Article prepared with the collaboration of Mathieu Huot and Benoit Chaurette, tax specialists and financial planners with Professionals’ Financial, and Guylaine Lafleur, notary and financial planner with Bachand Lafleur, groupe conseil inc.
The 2016 federal and provincial budgets announced new tax measures that could affect many doctors practising medicine in a pool. We therefore asked our in-house tax specialists, assisted by external experts, to assess the potential impact of these measures on doctor pools in Quebec and to recommend solutions.
Why do doctors choose to practise in a pool?
There are various reasons: to share tasks, to reduce expenses through economies of scale, to pool their income and share profits – the reasons for entering into this type of agreement are almost as numerous as the number of doctors who practise in a pool (more than 1681 in Quebec!). But they all have one thing in common: a spirit of cooperation, which is the cornerstone of all these agreements.
What are the new tax measures?
The federal budget of March 22, 2016 introduced new rules which will impact the practice of medicine within a LLP2 – commonly called a “services pool” – and which will reduce the tax benefits available to the professionals concerned.
These rules are in addition to the measures announced in the latest Quebec budget concerning the loss of eligibility for the small business deduction (SBD) in 2017 for corporations whose employees, combined, work fewer than 5,500 hours in a year.
A closer look…
- For fiscal years starting after the announcement of the 2016 federal budget, even corporations that use service contracts with a LLP are considered to be partners in the pool and are therefore no longer eligible for multiplication of the SBD.
- The new 5,500-hour rule will particularly affect incorporated doctors, because doctors are often the only employee of their corporation. A number of these doctors will therefore lose the provincial SBD. The impact: On the first $500,000 of taxable income of their corporation, the tax rate will increase to 22.30% for the years beginning after December 31, 2016, versus 18.50% in 2016.
- There is a positive aspect for incorporated doctors working in a pool: The loss of part of the SBD will enable doctors working in a pool to withdraw eligible dividends. These dividends are taxed at a lower rate than ordinary dividends. However, no such adjustment was made for the LLPs of doctors not practising in a pool and whose employees, combined, work fewer than 5,500 hours in a year.
The bottom line?
First, the tax rate on the first $500,000 of non-SBD-eligible income of the corporations of doctors who practise in a pool will be 4.50% higher than that of doctors who are not part of a pool. However, once dividends are paid, doctors who practise in a pool will realize a significant tax savings of 0.42%. This savings is due in part to the difference in the tax payable on the type of dividends paid.
Why is the Quebec pool situation different?
Essentially because the 5,500-hour rule is unique to Quebec. So it’s normal that the outcome for Quebec doctors differ from the situation in the rest of the country.
What, then, should be done?
For doctors who practise in a pool, these changes are an opportunity to validate their mutual interest in collaborating and in benefiting from the synergies of the group. It’s a chance to review their agreement and consolidate it rather than discard a practice arrangement that has to date provided them with many non-tax benefits.
Some groups may want to simplify their functioning and consider the possibility of the partners transferring their social shares to their corporation. The corporations of doctors who chose to incorporate their practice will then become partners of the partnership, which will simplify the administration of the group.
Why simplify the pool structure?
- Because the distinction between professional activities and other, non-professional activities will no longer be necessary.
- Because bill preparation and monitoring of accounts payable will no longer be necessary, since the corporation will no longer be a sub-contractor of the pool.
- Because personal income will no longer be attributed to the professional for non-professional activities
If you are part of a doctor pool, avoid hasty decisions. Arrange a meeting with a team of professionals who can help you make the right choices. These professionals can assess the appropriateness of remaining in a pool, simplify its structure to facilitate accounting management and administration, and optimize each doctor’s compensation in light of the recent tax changes.
Professionals’ Financial has a team of tax specialists who have the necessary expertise to advise you on the steps to take concerning your services pool. Don’t hesitate to contact one of our Wealth Management Advisors to assist you with your financial decisions.
1 At June 1, 2016. Source: Collège des médecins. The 168 figure reflects the number of LLPs, but some doctors also practice in general partnerships.
2 Limited liability partnership