This article originally appeared in the November/December 2020 issue of the Ontario Medical Review magazine.
Five key considerations for physicians
by Julie Petrera, MBA, CFP®
MD Financial Management
This time last year, no one could have predicted the course that 2020 would take. In addition to its devastating health effects, the COVID-19 pandemic has had massive financial impacts. Federal and provincial governments have spent billions on support programs and adjusted tax deadlines and student loan interest payments in response. As we start 2021, there may be aspects of your financial plan that you will want to review or change. Below are five key areas to consider as you update your financial plan.
Physicians across Canada have been supporting their patients, staff and families through an unprecedented time. It’s important to look after your financial health too, by making sure you have explored the support available to assist with reduced billings and sustained costs. Federal support programs include:
These programs have changed since they were initially launched, as have the qualification criteria. Your accountant or tax advisor is in the best position to analyze your specific situation and help you determine what you qualify for. In most cases, it’s not too late to apply and be paid retroactively.
The Canada Emergency Response Benefit (CERB) was available for a total of 28 weeks and paid $2,000 a month to Canadians who were unable to work due to COVID-19. If you received the CERB, these payments are taxable, but tax was not withheld at source. This means you will have to pay tax on these receipts when filing your 2020 personal income tax return. The amount of tax you owe will depend on your total income. We recommend you put aside at least 30% of what you received for taxes, which will be due April 30, 2021.
The Canada Emergency Business Account (CEBA) is the interest-free, $40,000 line of credit administered through financial institutions. As long as you repay 75% of the loan (up to $30,000) by December 31, 2022, 25% (up to $10,000) will be forgiven. This is still two years away, but it’s something to keep top of mind to ensure you qualify for the maximum amount of forgiveness possible on this line of credit.
RRSPs are available to physicians and non-physicians, and all Canadians are subject to the same limit-determining formula and maximums. These limits are based on personal earned income – that means if you are an incorporated physician who billed $300,000, and paid yourself $60,000 personally, the RRSP limit is based on the $60,000 of personal earned income. Since a contribution to an RRSP yields a tax deduction, the value of making a contribution is based on your personal income and marginal tax rate.
If your billings as an incorporated physician were reduced this year and you paid yourself less than usual, the tax-deduction value of your RRSP contribution may also be reduced, given that the value of your contribution depends on your marginal tax rate.
You may want to consider not making a full RRSP contribution this year, and instead carrying forward some of your contribution room to a year when you’ll earn more income. Remember, your contribution limit for a given tax year is based on the previous year’s income. That means lower billings in 2020 will affect your contribution room for the 2021 tax year.
Rather than contributing to an RRSP this year, it might make sense to focus on other retirement savings strategies, such as leaving money in the corporation or contributing more to your tax-free savings account. There’s no one-size-fits-all answer, but it’s certainly something to consider given the enormous impact the pandemic has had on many people.
You still have some time to decide – the RRSP deadline is March 1, 2021. Talk to your financial advisor about your optimal contribution strategy for this year.
In March 2020, the federal government reduced the mandatory withdrawal rates from registered retirement income funds (RRIFs) by 25% because of the pandemic and its impact on investments. This meant that if you hadn’t already withdrawn the previous minimum amount, you did not have to withdraw as much as anticipated. On January 1, 2021, the withdrawal rates are expected to go back to normal.
As a physician, you’re likely responsible for funding your own retirement. This can be done in any combination of ways: corporate withdrawals (dividends), government pension plans, a corporate individual pension plan, and withdrawals from RRSPs and RRIFs. The goal is to do this in the most tax- efficient way possible, since all of these sources of retirement income are taxable when withdrawn or received. Financial planning as a physician is always complex, but it is even more so in 2021. Talk to your financial advisor about specific planning strategies for your personal financial situation.
Julie Petrera, MBA, CFP® is National Lead of Financial Planning Content & Strategy at MD Financial Management, based in Ottawa. CFP® is a trademark owned by Financial Planning Standards Board Ltd. (FPSB) and used under licence.
The information contained in this document is not intended to offer foreign or domestic taxation, legal, accounting or similar professional advice, nor is it intended to replace the advice of independent tax, accounting or legal professionals. Incorporation guidance is limited to asset allocation and integrating corporate entities into financial plans and wealth strategies. Any tax-related information is applicable to Canadian residents only and is in accordance with current Canadian tax law including judicial and administrative interpretation. The information and strategies presented here may not be suitable for U.S. persons (citizens, residents or green card holders) or non-residents of Canada, or for situations involving such individuals. Employees of the MD Group of Companies are not authorized to make any determination of a client’s U.S. status or tax filing obligations, whether foreign or domestic. The MD ExO® service provides financial products and guidance to clients, delivered through the MD Group of Companies (MD Financial Management Inc., MD Management Limited, MD Private Trust Company, MD Life Insurance Company and MD Insurance Agency Limited). For a detailed list of these companies, visit md.ca. MD Financial Management provides financial products and services, the MD Family of Funds and investment counselling services through the MD Group of Companies.