As you move from med student to residency and beyond, your earnings will change – and so can your tax situation. That means, depending on your situation, you may need to pay tax by installments.
Here’s an overview of the ins and outs of installment payments to help you plan ahead.
Understanding tax as a med student and resident
As a medical student, your earnings were likely very low, and, as a result, your tax owing each year was probably low as well — and tuition tax credits might have wiped out any tax bill you’d have otherwise paid.
Then, as a resident, you were paid a salary, and income tax was automatically deducted from your paycheques without any action required by you.
Understanding tax as an in-practice physician
When you start working as an in-practice physician, your tax situation changes. If you’re like many physicians and bill your provincial health ministry on a fee-for-service basis, the tax you owe won’t be deducted and remitted to the Canada Revenue Agency for you. Instead, you’ll need to pay tax on your taxable professional income, which is your gross billings minus your deductible expenses.
You’ll need to calculate and pay your taxes owing directly — and starting in your second year of practice, you’ll usually need to make quarterly installment payments.
- In your first year of practice, the tax you owe will be tallied up when you prepare your income tax return. Then, you’ll need to send in the entire amount when taxes are due on April 30th of the following calendar year.
- In your second and subsequent years of practice, you’ll start to make quarterly tax installments (due in March, June, September and December). The amount of your quarterly payments will be based on your income tax owing in the two previous years.
Case study: Johanna’s tax journey
Here’s an example of how this process might work in the first few years of practice.
Year 1: No installment payments required
- Johanna is a new-in-practice physician. In her first year of practice, she works for seven months — July to December.
- In this first year, she is not required to make installment payments. Instead, she needs to set aside funds to pay the taxes due on April 30th of the following calendar year.
Year 2: Installments start
- In Johanna’s second year of practice, she consults with her financial advisor and professional accountant to calculate her tax bill and to prepare and file her tax return for her Year 1 income. She makes a payment covering the amount owing by April 30th of Year 2.
- This year, Johanna bills her provincial health ministry for the full 12 months.
- After she files her tax return covering her first year of practice, the Canada Revenue Agency asks her to make tax installment payments in September and December based on that return. These installment payments go towards the tax she owes on the income earned in Year 2.
- Because Johanna was only billing her province’s ministry of health for seven months in Year 1; however, her professional income was lower than it will be in Year 2 when she’s billing for an entire year.
- This means that the two installment payments Johanna makes in Year 2 likely won’t cover all of the tax she owes on the income she earns that year.
- As a result, she will need to make an additional tax payment when she files her taxes for Year 2 in the following calendar year. By April 30th of Year 3, she’ll have to pay the difference between the installments she’s already made for her taxable income in Year 2 and her actual taxes owing.
Year 3 and onwards: Installments become routine
- Now Johanna has about one and a half years of billing her provincial ministry of health for her services: seven months in Year 1 and 12 months in Year 2.
- Because installment payments are based on the last two years of self-employment income, her installment amounts may still be lower than her actual tax owing.
- This means she’ll probably still need to make an additional tax payment in April of Year 4 to cover the difference between her installment payments and her total tax bill for Year 3.
- After Year 3, the CRE will have two full years of self-employment income to calculate Johanna’s quarterly installment payments. This means that if Johanna’s taxable income is similar from year to year, her installments may largely or completely cover her taxes owing.
Every April, Johanna will pay the difference between her installments and any additional tax owing. If Johanna’s billings go up, or her expenses change — or both — her installment payments may not completely cover her tax owing for any particular year. (If she’s paid more in installments than her tax due, she’ll be refunded the difference. She can also opt to reduce or increase the amount she pays by installments if her taxable income is lower or higher.)
If Johanna decides to incorporate her medical practice, her tax situation may change again, and she’ll need professional advice to understand her tax obligations and options.
Keep in mind that there are a few ways to calculate tax installments. A professional financial advisor or tax professional can work with you to help ensure you understand your tax position and estimate the amount of your tax installment payments.
If you have questions about understanding your taxes during med school or as you prepare to work as a practicing physician, talk to a dedicated RBC Healthcare Specialist and see how they can help.
Read related stories:
- Should You Incorporate Your Medical Practice? Understand Your Options
- Salary or Dividends as an Incorporated Physician – What’s Right for You?
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.