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What do doctors really have to fear from the feds’ tax crackdown?

Opinion: Doctors are howling over Bill Morneau’s proposed closing of tax loopholes—but few of them would actually be significantly affected


 
Liberal Members of Parliament give Minister of Finance Bill Morneau a standing ovation as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Wednesday March 22, 2017. (Sean Kilpatrick/CP)

Liberal Members of Parliament give Minister of Finance Bill Morneau a standing ovation as he delivers the federal budget in the House of Commons on Parliament Hill in Ottawa, Wednesday March 22, 2017. (Sean Kilpatrick/CP)

Michael Wolfson is an expert advisor with EvidenceNetwork.ca and a member of the Centre for Health Law, Policy and Ethics at the University of Ottawa. He was a Canada Research Chair at the University of Ottawa. He is a former assistant chief statistician at Statistics Canada and has a PhD in economics from Cambridge.

Among the most insistent critics of the recent proposals by Finance Minister Bill Morneau to tighten up the use of private companies to avoid taxes have been Canada’s doctors.

Canadians generally do not begrudge doctors their above-average incomes. They spend many years training for their jobs, and then sometimes literally hold our lives in their hands. Still, valid questions remain about how much they make and how much tax they pay. Despite some claims, are doctors really in the middle class?

Muddying any clear answer is the fact that there’s no official definition of “middle class” in Canada. But one indicator is that, of the 15.1 million income tax filers in 2011, the halfway point along the income spectrum was at about $50,000. Only about one-fifth (21.9 per cent) of all tax filers reported incomes of at least $100,000. So anyone receiving an income of more than $100,000 could be considered at least upper-middle class.

In that same year, 52,160 doctors—or, more precisely, individuals working in doctors’ offices—reported incomes above $100,000.

But the story is more complex than this. Many doctors—30,280 of them in 2011—also owned a private company (technically, a Canadian Controlled Private Corporation or CCPC). These companies offer tax-planning possibilities not open to salaried or unincorporated individuals. For starters, they include a provision that permits up to $500,000 in income received via the private company to be taxed at a rate of about 15 per cent—far lower than the top individual income tax rate of about 50 per cent.

Such private company income will be further taxed when it is paid out to individuals and their families to use, though it can still end up being taxed at effective rates well below doctors facing the top rate of 50 per cent by using what Morneau calls “income sprinkling,” also known as income splitting. That refers to the practice of using a private company to channel income to other family members who are generally in lower income-tax brackets in order to avoid having to pay tax in that top 50-per-cent tax bracket.

In a study published in the Canadian Tax Journal in 2015, my colleagues and I estimated that this income sprinkling via CCPCs was costing federal and provincial governments at least half a billion dollars in foregone revenue every year. We also showed that doctors in particular had dramatically increased their use of these private companies in Ontario after the provincial government made an obscure change to their legislation in 2005, which allowed doctors’ and dentists’ spouses to be shareholders in their companies.

This apparently minor legislative change was introduced explicitly as part of fee negotiations with the Ontario Medical Association in order to avoid having to make public a more dramatic increase in doctors’ incomes.

Its main effect was to allow doctors to flow money out of their private companies to their spouses as dividends. The result was about a tenfold increase in the number of private companies owned by doctors since this 2005 change. With such a rise, despite its obscurity, it must have been a pretty attractive opportunity to increase their after-tax incomes.

But the benefits of this substantial back-door bump in income did not flow evenly to all doctors with CCPCs, nor across CCPCs more generally, as shown in this report.

Figuring out what was really earned isn’t a straightforward matter. Doctors rightly claim that their incomes are not nearly as high as the gross figures paid out by provincial governments in fees for each medical service they provide. Among other costs, they have to pay their staffs and office expenses.

But based on individual and corporation income tax return data from 2011, I have estimated the net (after staff and office costs) family incomes of individuals working in establishments classified as “doctors’ offices” and with income over $100,000 on their individual income tax return, including the money retained that year within their CCPCs.

The chart below indicates that 21,880 doctors did not own a private company. They will be completely unaffected by the federal government’s proposals to tighten up on the tax-planning uses of these CCPCs. In contrast, 30,280 doctors did own a CCPC. These doctors might be significantly affected by the proposed tightening of these tax preferences, especially to the extent that they engaged in aggressive tax planning.

DocsMiddleClass-numberDoctors

Those most likely to face considerable tax increases would be the 3,870 doctors with incomes over $350,000 and who owned a CCPC. These individuals made up less than one-tenth of all doctors with incomes over $100,000, and they were the most likely to exploit the tax preferences on which Morneau is now proposing to clamp down.

As shown in the table below, these doctors’ effective family incomes were substantially higher than what they had reported on their individual income tax returns. (To be clear, some portion of this family income likely came from sources other than the doctor’s CCPC. On the other hand, not all income sprinkling to other family members is captured in these figures if the other individual is, for example, a student living on their own). For example, the 1,390 doctors who had an individual income over $500,000 and owned a CCPC had an average family income plus income made that year but kept within their private company of about $1.4 million.

This amount is about twice the average family income of the 960 doctors who were also in the over $500,000 income range, based only on their individual incomes, but who did not own a private company.

And the 2,480 doctors who owned CCPCs and had individual incomes in the $350,000 to $500,000 range actually averaged $673,000 in 2011 when these other sources of income were included. (It’s important to keep in mind that this is not their gross income from medical practice; it includes only their net income, after deducting allowable expenses such as those for staff and their office.)

Average income of doctors and their immediate families plus income retained in CCPC (not including staff and office costs)

Income reported on individual tax returns (in thousands)
$100-200 $200-350 $350-500 >$500
Does not own a CCPC $240 $337 $483 $730
Owns a CCPC $378 $498 $673 $1,402

No reasonable definition of “middle class” would include doctors with family plus company incomes over $250,000 or $300,000, though more than 80 per cent of these doctors appear to be in this high-income range when measured by their family plus retained company income (all but the 10,050 in the upper-left corner of the table)—both those on salary, who have no choice, and those using a private company who can choose to channel their income in more “tax-efficient” ways.

There is a growing outcry from some doctors about the proposal to tighten up on the way they are taxed. But the numbers show there are many doctors who would not be affected at all, particularly those not owning a CCPC; they appear to be largely remaining silent. A clearer understanding of how much doctors really earn shows the gap between doctors with the special privilege of being able to use private companies, and those who cannot, whatever their income. Morneau’s proposed tax changes are not an attack on middle-class doctors: They’re a bid to restore fairness in tax treatment.


 

What do doctors really have to fear from the feds’ tax crackdown?

  1. This was typical Liberal spin. By invoking class-ism, and portraying “rich” doctors as a collective group of tax dodgers, the Libranos conveniently distracted from the fact that this measure will have a significant impact on the bottom lines of hundreds of thousands of farmers and small business owners.
    The hypocrisy displayed is brilliantly clear. Morneau tried to brush off criticism by claiming he might be impacted. Really? If he was against that kind of income structuring and tax planning as a private citizen, he was completely free to simply not tax plan in that fashion. Ditto for Justin Trudeau who funneled his speaking fees through a corporate entity in order to be taxed less onerously. No one made them do it.
    Here’s a concept. If people are having to resort to complex tax planning schemes in order to reduce the amount of taxes they pay, maybe you need to reduce the tax rates.

    • Maybe you need to stop being silly.

  2. Note that Justin Trudeau didn’t enact any provisions against family trusts like the one his family used to transfer wealth between generations.

  3. Mr. Wolfson seems to be getting a lot of press lately with his biased attacks on small businesses and private corporations in the name of tax ‘fairness’ – particularly those held by doctors.

    Like many physicians in Ontario and Canada, I incorporated my medical practice as a mechanism for retirement planning, in the absence of having a pension or benefits. I did not do it to game the system or exploit loopholes in order to become wealthy. I did it so I could fund my retirement. Indeed in Ontario physicians were encouraged to incorporate by the provincial government in lieu of increased payments to doctors.

    Like many, I am deeply concerned that the proposed changes by the Liberal government for private corporations will not only critically injure the financial health of physicians but will alter health care in Canada. If the proposed changes pass as is, retirement for me would be near immediate given my age and financial situation. Several other specialists I know have discussed moving although I believe that would not be an attractive option for most. I have also read with concern, the analyses for family doctors who might actually be in a worse situation, particularly the ones that are just starting and those with high overheads.

    Private corporations held by physicians result in tax deferral, not avoidance. Eventually the government will receive tax money at personal rates. The ability to have passive investments within a corporation in particular, increases the amount of tax that will eventually be collected, and allows doctors to plan for retirement pensions. Personally I would be happy to receive an indexed pension from the government like many officials do now but we all know that is not in the cards for its huge cost.

    These changes will affect not only doctors, but many families in farming and other small business areas in which ‘corporations’ have allowed success, generational transfers of businesses and retirements. This is not good legislation. Why would anyone think comparing salaried employees with pensions and benefits and sick days to self employed individuals who create small businesses and jobs, take no benefits and have no cushy pensions, is a fair comparison? Excluding Mr Wolfson biased articles, most independent analyses in the media, often from sources not particularly sympathetic to high earners such as physicians, have categorized the proposed changes as harmful, puzzling and ‘unfair’. The Prime Minister seems particularly focussed on these changes in the name of tax ‘fairness’ but a discussion of fairness simply based on tax paid without considering absence of pensions, paid benefits, the short period of earnings after extensive education, and the further erosion of relations between the government and physicians particularly in Ontario, can hardly be considered to be anything but political spin. In my opinion, there will and should be be a severe political consequence when Canadians realize what the government has done to harm health care.

    Forget the recent eclipse. We should all be awed how little time it took this Liberal government to become deaf to the concerns of millions of Canadians with small businesses.

    • Yeah that would be why Libs are so high in the polls

    • People with multiple degrees struggle to get their MSc’s, MBA’s, PHd’s, etc and then they go to work for a corporation. They pay 45-50% in taxes, have no pensions and can’t incorporate so they can pay 10.5% like MD’s who bill the public purse. How is that fair compared to a sole proprietorship doctor? A doctor who works shifts at a hospital or walk in clinic owned by someone else is NOT a small business. They directly employ ZERO people. They have ZERO risk of going out of business. They have to spend ZERO dollars on marketing and advertising. They have zero overhead. You obviously have a vested interest in perpetuating the scam. It is tax avoidance and deferral and that is the sole reason doctors incorporate. Aggressive accounting practices can use tax sheltered money for all kinds of things within the corp. Once you do take that money out, you are in retirement and at a lower income level. This makes you win win win all the way through your lavish retirement in these phony small businesses. People who work in corporations pay high premiums for dental and other expenses. If asked whether they would rather pay for their vacation days versus get a 40% tax break on say $350k/yr = $140,000, I seriously doubt anyone would not prefer to pay 40% less income tax. Doctors bill the public purse for hundreds of thousands and bargain collectively like a union. They have enormous unfair advantages over average Canadians. Every argument they have for maintaining their special tax status fails. Most doctors don’t pump their tax sheltered money back into business capital or hiring people, they use it to invest tax free, buy and lease real estate and automobiles, spread phony money to their kids and spouses, and take tax free vacations by calling them conferences and charging it to their shell corporation. Total SCAM!

      • I was trying to find a statement of truth in your post. It is really quite remarkable in its ignorance. As an example, I have trained many MSc and PhDs, and the ones that did not go to a professional school after, did well in industry or academia – all with nice pensions and benefits. Most doctors do have overhead.

        The most laughable comment is regarding tax sheltering as if the money is cheated away by criminal doctors. Emily – It is tax ‘deferral’ – If you take out enough to have what your refer to as a ‘lavish retirement’, then you are going to be taxed at a higher rates, just like anyone else. Your view on this is particularly off base.

        Clearly you are bitter about your situation or doctors or both. My advice. Stress is harmful. Relax and get some fresh air and exercise. And don’t call me in the morning.
        This goes beyond doctors and you of course know this.
        This kind of baseless rhetoric from someone so uniformed and so biased serves no purpose.

        • Sorry Emily, my post was directed to John Ramsey’s comments.
          Apologies

      • John, you really should stop posting as you appear to be totally clueless. Who pays 10.5% tax? Lets talk real dollars. I paid 175,000 in tax last year and have thirteen years post-secondary education. How much tax did you pay? Canadians who pay less tax but still get one vote like I do. How about we get so many votes for each 50,000 we pay in tax? Why should people that don’t work as hard and contribute as much to the economy get the same number of votes. Its like letting very obese people decide what is for supper. So yes lets have this conversation about who is carrying their weight in this society. The government wants to make us fight so lets fight.

        Doctors that work for a Medicenter pay 51% overhead when you include GST. Doctors that do the most ER shits in the country also work in offices with overheads while they are in the ER. People that work for corporations that I know get , stock, pension(some retirement help), benefits, sick days, severance etc.

        I run a clinic with fifteen physicians, I own the building, we all pay staff, utilities, rent, supplies, property tax, huge accounting fees, professional fees, EMR fees, paper disposal fees, phone, internet fees, business licenses, etc. We get no benefits (my family spent over 50,000 on dental fees alone), my children don’t qualify for student loans and I can only write off $5,000 of their 8 o 16 thousand each of tuition. I have no sick time, our disability insurance is so bad it will just cover my overhead and only for two years. No one can sell a practice anymore so you retire with no business to sell. I work seven days per week but years ago I was a high school teacher. Had I stayed a teacher, I could retire now at 56 and I would need 2 million to get the same pension and I would also get benefits.

        I use the passive money to invest in the Alberta economy like oil stocks. They are way down so after 22 years in practice I have 165,000 in my RRSP and the same in my PC. Where will all the investments for our economy come from if it goes in taxes? I can’t retire and in fact I don’t see myself ever retiring, my father who I took the practice from retired at 73. He got no social security and when he died my mother got zero dollars from his CPP that he paid in for decades. She has too much money to qualify for a nursing home or Lodge so she has to go into a private facility that tries to take all her money before she dies.

        I hope the government has the balls to do what you obviously want them to do. Then I can get off this treadmill and not feel guilty about changing jobs. I want to quit doing in-patient work, nursing home work and I am sick and tire of filling out forms and sick notes for free. You see John we will just form one big company and own shares and pay dividends. Our accounting fees will be lower and I can work less and make the same money. The company can then provide benefits to each doctor and company cars etc.

        The problem with a democracy is that people like you actually think you know something about business when you have revealed that you are clueless about how we are paid. John, I am tired of carrying your sorry a&& in this democracy. Get more training, work harder and pay more taxes or just shut up.

  4. Please people! Stop saying ANYTHING not positive about ANYTHING the Liberals do!! You must know by now it makes Emily1 cry!

    • Statements should be truthful…….not just partisan.

      And I am not a Liberal.

  5. Dr. Michael Wolfson is the individual of whom this whole policy was designed upon by the Liberal Party. So his opinion in this matter is obviously completely biased and his reputation depends on the implementation of this legislation and will serve him well should it succeed.

    What is not discussed is how this will not only effect Doctors but anyone who has a business in this country and how these individuals have none of the benefits that Dr. Wolfson has such as a pension, medical and dental insurance, CPP, EI, etc. Over 50% of jobs in the economy are created via these business’s and should there be no reward for their risk then who is to employ everyone? Dr Wolfson perhaps in a study of his failed policy?

    • I just watched Wolfson debate the issue against a representative of small business in Canada.

      Wolfson lost the debate IMO. He quotes [his] opinions rather than facts. He has no idea of the negative effects this will have on small business in Canada.

  6. A doctor who works shifts at a hospital or walk in clinic owned by someone else is NOT a small business. They directly employ ZERO people. They have ZERO risk of going out of business. They have to spend ZERO dollars on marketing and advertising. They have zero overhead. They bill the public purse for hundreds of thousands and bargain collectively like a union. They have enormous unfair advantages over average Canadians. Every argument they have for maintaining their special tax status fails. If you are a highly educated professional in the private sector in the same bracket as a doctor, you are paying about 30-40% more in income tax and you don’t have a pension either. Doctors don’t pump their tax sheltered money back into business capital or hiring people, they use it to invest tax free, buy and lease real estate and automobiles, spread phony money to their kids and spouses, and take tax free vacations by calling them conferences and charging it to their shell corporation. Total SCAM!

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