The Canadian Medical Association says the Liberals’ proposed changes to capital gains taxes will jeopardize doctors’ retirement savings, but some financial experts insist embedded professionals are not as doomed as they say.
Prime Minister Justin Trudeau’s government last week presented a federal budget that proposes taxing two-thirds, rather than half, of capital gains (or gains made from the sale of assets).
The increase in the so-called inclusion rate would apply to capital gains over $250,000 for individuals and all capital gains earned by corporations.
Since doctors typically incorporate their medical practices and invest for retirement within their corporations, the association notes that its members will now face a higher inclusion rate on all capital gains they make, including retirement investments.
However, the impact facing Canadian doctors is still unclear.
Jean-Pierre Laporte, CEO of Integris Pension Management Corp., maintains that doctors can completely shield their retirement savings from capital gains taxes.
Laporte says incorporated professionals, such as doctors, can sell investments and open a registered pension plan. Contributions to the plan would be tax deductible, meaning the individual would not pay any tax on any capital gains he or she earns.
“If a medical professional corporation is concerned about increasing corporate taxes because of this budget change, one solution that has been around for years… is for the corporation to establish a registered pension plan,” Laporte said.
Doctors would still have to pay income taxes on the money they receive in the form of a pension, as is the case for other Canadians who have a pension.
There are also limits on how much a person can contribute to a pension plan, meaning doctors will end up paying more taxes on their personal investments.
“Over time, these measures will affect them. But not even close to the extent that emerges from the news,” Laporte said.
Nicole Ewing, director of tax and estate planning at TD Wealth, says whether it makes sense to open a pension plan depends on each individual’s circumstances.
“It is not a single decision. There are ongoing administrative and compliance requirements. And there are restrictions on how to get out of that in the future. So it’s very important to understand to make sure you go into something like this with your eyes wide open,” Ewing said.
As for how much the new capital gains tax rules will affect doctors, Ewing said it’s too early to tell.
“I think it’s premature at this stage to draw any conclusions about what the impact would be,” Ewing said.
In a statement, the Canadian Medical Association echoed Ewing’s comments, noting that opening a pension plan may make sense for some people.
“While certain people may benefit from an (individual pension plan), there are numerous variables to consider,” the CMA said, noting there are limitations on the contributions that can be made.
The Liberal government has argued that the proposed changes to capital gains taxes are about fairness and a level playing field between those who earn their income through capital gains and other sources, such as employment.
Physicians who incorporate their practices have historically benefited from lower tax rates that made it easier to save money in the first place.
Experts who help manage your financial affairs say many doctors make the most of registered retirement savings plans and tax-free savings accounts, which are not affected by capital gains taxes.
They also point out that by incorporating their practices, they benefit from a lower tax rate: in Ontario, that’s just 12 per cent of the first $500,000 of taxable income.
Trudeau and Finance Minister Chrystia Freeland have dismissed doctors’ calls to reconsider the capital gains tax changes, arguing that the revenue generated by the tax change is needed to fund things like housing and health care for all.
“I think Canada’s health professionals recognize, perhaps more than anyone, how important these investments are,” Freeland said Tuesday.
“They’re huge and I think it’s totally appropriate, it’s really fair to ask those who are doing the best in our society to pay a little more to fund them.”
The government estimates that only 0.13 per cent of Canadians in a given year will have to pay more capital gains taxes as a result of the changes.
The federal government expects the inclusion rate increase to generate $19.4 billion in revenue over five years.
This report by The Canadian Press was first published April 25, 2024.
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