Doctors may take tax change out on provinces
Incorporation usually a factor in setting rates
If the federal government goes through with its proposed crackdown on tax planning through private corporations, doctors who take a hit on their paycheques could make things harder for provincial governments trying to keep their health care budgets under control.
Although the proposed changes would affect many professions that see high rates of incorporation, doctors argue their situation is special because of their relationship to the publiclyfunded health system.
Every few years, a team of provincial negotiators sits down with that province’s doctors’ association to hammer out an agreement on the rates paid to physicians for procedures and services. Both sides have occasionally agreed not to raise those fees, under the justification that provinces give doctors access to substantial income tax breaks by allowing them to incorporate.
“For us, the right to incorporate was given in lieu of the fact that we weren’t going to increase the tariffs and the rates,” said Dr. Manoj Vohra, president of Doctors Nova Scotia.
“Physicians can’t increase their fees like other small businesses may be able to ... What will happen is we will be having discussions with the province to say, somewhere, physicians have to be able to recoup the losses that they’re going to incur to literally run their practices.”
Dr. Trina Larsen Soles, the Doctors of B.C. president, said the tax breaks have been a factor in their negotiations even though the ability to incorporate there wasn’t initially set up as a concession on fees.
“You negotiate in a particular structure,” she said. “Essentially it is, ‘Well, you don’t need this particular fee increase or that to be funded, because you can incorporate.’”
Alberta Medical Association President Dr. Padraic Carr echoed those sentiments.
“Professional corporations have been factored into our provincial negotiation and our relationships with government and physicians, some of it formally and some of it informally,” he said.
“If professional corporations cease to exist in the form that we have now, then obviously we’re going to have to explore other options to keep our businesses sustainable with the master agreement.”
Health spending is the largest component of provincial budgets, and doctors’ fees make up a big portion. Last year’s $134-billion Ontario budget booked $51.8 billion in health spending, of which $11.5 billion was expected to be physician compensation.
Keeping a lid on fees is a key method by which provincial governments try to control health care spending and balance their budgets. However, the provinces would get some increased tax revenue from the proposed changes, which could soften the blow of a fee hike. Other benefits could also be negotiated in lieu of a fee hike to replace the lost tax savings.
Incorporating provides various benefits for doctors running a practice, but the tax advantages alone are a huge incentive. Tax guides show doctors can save tens of thousands of dollars annually through methods such as naming family members as shareholders, then splitting the income to avoid the highest tax bracket.
Supporters of the tax changes point out that about a third of doctors in Canada remain unincorporated, and even for the incorporated ones, the benefits go disproportionately to the wealthiest who have more income to shelter.
The federal government’s changes would curb the ways that private corporations can be used as a tax shelter, including new rules around growing investment income inside a corporation, converting dividend income into capital gains and splitting income among family members.
The proposal, announced July 18 and now going through a 75-day consultation period, has been enormously controversial in the medical community.
Doctors have railed against it, but the Canadian Nurses Association and the Canadian Association of Social Workers have both come out in support of the proposal. The CNA, which represents 139,000 registered nurses, has faced backlash from some of its members who said they weren’t consulted and don’t agree, but stands by its position.
The outcry from doctors is compounded by local tensions: in Nova Scotia, it’s the province’s issues with doctor recruitment and retention; in Ontario, it’s a bitter dispute over fee reductions; in B.C., it’s an ongoing reform of primary care delivery.
Prime Minister Justin Trudeau and Finance Minister Bill Morneau have said they fully intend to go through with the changes, though there may be some adjustments in response to the consultation.
Morneau told the National Post this week the provincial arrangements around incorporation are not a good method of compensating doctors, and since provinces set these deals up, it’s now up to them to adapt.
“I think that’s an important discussion provinces should have with doctors,” he said. “We’re not going to create a tax code that considers compensation for certain professional groups as its objective. It needs to be a system that doesn’t provide particular advantages for professionals and wealthy individuals to reduce their tax.”
Provinces are still studying the proposal, and will likely send submissions to the government on it by the Oct. 2 consultation deadline. Most of them declined to comment for this story.
In Ontario, sensitive negotiations on a new deal began last week, following years of acrimony.
“This is the last thing we need right now,” Ontario Medical Association President Dr. Shawn Whatley said. “We’re coming to the end of three and a half years without a contract, numerous rounds of cuts. And then to have this thrown into the mix? It’s just unnecessary, it makes things so much more difficult at the provincial level.”