Financial Assistance Programs for Physicians

We have been asked by our clients to put together a summary on financial assistance programs available to physicians.  We carved out the important ones and summarized them in layman’s terms.  Keep in mind that these programs are changing by the day.  It is a general guide from which you can learn about the ones that may apply to you, so you will look into it further with your accountant or advisor.

10% Temporary Wage Subsidy

This subsidy will reduce your payroll deduction by 10% of the salary your corporation paid its employees (including yourself) between March 18, 2020 and June 19, 2020.  The maximum subsidy is $1,375 per employee up to a maximum of $25,000 per Corporation over the entire period (not per month).

Who may benefit from this?
Incorporated physicians who have employees on payroll.  It is fine if the physician can be the only person on payroll.

Example:
On March 27th, 2020, your corporation paid yourself and one of your employees a salary of $7,000 and $4,000 respectively.  The payroll deduction for the given salary should be about $2,500 (taxes, EI and CPP), which will be remitted on April 15th, 2020.  With the subsidy, you can reduce your deduction by $1,100 (10% of $7,000 + $4,000), and remit $1,400 instead.

Canada Emergency Wage Subsidy (CEWS)

CEWS will provide 75% wage subsidy (up to $847 per week) to your corporation up to 12 weeks, retroactive to March 15, 2020.  To be eligible for this subsidy, you must experience a drop in income of at least 15% in March 2020 and 30% for the following months.  The drop in income can be calculated based on billings (earned by not yet been paid) or income paid to the corporation during that period.  However, you must use the same calculation methods for all the months.  Also, if you are eligible for one period (Period 1 or Period), you are automatically eligible for the following period.  This wage subsidy would include salaries paid to you and/or your employees. 

Eligible Periods

Who may benefit from this?
Incorporated physicians who have employees on payroll and the corporation has experienced a drop in income in March, April or May 2020 compared to the average monthly billings of January and February 2020 or the corresponding month in 2019.  It is fine if the physician can be the only person on payroll.

Example:
Your billings for March 2020 has dropped 17% compared to March 2019.  On March 27th, you paid yourself $3,000 and one of your employees $2,000 based on a bi-weekly pay period.  Your corporation will receive a subsidy of $847 (max) x 2 your salary and $750 x 2 for your employee’s salary.
Note: The application for this subsidy has not yet been opened.  There is a chance that this may change by the time it is available. 

Canada Emergency Response Benefit (CERB)

CERB can provide a payment of $500 per week up to 16 weeks if a physician has stopped or reduced the workload due to reasons related to COVID-19.  The reasons can be lack of patients or being in self-isolation.  The criteria has been changed a few times since CERB was introduced.  The current eligibility criteria is that you cannot have earned more than $1,000 in income for 14 or more consecutive days within the first four-week benefit period.  For subsequent claims, you cannot have earned more than $1,000 in income for the entire four-week benefit period.
For physician working as an employee or a sole proprietor, income would mean any salary or self-employed income paid to you during the 4-week period. For incorporated physicians, income would mean billings paid to the corporation AND salary or dividend paid to you from you own corporation.
Who may benefit from this?All physicians who have stopped working or reduced their workload due to reasons related COVID-19, and have received less than $1,000 of income during the 4-week period.

Example:
You are tested positive for COVID-19 and unable to work between April 3 and May 10 and you have not paid yourself any income from the corporation, you would qualify for $2,000 ($500 x 4 weeks) of benefit. 

Canada Emergency Business Account (CEBA)

CEBA can provide your corporation a $40,000 interest-free loan to cover on-going expenses such as payroll, rent and insurance.  If the loan is repaid by December 31, 2022, up to $10,000 can be forgiven.  To be eligible for this, you must had a minimum of $50,000 payroll in 2019.  You may check your 2019 T4 Summary Line 14 to confirm the payroll amount for 2019.

Who may benefit from this?
Incorporated physicians who had a total payroll of over $50,000 in 2019

Other Relevant Insurance Related FAQ

Premiums Deferrals and Waived Medical on Additional Coverage

• RBC, Great-West and Canada Life are offering a 3-month interest-free premium deferrals on in-force disability, critical illness and term life insurance policies.  Deferred premiums will be repaid at the end of the 3 months in lump-sum or over the following 3 or 6 months.

• Canada Life has waived the medical for up to $2 million on life insurance and $250,000 critical illness insurance applications.  Other companies have waived their medicals but for a lower limit.

• Medical is always waived on disability increases by exercising Future Income Option (FIO).

Insurance Claims due to COVID-19

• You will qualify for disability benefits if you are under quarantine or being treated because you have been diagnosed with COVID-19.  However, you must first satisfy the elimination period, which is usually 90 days.

• Your life insurance will pay if you die from COVID-19.

• Since COVID-19 is not one of covered conditions under a critical illness insurance contract, no benefits will be paid if you have been diagnosed with COVID-19.

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Financial Tips And Ideas In Preparing For Residency

Debt consolidation

• With prime rate being reduced to 2.95% within a week, advice on not to consolidate your debt remains the same. 

• While your line of credit’s interests rate is prime – 0.25% = 2.7% and the interest rate on your student loan is prime, your student loan interest paid will generate a tax credit that is equivalent to 20% tax savings.  That makes the net interest payments on your student loan prime – 20% = 2.36% less than that of the line of credit.

• Your student loan interest payment will be reported on line 31900 of your tax return.

Buying and Renting

• With the current pandemic situation, the real estate market will inevitably be affected.  Even though most of you have matched and know where you will be in July, holding off on signing a lease or make an offer on a new property would be advisable at this stage.

• With interest rates trending downward, variable mortgage is likely to be a better choice.

Tax credits

• The TD1 is used to report your deductions and credits to your employer (the hospital) so they would take them into account when calculating your tax deductions from your pay.  If you do not report your credits, you will just get a refund in the following year when you file you taxes instead.

• Some hospitals may not accept the TD1 for reporting carry-forward tuition credits.  If that is the case, you will need to use the T1213 form instead.

Investing

• We do not recommend timing the market but the market has indeed dropped about 30% from peak to trough year to date.  It is indeed an opportunity to start investing.

• My recommendation to clients who are in practice or residency is the same – ease into the market by investing consistently over a 12 and 24 month period with dollar cost averaging.  This will mitigate the risk of buying at the wrong time.  The goal is to participate in the recovery, the timing of which is unknown.

RBC MSO

• Self-quarantine does not disqualify you from applying for the RBC MSO plan.  However, anyone who has been tested positive for COVID-19 will have a minimum waiting period of 180 days before they can apply.

• We are accepting RBC MSO applications and also trying hard to have all the RBC MSO policies issued as soon as possible in case RBC temporarily shuts down the underwriting operation.  The turn-around time is 2 weeks at the moment.

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Professional Corporation Surplus Stripping

Since the federal government removed income splitting with family members in 2017, many physicians and dentists had to pay more taxes in order to maintain the same standard of living.  Since this change, other tax deferral strategies such as IPP and RCA have gained their appeal.  We are also seeing more clients making use of life insurance to shelter a portion of their corporate surplus.
 
Surplus Stripping
 
One particular strategy that gained a lot of traction in the past two years was surplus stripping.  The usual method to extract savings out of the corporation is through dividend.  In Ontario, if you are in the highest marginal tax rate, the dividend tax rate is 47%. The Surplus Stripping strategy, in a nutshell, is to convert these dividends to capital gain, resulting in a tax arbitrage of about 20%.  For example, for a $100,000 withdrawal, you would save about $20,000 in taxes by converting the dividends to capital gain, assuming you are in the highest tax bracket.  
 
Why isn't everyone using it?
 
1. It is a sophisticated strategy that involves a tax lawyer to layer the steps properly.  The setup cost is high and it only makes sense if you have substantial savings in the corporation for extraction.

2. The tax savings are highest if your income is already in the highest marginal tax rate.  The savings will be less if your marginal rate is lower.

3.  You are still paying taxes on the withdrawal - taxes that can be deferred if you leave the money in the corporation for investment.  That is why our clients who have used this strategy are not using it for investment purpose, but to reduce personal debt.
 
It may not be the best time to consider this strategy as many accountants and lawyers predict that the government will be closing this loophole in their next budget.  They already tried killing it in 2017 but due to massive push-back from lawyers and accountants, it was put on hold.  It would be a good idea to look into this surplus stripping strategy if it survives another budget.

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Finding The Right Insurance As A Physician – Part 1

In this day and age, we can research any topic before we make a purchase decision. Insurance is also following the same trend. However, while buying insurance is easy, claiming is a totally different story. Certain types of insurance are far more complicated than others at claim time.  It will save you tremendous amount of grief if you have someone to work along side you to negotiate with the adjudicator on your behalf.  The question is how you find the right broker.

Watch for unethical or uneducated brokers
Insurance is sold on a commission-based system for brokers.  Here are a few clues that may help you spot the ones who are just trying to make a sale, as opposed to looking out for your best interests.  

• Too good to be true

Suggesting that you should go with the cheapest options to earn your trust and make the sale.  All insurance companies are insuring the same crowd (working Canadians) and the actuaries calculate the premiums based on the risk of this same group of people.  There is always a reason why one plan costs more or less than the other.  Your broker should be able to educate you on these differences and help you identify the crucial riders, while excluding others to save you money

• Badmouthing other brokers 

Insecure brokers will discredit their peers and try their best to make them sound bad.  Over-aggressive slander is a sign they are just trying to say anything to secure your business.  Brokers make recommendations based on their training and claims experience.  It is not unusual for two brokers to provide different recommendations to the same situation.  

• Frequently trying to replace your plans

The commission paid in the year an insurance product is sold is usually higher than renewal commissions in subsequent years.  If your broker frequently suggests that you should flip your insurance to different carriers, they may be trying to churn the business so they can earn more commission with a new sale.  
 

Most insurance products are brokered.  That means you will pay the same premium whether you work with a broker or not.  We think that finding the right broker is far more important than finding the right insurance product.  We will talk about the type of questions to ask your broker in the next article.

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Are you ready for the next recession?

As the year wraps up, many of us go through our annual checklist of time-sensitive things to do.  Although timing the market is something we do not promote, we do believe that the market is cyclical.  One should always be prepared for a recession, especially when many reliable indicators are suggesting that we are heading into one in the near future.

From our years of experience, we have noticed that economists, even ones backed by major banks, do not always predict a recession correctly.  Let’s take 2019 as an example.  If you have participated in the market in the past 12 months, you would have had a double digit return on your portfolio.  However, we know that some have missed the boat because they cashed out in the beginning of 2019 after a major correction at the end of 2018.

Hence, we never encourage our clients to time the market.  Instead, we emphasize on being proactive and to prepare for both the best and worst case scenarios.  Here are a few suggestions to consider:

1. Money that is saved for short-term (3 years or less) should be in a guaranteed savings account.  Do not take any chances as you really want to avoid any withdrawals at the bottom of the market.

2. Re-assess your current asset allocation on all accounts to see if you are using the right mix (eg: conservative, balanced or growth).  Most importantly, go through the mental exercise yourself or with your advisor on what may happen to your portfolio in a major market downturn.

3. Lastly, set up automatic savings plans so you keep investing month to month.  Dollar cost averaging is the most resilient strategy that works in any market cycle.  You want to invest with discipline and invest just as much and as often when you enter the recession and when you come out of it.

These suggestions may seem generic but you will be surprised how many would become emotional and not follow them when the recession does hit.  Lastly, the cost of investment should always be part of the consideration.  In this day and age, we see little to no benefits to invest in any expensive, actively managed mutual funds.

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How is My Investment Doing?

2018 was a significant year for our firm as we ended a 12-year relationship with our investment dealer and transitioned to a partnership with Wealthsimple.  It was a difficult decision but none-the-less it was a necessary move to adopt a smarter and more efficient way of investing for our clients.

Simple Return (great for comparing non-financial investments)
One of the feature at Wealthsimple we loved at first sight was the Real-time Performance Reporting.  It takes the guessing out of the equation, which is exactly what every investor wants to know when they log in to their investment account.  Most people understand what Simple Return, which represents the gain as a percentage of the amount invested.  If you made $10 from your $100 investment, your Simple Return would be 10/100 = 10%

Money-Weighted Return (great for financial planning purpose)
Wealthsimple took a step further to provide Real-time Money-weighted return and Time-weighted Return.  Money-weighted return represents the return of your portfolio taking into account when you deposit and withdraw money.  For example, if you plan on investing $1,200 this year, your Money-weighted Return will be different if you deposit a lump-sum of $1,200 in the beginning of the year as opposed to $100 per month over 12 months. 

Time-Weighted Return  (great for measuring portfolio performance)
Time-weighted return represents the performance of your portfolio without taking withdrawals and deposits into account.  This is strictly a measure of the portfolio performance.  This is also the industry standard for measuring investment performance so you have a fair comparison among your investment options.

Why is it nice to have all three? 
Simple return is useful when you have another non-financial investment you want to compare with (e.g. real estate or business).  Since there is no standard in how to measure the return in these other instruments, most people will just use Simple Return for comparison.  When we build financial plan for clients, the investment return used in projections would be Money-weighted because we need to take into account when the clients make deposits and withdrawals.  Lastly, Time-weighted is used when we want to measure clients’ portfolio performance relative to others.  If a portfolio is consistently under-performing, it would be time to find an alternative.

All three measurements may provide a similar result, but understanding the differences will help you decide which one to use for your own measurement and comparison.
 

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Finally, Something Positive for Being Incorporated! At least for Ontario...

The federal budget’s introduction of reducing professional corporation’s deduction limit due to passive income was definitely one of the most devastating change made to professional corporation since it was introduced.  Yesterday’s news from the Ontario government came with a real surprise.  In their Ontario Economic Outlook and Fiscal Review, the government has announced that Ontario will not parallel the new federal restriction for the small business deduction (SBD) based on passive income on CCPC (which includes professional corporation). Consequently, all eligible Ontario small businesses will continue to receive the Ontario small business deduction.
 
What does that mean to you?
We would use the maximum passive income of $150,000 as an example to illustrate the difference the announcement has made.  If your corporation is generating a $150,000 of passive income from your investment portfolio or rental income, your professional earned income will be taxed at a higher rate of 26.5% (15% federal and 13.5% Ontario) as opposed to the small business rate of 13.5% (10% federal and 3.5% Ontario).  If Ontario does not parallel the federal restriction on passive income, only the higher federal tax will be applied and as such, your professional earned income will only be taxed at 18% (15% federal and 3.5% Ontario), not 26.5%.
 
We were very excited about the news that could not wait to share this with you before we wrap up the week.  Please reach out to us if you have any further questions about the announcement.  Details of the Ontario Review can be found in the following article summarized by PWC.
 
https://www.pwc.com/ca/en/services/tax/budgets/2018/ontario-economic-outlook-fiscal-review.html
 

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Rethinking the RESP

The restrictions on income splitting and passive investment in the corporation introduced in the last budget have forced most physicians to rethink their income distribution and saving strategies.  Issues such as paying out dividend vs salary, and saving in the corporation vs personally (RRSP, TFSA) would probably have come up in your last discussions with the accountant or advisor.  However, one often-overlooked area is funding your children’s education.
 
How it has been?
When it comes to saving for the children’s education, there has always been a debate between funding the RESP to take advantage of the 20% government grant and investing the savings in corporation.  The issue around RESP is that it isfunded with after-tax dollars.  In other words, you pay taxes to withdraw money from the corporation to fund the RESP and use the 20% grant to offset the tax you paid.  When we compared the two education funding options (corporation vs RESP), saving in corporation generally has a slight tax advantage but not by much.  For most physicians, funding the RESP is still the preferred strategy (myself including) because it has a more predictable trajectory and is less likely to be affected by future tax and political changes.  The tax change earlier this year is the evidence of this belief.
 
Although the RESP’s lifetime contribution limit is $50,000 per child, most physicians would only contribute up to the amount ($36,000) that qualifies for the$7,200 grant.  That is because, as previously mentioned, using after-tax dollars to fund the RESP without the matching grant is not as efficient as saving in the corporation and paying the dividends to the children when they turn eighteen.
 
How it should be going forward?
Without the ability to income split with children, one may wonder if it makes sense to fund the RESP to the $50,000 limit.  I still have a mixed feeling on this strategy because there is always a chance that income splitting may return in the future (at least that is what I hope) and paying unnecessary taxes today to fund a goal that happens 15 to 20 years from now is hard to swallow.  One thing for sure is that funding your children’s education will require a lot more financial planning, becausepaying them $40,000 almost tax-free when they turn eighteen is a thing of the past.  The following chart will give you an idea of the increase on tuition for varies programs in the past 10 years.

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Friendly reminders:

• The best time for tax planning is the last quarter of the year. Please reach out to us if you require any assistance to plan for your 2019 income distribution.

• The OMA OPIP coverage's subsidized funding is significantly reduced for 2019. You should reevaluate your needs to see if change is necessary. 

New Budget on Passive Income – A bittersweet Outcome

As much as I disagree with Ottawa on their point of view of having “an unfair tax advantage” for small business, I am glad to see that they listened to the feedback and found a cleaner and simpler solution to close what they consider to be a loophole for small corporations, which include professional corporation (MPC).
 
What is?
Currently, most MPC are enjoying the small business tax rate of 15% (Ontario) by keeping the corporate income under $500,000.  This $500,000 is called the Small Business Deduction Limit.  Even if your corporation bills over $500,000, your accountant would use salary to reduce (called bonusing down) the corporate income to $500,000, so your MPC does not get bumped up to the regular business tax rate of 26.5% (Ontario).
  
What will be?
With the new budget, this Small Business Deduction Limit is reduced by $5 for every $1 of passive income over the $50,000 threshold.  Once your passive income reaches $150,000, your MPC will completely lose its small business deduction limit of $500,000 ($100,000 x 5).
In my experience, most MPC do not have a $500,000 income especially when most physicians are now on salary to accumulate RRSP contribution room.  For example, if you bill $400,000 per year and take $150,000 of salary, your MPC will only have a $250,000 of taxable income. That means your MPC will not be affected by this change until your passive income reaches $100,000 (or $2 mln in savings at 5% return).  Here is a table to illustrate the relationship between MPC income, Passive income and Small Business Deduction Limit.

What to do?
Of the 23 financial plans we completed for clients in the past two months, only a couple of physician would accumulate over $3 mln  in the corporation within 10 years of practice.  Most will reach their passive income threshold after 20 years assuming that they would maximize their personal savings (RRSP TFSA RESP) and aggressively pay off their mortgage over that period. 
Until accountants and lawyers come up with other options to mitigate this tax impact, we continue to advise physicians to maximize their RRSP and TFSA so that less money would accumulate in the corporation.  Whole Life is also a Must in the corporation going forward to tax shelter investments as the growth within a Whole Life plan will not count towards passive income. 
 
Please feel free to reach out to us if you have any questions on the budget and how the change may affect you.
 

Friendly reminders:

• Speak to your accountant about switching to salary if you are still on dividends
• Contact us if you want to include Whole Life insurance in your Corporate investment portfolio. Whole Life insurance works better if you start at a younger age.

Revisiting Salary after the Tax Change

The income splitting tax change announcement made right before Christmas was a big surprise for most accountants and advisors.  Many had been burning the midnight oil throughout the holiday and into the New Year trying to help their clients prepare for the change that was made effective January 1st, 2018.   

Once incorporated, physicians would need to choose between salary and dividend when they take money out of the corporation.  In more recent years, more physicians opt for dividends over salary due to its simplicity of not having to remit taxes and CPP (Canada Pension Plan) every month.  The net after-tax dollar amount is also higher when you do not need to give the government $5,000 a year for storage until you retire.  (I used the word “storage” because you are only getting 1 to 2% return on your CPP contributions at best).  In my opinion, the real benefit of salary is to build your RRSP contribution room.

However, the scale definitely tips over to salary a lot more for 2018 for a couple of reasons:

1.       The dividend tax rate is higher for 2018.  Wait!  Didn’t the government lower the corporate tax rate for 2018?  Yes, they did but they also increased the dividend rate so you do not get to take advantage of drawing dividends.  In fact, you are paying slightly more taxes for 2018 than 2017 when withdrawing dividends.  Here is an article from PWC explaining this tax change.

2.       The last update from government on raising taxes on passive income inside corporations was introducing a $50,000 threshold.  So, instead of taxing all passive income at a higher rate, only passive income over $50,000 will be taxed at a higher rate.  Having more RRSP contribution room will allow you to shift more of your savings from the corporation to your RRSP so that your corporation will not reach the $50,000 passive threshold as quickly.  This change has not yet been put in place but we will probably hear more about this in the coming months.

It is worth having a discussion with your accountant and advisor to see if your dividend/salary composition should remain the same for 2018.  If you are switching to salary and RRSP, you should also learn more about the drawbacks of RRSP such as minimum withdrawals requirement at age 71 and taxation at death.

Reminders:

It is not too late to declare additional dividends for 2017.  Since 2017 is the last year you can distribute dividend a non-voting shareholder without justification, you should see if it makes sense to top up the dividend to a higher tax bracket for your spouse and/or parents.

Further to the last point, you may also increase the payout to your spouse so he/she can effectively use his/her RRSP contribution room at a higher tax bracket for 2017.