Why Doctors Need a Capital Gains Tax Break
I’ve been a family doctor since 1993, when I set up my practice in Coquitlam, B.C. Under Canadian tax law, doctors were—and still are—allowed to work as sole proprietors. But around that time, provincial and territorial governments started encouraging family physicians to incorporate their practices (as “medical professional corporations”) as a way to manage expenses and save for parental leaves, sick days and other life events. We could also save for retirement through investments and capital gains retained within our corporations.
At first, it wasn’t feasible for me to incorporate. Like many of my colleagues, I graduated from medical school with an incredible amount of debt. Every dollar I earned went toward salaries for myself and my staff, along with expenses like training, equipment, injectable medications, refrigerators and computers. Those alone nearly doubled my costs. I also had two young kids, plus housing and child care costs. I needed every single dollar I made. Another decade passed before I incorporated.
New tax changes have pulled the rug out from under our entire profession. Under the federal government’s newly enacted capital gains tax legislation, which went into effect in June, 66.67 per cent of all capital gains earned by trusts and corporations are taxable—close to a 17-percentage-point hike from the original inclusion rate of 50 per cent. This change affects approximately 60 per cent of Canada’s 96,000 doctors. Incorporated practices are structured differently than small businesses, so we’re ineligible for the lifetime capital gains exemption that applies to those who use 90 per cent of their assets to operate. (This applies to jobs like mechanics, hairdressers, bakers and farmers.) We fall between the cracks.
There’s more: doctors now pay a capital gains tax on any income investment—like stocks, bonds and mutual funds, for example—earned through their corporations. We also pay tax when we pay our salaries out of the corporation, dipping directly into our retirement savings. Some doctors have already been saving for decades, and the new inclusion rate will apply to them, too. For doctors who have been working for the last 20 to 30 years, it winds up being a roughly eight per cent additional fallback on the capital gains. If an eight per cent penalty was applied to any other Canadian pension plan, there would be rioting in the streets. Our best solution now is to petition the federal government to ensure that medical professional corporations receive the same $250,000 inclusion rate exemption that’s applied to individuals.
These tax tweaks appear to be small, but they put more undue pressure on our physician workforce at a time when the public health care system is crumbling around us. An estimated 6.5 to 7 million Canadians do not have a family doctor, and federal data suggests Canada will need nearly 50,000 more family doctors by 2031. We shouldn’t be introducing new reasons for clinicians to leave Canada—or leave the profession. Burnout aside, doctors are already under immense financial strain. We pay for our community offices, rent, staff salaries, supplies and equipment. The overhead costs of running practices used to sit between 20 and 30 per cent of the average family doctor’s income. In the last 20 years, with the advent of electronic medical records, more complex treatments and inflation, it has jumped to 40 per cent.
There’s no question that doctors (and other professionals, like dentists and pharmacists) are better paid than most Canadians who work in non-professional jobs. But physicians’ fees are also set and regulated by the provinces and territories; we don’t have the ability to increase them to make up for these new deductions. As inflation rises, our staff’s cost of living goes up, as do our expenses. Unlike lawyers and dentists who can simply increase their fees and pass the difference along to clients, physicians can’t. And, when we take time off for a holiday or illness, those costs don’t go away. The majority of doctors simply absorb them, working twice as hard when they return.
I’m already aware of doctors—older colleagues and new practitioners—who are closing up shop and retiring early because of these proposed changes. I heard from one doctor who was aiming to retire in the next few years. She had a retirement fund of $1.6 million, and in 2022, her capital gains income was sitting at $44,000. At the old rate, she’d have to pay roughly $10,000 in taxes; under the proposed legislation, that number would be about $4,000 more each year. To break even, she’d have to significantly delay her retirement, and she’s already 67 years old.
On the issue of parental leave, I spoke to a 35-year-old specialist who incorporated her practice in 2022, with planned maternity leaves on the horizon. She returned to work three months after the birth of her first kid to shore up income, with the goal of taking a longer mat leave with her second child. The new capital gains legislation has made her question whether to have a second child at all. The taxation changes could mean Canada won’t be able to attract young physicians to community practices. I’m hearing from soon-to-be grads in family medicine who are saying they’re either going to look for salaried positions at hospitals, move to another jurisdiction or leave health care. They have no incentive to stay.
In 2019, community-based medical practices contributed roughly $35 billion to Canada’s economy—that includes the people we employed, the supplies we purchased and the patients whose illnesses we treated (and, therefore, diverted from more extensive, longer-term treatments). Being a doctor is not an easy job; we do it because we want to care for patients, for the public good. But at the end of the day, doctors need to care for themselves, too.
My husband worked in the telecommunications industry, and he retired several years ago. We’re the same age. There’s absolutely no way that I could consider retiring at this point, especially given these capital gains changes. After 31 years dedicated to Canadians, shoring up a health system that was increasingly not meeting the needs of my patients, I looked into whether I’d be able to work in the United States or Australia without having to write additional entry examinations. I thought I’d accumulated a decent amount of savings over the years, but clearly, that number can change at any time. In many ways, it seems, my future is uncertain.
Kathleen Ross is the president of the Canadian Medical Association.