirement income, but I don't think it's quite the hardship that it's being made out to be.

Interestingly, the inclusion tax was changed as high as 75 percent in 1990 and in comparison to personal income tax this is still a big advantage where the personal amount is small fixed amount (15K) rather than a percentage - i.e. it doesn't matter if one earns 50K vs 200K.   This is important in comparison to RRSP where withdrawals are taxed at income tax levels.  Conversely, an incorporated physician can choose other vehicles for income such as dividends.  Ultimately however, incorporation only usually sense when debts are paid and common instruments like TFSA and RRSPs are maxed out.  

I mostly agree with shikimate's suggestions, but also agree with Bambi's point that children shouldn't generally be delayed as the window really does expire if that is a goal.  Moreover, I also think that optimizing career satisfaction may conversely sometimes require further training/fellowship - there's no point in rushing to a job which you may not like much and actually be less productive at.   Also, sometimes further training/fellowship can result in disproportionate income gains..  interventional cardiology.. cough.  

 

[Bambi]

The major hit for the vast majority of people to be affected by the effective increase in capital gains tax, aside from the sale of 2nd or 3rd homes, will be on death when significant capital gains tax will come to roost. Until then, for most of us, the capital gains in any given year will not likely reach the level where increased taxes apply.

[Sceptical]

The latest budget reinforces the point that there is a legislative risk to investments/retirement savings. Right now, the cap gains inclusion has been bumped up to 66.67% (at >250k CAD individually and starting from the first dollar for corporate accounts), but cap gains and corporate taxation continues being a low-hanging fruit for governments for potential further taxation. The legislative risk is much less for personal tax-sheltered accounts (TFSA, RRSP, etc.) only because it would affect a lot more of the general public and sway public opinion, so perhaps those early in their careers (myself included) will aim to maximize these and maximize RRSP contribution room. 

I'm also curious as to how much more of a factor potential earnings (and current/potential future taxation) will play into the decision-making for new trainees for specialty/career selection, given the trend towards entering medical school at a later age (e.g. 2nd undergrad, master's and PhDs, 2nd career), longer training times (e.g. more fellowship/subspecialty training, FM third year), and higher starting debt loads (esp. IMGs) which work against compounding time for investments.

[SpeakWhite]

5 minutes ago, Sceptical said:

I'm also curious as to how much more of a factor potential earnings (and current/potential future taxation) will play into the decision-making for new trainees

I question the decision-making capacity of anyone over 23 years of age going into medicine!

[shikimate]

On the macro level, Canada doesn't have that many high paying jobs so MD/DDS/OD, even though cost is high, will still attract many students. Yes, you can study CS and make more in silicone valley but that's not everyone's thing. 

[Sceptical]

It's regrettable that these kinds of discussions only happen behind closed doors and under the guise of anonymity (c.f. PFI) because of fears of reinforcing the trope of the wealthy physician and poor financial literacy (generally among the Canadian population and specifically among physicians/learners).

[MedicineLCS]

My impression is there's also a bit of a generational divide. You have the 50+ docs who had low tuition and higher fee codes (Ontario cuts notwithstanding...) asking how many millions their house can be, you have the younger physicians who had to pay higher tuition but lived through the low interest rate days and may or may not have been able to capitalize on it, and then you have the current crop of med students paying 30K+ annual tuition at many schools in a 5+% interest rate environment. The problem is that the people giving talks are the first two groups and a lot of their assumptions are no longer true. You will still have excellent income comparatively to your peers but compared to a physician in your identical situation 20, 10, even 5 years, ago you are substantially worse off in many expensive areas of the country, which, surprise, are the areas people like to live in the most. 

There are many late 20s/early 30s medical students who feel squeezed on one end by training time and on the other by reduced runway to retirement/launch, even worse in VHCOL or HCOL cities. I think this is part of the reason the CCFP's 3 year FM residency fell so flat, completely tone-deaf response by older academics. "You'll pay it back doctors make lots of money" is the refrain and relatively speaking sure, but a lot of this is based off old assumptions about income earning + interest rates + a 21 yearold MS1. A 27 yearold MS1 attending UBC or UofT is in a very different situation. "Just work harder/go North/rural" is one thing to say to a single or childless 29 yearold FRCPC or CCFP, it's another thing to someone who is geographically or socially limited. 

[shikimate]

Good points above, I might add a few other "dividers":

1a - longer training. A lot of specialties require fellowships and additional training to do a job that only required a 4 year residency 20 years ago. Again, each training year is an opportunity cost with an attending pay. 

1b - harder to get in. I remember a doc who graduated in early 90s telling me they didn't know what they wanted to do with life after undergrad so just applied to med school and got in. In this day and age MSc and PhD are not that rare amongst applicants. Again, each year is an opportunity cost.

2 - unmatched. Remember that before 1990s, there was such thing as rotating internship. Even if you didn't match, you can still be a GP. Nowadays, if you gun for ROADS and strike out, you are in a deep hole.

3 - pay transparency. Physician fees are much more publicized these days for the sake of "transparency", so there is much more backlash against physicians that earn more, even though they might earn that through totally legitimate ways.

 

[1D7]

On 4/29/2024 at 7:33 AM, Bambi said:

The major hit for the vast majority of people to be affected by the effective increase in capital gains tax, aside from the sale of 2nd or 3rd homes, will be on death when significant capital gains tax will come to roost. Until then, for most of us, the capital gains in any given year will not likely reach the level where increased taxes apply.

The new inclusion rate will affect incorporated physicians for any investments made in the corporation. The 250k threshold for the lower rate is just for personal investments (i.e. if you do not have investments in a corporation).

This is somewhat blunted by using an RRSP.

On 4/28/2024 at 10:52 PM, indefatigable said:

The capital gains increase are misunderstood.  I don't think it will have a that much of an impact on the average physician including most family physicians.  For family physicians, there are much more important considerations with respect to actual income generation during practice.  For very high net worth incorporated physicians with substantial holdings in corporation (or personally) who decide to realize significant capital gains in a given year they will pay more tax, but still proportionately much less than a salaried income earner.  The biggest tax hits will occur during intergenerational wealth transfe, selling second or third homes under the new rules and during retirement.

If you were a 60-year-old family doc who planned to retire in 3 years with the majority of your investments in your corporation, these changes essentially amount to the government raiding your life savings, forcing you to work longer (or live a more austere life in retirement). People plan to have a specific amount saved by a certain time to retire by a certain age. Anyone affected (i.e. the majority of physicians) is rightfully angry.

The provincial and federal Canadian governments have a clear anti-physician bias. There was the previous removal of income splitting, now an increase in capital gains tax. Not to mention the relatively recent hostile Ontarian environment for physicians with clawbacks/unilateral cuts and hostile actions in other provinces.

Rather than incentivize people to work with better after hours/call stipends, they rather attack the retirement accounts of mid/late career physicians to force them to keep working.

[indefatigable]

13 hours ago, 1D7 said:

If you were a 60-year-old family doc who planned to retire in 3 years with the majority of your investments in your corporation, these changes essentially amount to the government raiding your life savings, forcing you to work longer (or live a more austere life in retirement). People plan to have a specific amount saved by a certain time to retire by a certain age. Anyone affected (i.e. the majority of physicians) is rightfully angry.

The provincial and federal Canadian governments have a clear anti-physician bias. There was the previous removal of income splitting, now an increase in capital gains tax. Not to mention the relatively recent hostile Ontarian environment for physicians with clawbacks/unilateral cuts and hostile actions in other provinces.

Rather than incentivize people to work with better after hours/call stipends, they rather attack the retirement accounts of mid/late career physicians to force them to keep working.

No question paying more taxes suck and I agree that paying more in retirement especially sucks.  But I think the outrage and hyperbole is a little out of proportion as I explained in my example above - capital gains are still taxed more favorably than income including RRSPs.  

Even in your hypothetical example of 60 year old family doc with a big corporation (maybe they were working a lucrative practice during the golden days of FM), the current rate is an improvement over the rate they had when they maybe started saving 30 years ago!  So if they were planning it all out 30 years ago, they are actually in for a pleasant surprise.  

Obviously, how much they are actually affected will depend on the extent of their actual realized capital gains - which depends on exactly what assets they own.  Sure if they went all in google 20 years ago, they will take a bigger tax hit when they sell those shares e.g. 100 K shares will incur roughly incur 33K of corporate taxes vs 25K!   Of course the appreciation of Google share price will mean that their total capital gain more than offsets the relatively small increase in taxes - they would be a decamillionaire had they invested a 100K in shares initially.  Of course it's fairly unlikely that someone has only invested in assets that are incurring large appreciations and hence capital gains.

I get that there are always more costs, but the sky is not falling and there will not be a stampede to the US.  Maybe some cottages will get sold early to avoid paying more income tax.  Maybe it will be harder to help with some costs of kids getting settled in or vacations, but it won't mean trips to a foodbank.

Of course I find this example a little disingenuous as there was just a recounting of 53-year old FP who was quitting her practice in Mississauga after 20 years who maxed out her take home income at 142 K.  However, I doubt any physician at this level of income should be investing in retirement through a corporation - it makes much more sense to max out RRSP and TFSA in which case they would be unaffected.  The math for incorporation only (and vulnerability to increase in corporate gains rate) really works best for high earning physicians.  

https://torontolife.com/city/family-doctor-clinic-closing-burnout-inflation/

[Artier]

On 5/1/2024 at 1:17 AM, indefatigable said:

No question paying more taxes suck and I agree that paying more in retirement especially sucks.  But I think the outrage and hyperbole is a little out of proportion as I explained in my example above - capital gains are still taxed more favorably than income including RRSPs.  

Even in your hypothetical example of 60 year old family doc with a big corporation (maybe they were working a lucrative practice during the golden days of FM), the current rate is an improvement over the rate they had when they maybe started saving 30 years ago!  So if they were planning it all out 30 years ago, they are actually in for a pleasant surprise.  

Obviously, how much they are actually affected will depend on the extent of their actual realized capital gains - which depends on exactly what assets they own.  Sure if they went all in google 20 years ago, they will take a bigger tax hit when they sell those shares e.g. 100 K shares will incur roughly incur 33K of corporate taxes vs 25K!   Of course the appreciation of Google share price will mean that their total capital gain more than offsets the relatively small increase in taxes - they would be a decamillionaire had they invested a 100K in shares initially.  Of course it's fairly unlikely that someone has only invested in assets that are incurring large appreciations and hence capital gains.

I get that there are always more costs, but the sky is not falling and there will not be a stampede to the US.  Maybe some cottages will get sold early to avoid paying more income tax.  Maybe it will be harder to help with some costs of kids getting settled in or vacations, but it won't mean trips to a foodbank.

Of course I find this example a little disingenuous as there was just a recounting of 53-year old FP who was quitting her practice in Mississauga after 20 years who maxed out her take home income at 142 K.  However, I doubt any physician at this level of income should be investing in retirement through a corporation - it makes much more sense to max out RRSP and TFSA in which case they would be unaffected.  The math for incorporation only (and vulnerability to increase in corporate gains rate) really works best for high earning physicians.  

https://torontolife.com/city/family-doctor-clinic-closing-burnout-inflation/

I think the issue is not with this one specific change. It's death by a thousand cuts. From OHIP fee cuts and clawbacks in 2015 under Wynne/Hoskins, fee increases not even matching one third of inflation over the last 10-15 years, federal TOSI rules in 2017/18, and now capital gains hikes, doctors are being squeezed from all ends just in the last 8-10 years. The costs of the healthcare system (and broader deficits across the board) have ballooned in recent years and the government wants doctors to absorb these costs on our backs without complaining rather than fix gross mismanagement and overspending. While I agree with you that this one change won't make a "huge" difference to doctors retiring, if we do not push back on it then the government will not hesitate to slap on the next tax or fee reduction or corporate structure change to shortchange us again in a few years. What's concerning is the overall pattern. This is also all happening in an environment where NP pay packages are rising to almost match FM pay and no one wants to do primary care. It's a slap in the face that both the government and public will have to pay for in the coming years. It is also irritating to see other physicians/trainees be willing to accept these changes without foresight into the grave they are slowly digging for themselves and their colleagues over the coming years. We have to fight as a united front for our future salaries and working conditions, just as any other association of professionals would or we're setting up all future physicians in our shoes to get taken advantage of by bureaucrats with cozy inflation adjusted salaries and pensions. From the government's perspective, they love it when we are divided. Why fix the system when doctors can just work more for less. Surely that will solve all our problems. They don't respect us or all the sacrifices we've made for the privilege of taking care of others, we're just commodities to them.

[Bambi]

59 minutes ago, Artier said:

I think the issue is not with this one specific change. It's death by a thousand cuts. From OHIP fee cuts and clawbacks in 2015 under Wynne/Hoskins, fee increases not even matching one third of inflation over the last 10-15 years, federal TOSI rules in 2017/18, and now capital gains hikes, doctors are being squeezed from all ends just in the last 8-10 years. The costs of the healthcare system (and broader deficits across the board) have ballooned in recent years and the government wants doctors to absorb these costs on our backs without complaining rather than fix gross mismanagement and overspending. While I agree with you that this one change won't make a "huge" difference to doctors retiring, if we do not push back on it then the government will not hesitate to slap on the next tax or fee reduction or corporate structure change to shortchange us again in a few years. What's concerning is the overall pattern. This is also all happening in an environment where NP pay packages are rising to almost match FM pay and no one wants to do primary care. It's a slap in the face that both the government and public will have to pay for in the coming years. It is also irritating to see other physicians/trainees be willing to accept these changes without foresight into the grave they are slowly digging for themselves and their colleagues over the coming years. We have to fight as a united front for our future salaries and working conditions, just as any other association of professionals would or we're setting up all future physicians in our shoes to get taken advantage of by bureaucrats with cozy inflation adjusted salaries and pensions. From the government's perspective, they love it when we are divided. Why fix the system when doctors can just work more for less. Surely that will solve all our problems. They don't respect us or all the sacrifices we've made for the privilege of taking care of others, we're just commodities to them.

Well said!!