Several years in to his practice he had worked very hard, and saved prudently.
Despite his status as a successful doctor, (and the well-kept secret that he had quietly tucked away over a million dollars) he didn't flaunt his wealth. He drove a Chevy, and chose a simple, inexpensive lifestyle and wardrobe. He lived on a beautiful piece of property overlooking a canyon, but in a trailer.
He loved the property's panoramic views and planned to build a stately home on it soon. He was single and admitted to being a bit lonely. He had given himself to school and work and managing a business, which gobbled up that most precious of resources - time for loved ones.
He showed me his plans for the new home. The stately edifice would overlook a majestic river several metres below, and look up to towering mountains above. He was finally dating, and the relationship looked promising.
She knew he was a doctor, but had no idea he had saved so well, nor any of his plans to build this majestic new house. She would get an extremely pleasant surprise once he was certain that she was in it for him, and not his wealth.
Whether you are a new graduate working as an associate, running your own practice, or approaching retirement, a little planning will go a long way. As your personal, professional and financial situations evolve, you should adjust that plan accordingly. The unfortunate, but all too common fact of life for many medical and dental professionals is the combination of above average income with well below average time to ponder what to do with it.
This can sometimes lead to significant inefficiencies, or worse, completely unnecessary disasters.
This series of articles will take us through some of the key planning issues professionals should consider at various stages of their career.
Part 1: The early years - choosing a practice arrangement that is right for you
As a new graduate entering the profession, there are several ways to practice medicine and dentistry. However, given the large amount of student debt following graduation, and the risks and capital outlay associated with starting your own practice from scratch, many graduates choose to become associates.
Employee vs. independent contractor
Generally, an associate in a medical or dental practice has no ownership or equity interest in the practice. An associate's status could be that of an employee or of an independent contractor, depending on the work arrangement mutually agreed upon. This arrangement should be formally specified in a contract.
Most physicians working in private clinics or hospitals and most dentists working in private practice, are considered independent contractors. They engage in a fee-for-service arrangement and they generally receive a certain percentage of the billings.
The question of whether an associate is in a business relationship or in an employee-employer relationship is important from both a legal and tax perspective. Legally, it determines which laws govern and protect the associate's relationship with the business. From a tax perspective, employees will have source deductions removed by their employer from their pay cheque and remitted to the government on their behalf.
Independent contractors do not; rather, they usually remit quarterly tax instalments to the government as well as pay certain expenses out of pocket that would normally be covered by an employer. On the other hand, while employees have little ability to claim any deductions against their employment income, independent contractors may be able to claim business expenses against their income, reducing their tax bill.
The overarching rule applies here: the greater the risk, the higher the potential loss or reward. Contractors take more risks, but if they manage those risks well, can earn a more substantial reward.
The essence of the relationship between the practice owner and the professional determines whether an individual is an employee or an independent contractor, regardless of what is written in the contract. Many court cases have addressed the question of whether someone is an employee or independent contractor. You don't want to be one of them.
Prior to the start of your contract, you should review your associate agreement with a qualified legal professional to ensure if it truly reflects an employee or independent contractor. You can also request a ruling from the Canada Revenue Agency, using Form CPT1, Request for a Ruling as the Status of a Worker under the Canada Pension Plan and/or the Employment Insurance Act, available at http://www.cra-arc.gc.ca/E/pbg/tf/cpt1/README.html.
The content in this article is for information purposes only and does not constitute individualized tax or legal advice. It is imperative that you obtain professional advice from qualified tax and legal advisors before acting on this information.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities (member CIPF) and can be reached at [email protected].
