Family Med net income/tax question

[SKM]

Hey guys! I was wondering how taxes work for a GP. Do you pay tax on your gross income before factoring in overhead, or after paying your overhead?

 

Seems a bit depressing if it is on your total gross pay:

 

Avg Canada GP Salary: 246000

Tax: ~80000

Overhead: ~85000

Net Income: 81 000

 

If it is after your overhead:

Overhead: 85 000

Tax: 50 000

Net Income: 112000

 

A bit better

 

To hit that 250k/yr, how much vacation time (realistically) would you be able to take in a year?

[mavrik13]

It can be quite complex - that is why a smart GP has a good accountant.

 

GP's incorporate themselves into a business. Therefore, they only pay income tax on their salary (which they determine as based on their business plan), and pay a business tax rate on the rest (which I don't pretend to understand).

 

A GP taking 4-6 weeks of vacation a year, working full-time the rest, should be able to bill around 300k. Varies a lot from person to person.

[ploughboy]

Hey guys! I was wondering how taxes work for a GP. Do you pay tax on your gross income before factoring in overhead, or after paying your overhead?

 

Seems a bit depressing if it is on your total gross pay:

 

Avg Canada GP Salary: 246000

Tax: ~80000

Overhead: ~85000

Net Income: 81 000

 

If it is after your overhead:

Overhead: 85 000

Tax: 50 000

Net Income: 112000

 

A bit better

 

To hit that 250k/yr, how much vacation time (realistically) would you be able to take in a year?

 

Quick back-of-the-envelope calculation using your numbers:

 

246000 gross billed by medicine professional corp

 

86000 overhead, other write-offs etc (I have no idea if 35% is reasonable or not, it's your number...)

 

That leaves 160000 in the mpc

 

Taxed at 15%, so the mpc pays 24000 in tax

 

That leaves 136000 in the mpc, but you haven't paid yourself yet.

 

How you get some of that money out of the mpc and what the effective tax rate is really depends on your personal situation, on how much you can income-split and what your lifestyle is like: spouse? spouse working? kids? are they over or under 18? supporting your parents? how much of that 136000 do you need to live on a day-to-day basis (don't say "all of it").

 

 

 

I haven't had my coffee yet and I'm not an accountant, but that's the bare-bones outline as I understand it

[NLengr]

The CMA has better numbers regarding overhead and average gross income. 35% overhead is too high. 28% is the average. Also, no smart doc pays regular income tax on all the money. Nearly everyone incorporates.

 

http://www.cma.ca/becoming-a-physician

[BoyInTheBubble]

Tax is paid on net income which is billings minus expenses (overhead, fees, etc).

 

If you have not incorporated, the money is taxed as personal income.

 

If you have incorporated, you still have to pay yourself. If you declare income, this is PRE TAX for the corporation. Income counts as an expense. (And you pay personal income tax on that amount). If you pay yourself a dividend, this comes AFTER TAX. It is not an 'expense'. It is not subject to personal income tax, but there is a dividend tax. It's a bit more complex (it changes relative to your personal income), but works out to be less than personal income tax.

 

The benefit of declaring INCOME is that you need it for things like RRSP, RESP, etc. (You do not get RRSP room from dividends. Pretty sure anyways.) But keeping money in the corporation IS your retirement savings plan.

[rmorelan]

Tax is paid on net income which is billings minus expenses (overhead, fees, etc).

 

If you have not incorporated, the money is taxed as personal income.

 

If you have incorporated, you still have to pay yourself. If you declare income, this is PRE TAX for the corporation. Income counts as an expense. (And you pay personal income tax on that amount). If you pay yourself a dividend, this comes AFTER TAX. It is not an 'expense'. It is not subject to personal income tax, but there is a dividend tax. It's a bit more complex (it changes relative to your personal income), but works out to be less than personal income tax.

 

The benefit of declaring INCOME is that you need it for things like RRSP, RESP, etc. (You do not get RRSP room from dividends. Pretty sure anyways.) But keeping money in the corporation IS your retirement savings plan.

 

you are right about the dividends and RRSPs Don't need income for RESPs though.

 

The tax principle is that in theory dividends and income when all is send and done should have the same amount of tax - the government doesn't mean for there to be a difference. Still they run out of sync every once in a while so you can take advantage of that when it happens

 

In corporation you can create pensions as well as another wrinkle

[BoyInTheBubble]

 

In corporation you can create pensions as well as another wrinkle

 

Why would you?

[rmorelan]

Why would you?

 

Tax differal as I understand it

[BoyInTheBubble]

I thought it just acted like a pseudo-pension because you keep the money in the corporation and pay it out slowly over your retirement at a lower income level. But that's interesting. Those details I will leave to an accountant because i just don't care enough to do it on my own.

[herewego]

I thought it just acted like a pseudo-pension because you keep the money in the corporation and pay it out slowly over your retirement at a lower income level. But that's interesting. Those details I will leave to an accountant because i just don't care enough to do it on my own.

 

Without getting too technical, incorporating allows one to also have share holders which allows for income splitting. This is usually a way to circumvent a higher tax bracket as you get taxed on $50,000 (or whatever low tax bracket cut off you are trying to make) and your spouse gets taxed on $50,000 (again, same principal if which tax bracket you are trying to avoid) instead of getting taxed on $100,000 of income. Someone correct me if in wrong, but I believe the corporation is only taxed on ~13% (which is why it is advised to pool as much money in the corporation as possible and leave the minimum living expenses to be taxed under income) while income can vary from ~20% to ~42% depending on how much income you claim (which is why income splitting is preferred).

 

I'm not accountant but from my minimal understanding this is the gist of it. Moral of the story, incorporate, pool money in the corporation, and income split to reduce your tax bracket (apparently a monetary benefit in the long run).

[Gametime24]

Without getting too technical, incorporating allows one to also have share holders which allows for income splitting. This is usually a way to circumvent a higher tax bracket as you get taxed on $50,000 (or whatever low tax bracket cut off you are trying to make) and your spouse gets taxed on $50,000 (again, same principal if which tax bracket you are trying to avoid) instead of getting taxed on $100,000 of income. Someone correct me if in wrong, but I believe the corporation is only taxed on ~13% (which is why it is advised to pool as much money in the corporation as possible and leave the minimum living expenses to be taxed under income) while income can vary from ~20% to ~42% depending on how much income you claim (which is why income splitting is preferred).

 

I'm not accountant but from my minimal understanding this is the gist of it. Moral of the story, incorporate, pool money in the corporation, and income split to reduce your tax bracket (apparently a monetary benefit in the long run).

 

I believe if you pool the money and leave it in the corporation, you can also invest with it so it can grow, tax-deferred until you take it out.

 

Ie, you have 100 000 you don't need for living, you could take it out and pay big tax, then likely invest it (since it was money you don't need). Or you could leave it in, pay corporate tax, and invest it. Helps out because a 5% ROI on a bigger amount of money, is more money, do that for 10+ years and it really adds up.

[BoyInTheBubble]

Without getting too technical, incorporating allows one to also have share holders which allows for income splitting. This is usually a way to circumvent a higher tax bracket as you get taxed on $50,000 (or whatever low tax bracket cut off you are trying to make) and your spouse gets taxed on $50,000 (again, same principal if which tax bracket you are trying to avoid) instead of getting taxed on $100,000 of income. Someone correct me if in wrong, but I believe the corporation is only taxed on ~13% (which is why it is advised to pool as much money in the corporation as possible and leave the minimum living expenses to be taxed under income) while income can vary from ~20% to ~42% depending on how much income you claim (which is why income splitting is preferred).

 

I'm not accountant but from my minimal understanding this is the gist of it. Moral of the story, incorporate, pool money in the corporation, and income split to reduce your tax bracket (apparently a monetary benefit in the long run).

 

Yes. Totally agree. Corporate tax rates vary by province. I think federal rate is 11% (if you're a small business aka less than 500000 income). And this is what's left after you'd paid expenses (rent, fees, personal income).

 

I was curious about setting up an actual pension plan.

[BoyInTheBubble]

I believe if you pool the money and leave it in the corporation, you can also invest with it so it can grow, tax-deferred until you take it out.

 

Ie, you have 100 000 you don't need for living, you could take it out and pay big tax, then likely invest it (since it was money you don't need). Or you could leave it in, pay corporate tax, and invest it. Helps out because a 5% ROI on a bigger amount of money, is more money, do that for 10+ years and it really adds up.

 

Sort of.

 

 

Income that is left in the company (that was generated by the company), is taxed at the lower corporate rate.

 

Using this money to invest, I believe you pay a different rate. Google Canadian Corporation Investment Income Tax. It's actually substantially then the corporate tax rate. It applies to all the passive income type things.

 

However, you're left with money in the corporation (from the initial tax being lower) that you have a big pile to invest with - therefore making more growth.

 

I think the tax rate on investment income is supposed to be the same if you are an individual or the company.

[ubcredfox]

The only thing everyone forgets is that your liquid capital amassed in a medical professional corporation is not safe from personal liability suits, unlike in any other sort of corporate setup. This can be potentially disastrous.

[cheech10]

How much personal liability are you at risk for, though? The CMPA covers most possibilities related to your practice (unless there are criminal charges?). Umbrella coverage will cover most of the rest. Also, if you don't incorporate, your personal assets are at risk, so there is no benefit to not incorporating from a liability standpoint.

[cheech10]

BoyInTheBubble, you can set up an IPP, which is like a defined benefit pension plan, within a corporation, however there isn't much advantage to doing so. The fees are considerable to set up, and you need to have it assessed by an actuary every three years, and it may require large lump sum contributions if it falls behind expected returns, leading to cash flow issues for your corp. Most physicians have stopped setting them up (unless their advisors are very persistent/persuasive).

 

The decision making for incorporation is pretty simple:

- do you have a spouse (or adult children) in a lower income tax bracket? If yes, income splitting via dividends +/- salary presents significant tax SAVINGS, a big win

- do you make significantly more money than you spend each year, that you wish to invest? If yes, you have an opportunity to DEFER 30% of your income tax, a small win as you do eventually have to pay it back.

- if your answer is no to both these questions, the fees associated with corporations (figure $2000+ for legal and accounting yearly) are likely more than the benefit you can realize

[rmorelan]

How much personal liability are you at risk for, though? The CMPA covers most possibilities related to your practice (unless there are criminal charges?). Umbrella coverage will cover most of the rest. Also, if you don't incorporate, your personal assets are at risk, so there is no benefit to not incorporating from a liability standpoint.

 

and you are of course going to have appropriate insurance as well for other liabilities.

[da_birdie]

slow day at work in hospital, I'll chip in:

 

I'm a family physician in 5th year of practice in Vancouver.

Not sure how much I bill a year, but I (well, my corporation) took home north of 250k (after overhead, before tax) for the last 3 years straight, working ~42 hours/week, 47.5 weeks/year.

 

I have 2 corporations. One is a medical professional corporation, the other is a Holdings company. At the end of the month, my MPC pays dividend to myself, the remaining goes to the Holdings company.

 

The function of the Holdings company as I understand it, is to protect the $ from litigation/divorce, etc.

 

The Holdings company invests its money, earning passive income.

The passive income is unfortunately taxed at a very high rate(~40%).

 

My MPC paid myself 100% via dividends last year. I am considering this year to pay part salary, part dividends, since salary earns RRSP room, and BCMA has a Contributory RRSP Plan that gives you "free money" (amount depends on how much you contribute yourself) into your RRSP.

 

My accountant was not very keen on this part-salary part-dividend approach, maybe because it would create more work for him (I guess )

 

Accounting + legal fees for both corporation combined ~$2000/year (maybe $3000 in the first year setting up)

(I went for a cheap CGA, but if I have kids or have more complicated set-up in future, might switch to a more expensive CA/CGA specialized in physician practice)

[burrb]

^ what kind of car do you drive.

 

really, I'm just curious lol

[BoyInTheBubble]

The holding company does not protect from liability as a professional or from divorce (as they are still YOUR assets).

 

The professional corporation is not allowed to invest extra money. You can invest your extra/unused earnings from being a doctor, but you cannot take out a loan or mortgage to invest.

 

With a holding company, you can have a line of credit or mortgage to invest. Furthermore, if you own a property and someone sues you, the liability is only on the holding company and NOT the professional corp. (whereas the liability can flow through in other direction from the professional corp.) There are specific restrictions on the professional corps, essentially they are for the business of being JUST a doctor - not any money making interests you may have.