Physicians, even though generally paid by the various provincial health insurance programs are effectively self employed business owners who experience financial difficulties often because of tax related debt. Licensed Insolvency Trustees regularly meet doctors who have accumulated significant tax debt, not because they have been irresponsible, but because the way physicians earn, report, and manage income often creates financial situations that are very different from those faced by salaried employees.
Many physicians start their careers burdened with significant student loan debt (very often bank loans for post graduate study) and at an age where stage of life expenses (weddings, starting families) simultaneously occur. They then spend years focusing on patient care while managing demanding schedules, building practices, learning to run a business (including paying all practice related expenses), and balancing family responsibilities. Tax planning can easily become something that receives attention only when a filing deadlines approach. Making matters worse, many accountants try and help the doctor defer taxes through various legitimate strategies but eventually the tax bill has to be paid. Add to that unexpected tax assessments or reassessments that arrive with a balance owing, compounded daily at the CRA’s current prescribed annual interest rate of 7%, and the amount owing can become much larger than anticipated.
Tax debt among physicians is far more common than many people realize. It is also a problem that can usually be managed fairly once the right advice is obtained.
Why physicians often accumulate tax debt
Unlike employees whose taxes are deducted from every paycheque, most physicians are responsible for setting aside their own tax obligations. Depending on how their practice is structured, will be drawn throughout the year without sufficient tax being withheld, creating large balances when returns are filed. In the very first year of practice there is usually no requirement to make income tax instalment payments. At the end of that first year the tax returns only need to be filed by June 15 of the second year. In the first two weeks of June, the accountant meets with you and tells you what they calculate you owe (and that interest has accumulated since May 1), and that you also must pay the first two quarterly tax instalments for year 2. The instalments for year 2 are (in most circumstances) based on year 1 tax return. So, you owe one and a half years of tax. You get the picture – you start on the back foot and never quite recover.
This becomes even more challenging when income fluctuates from year to year. A physician may have an exceptional year professionally while also making significant investments in a practice, purchasing equipment, hiring staff, covering unexpected business (or personal) expenses and repaying student loan debt. Although cash flow may appear healthy, the tax liability created by that income often arrives months later.
It is also common for physicians to prioritize investing in their practice or supporting their family ahead of setting aside funds for taxes. That decision is understandable, particularly when cash flow is tight despite strong revenues, but it can leave doctors facing substantial CRA balances that continue growing through interest and penalties.
CRA ‘s extraordinary tax debt collection powers
One of the biggest misconceptions surrounding CRA debt is that it is treated like any other unsecured debt.
It is not.
The Canada Revenue Agency has collection powers that extend well beyond those available to banks and other creditors. CRA can garnish income, freeze bank accounts, intercept tax refunds, and register liens against property without following the same legal process required for credit card companies or other unsecured lenders. For example, a bank needs to get a court order to seize an asset or garnishee your income payments from the province.
For physicians, these collection powers can become particularly disruptive because professional practices often rely on steady cash flow to meet payroll, pay office expenses, and continue serving patients (not to mention supporting your family). A frozen bank account or significant garnishment can affect not only the physician personally but also the operation of the practice itself.
Why payment arrangements are not always enough
Many physicians assume that calling CRA to establish a payment arrangement will resolve the issue.
Sometimes it does.
If the debt is manageable and can realistically be repaid within a reasonable period, CRA may agree to structured payments. However, those arrangements generally require repayment of the full principal balance together with continuing interest. For larger tax debts, that can mean years of repayment while interest continues accumulating. CRA is often unrealistic in its expectations of what can reasonably be afforded in tax debt repayment. For example, a doctor has two years of taxes owing and now has a payment plan with CRA to repay over two years. Assume net taxable income is the same in each of the past two and the current year at $400,000 and the taxes owing in respect of each year is $180,000. In Year 3 you would have to pay $180,000 (half of the payment plan) + the current Year 3 taxes of another $180,000 for a total of $360,000. That means you have $40,000 to live off in Year 3 ($400,000 less the $360,000). We all can see how that cannot work out in reality.
This is why some physicians discover that they sacrifice to dig themselves out of the first hole only to find themselves in a new hole (be it with CRA or other debt to subsidize their cost of living).
Don’t let embarrassment delay action
Doctors spend their careers helping other people address sometime very difficult problems. That responsibility sometimes makes it harder to ask for help when their own financial situation becomes stressful.
Many physicians worry that tax debt somehow reflects poor financial management or professional failure. It does not.
Tax debt often develops because physicians have unique income structures, demanding careers, significant professional expenses, and very little time to devote to financial administration. Combined with changing tax legislation, fluctuating income, and rising operating costs, and aggravated by too often over aggressive tax planning schemes, it is easy to understand how balances can accumulate over several years.
The embarrassment is not from addressing the situation with the right professional, the embarrassment is from sticking your head in the sand and dreaming that by working ever harder (despite the cost to your own health and relationships) you can fix it.
Understanding your options
When tax debt has reached a point where repayment is not realistic and/or the cost to your health and relationships (and even the impact on your professional performance) are problematic, it is important to understand all your solution options that may be available.
In many instances working more, trying to reduce practice operating costs or personal standard of living is simply not enough.
Where repayment on terms stipulated by CRA is either not affordable or fair to you, a consumer proposal may provide a practical alternative. A consumer proposal allows eligible individuals to work with a Licensed Insolvency Trustee (accountants and lawyers are not licensed to do this work) to negotiate a legally binding settlement with all unsecured creditors, including CRA, based on what you can reasonably afford rather than requiring repayment of the full amount.
The interest stops and most CRA enforcement processes in place are stayed (that is, ended) including lifting the freeze on bank accounts and garnishment of your fee payments. There are also no additional fees to pay – these are included in the consumer proposal payments agreed to.
For physicians carrying significant tax debt, this can dramatically change the financial picture by reducing the overall repayment obligation and stopping further collection action once the proposal has been filed.
Why early advice makes such a difference
One of the biggest advantages of seeking professional advice early is that it provides more flexibility.
Many physicians continue making payments for years while hoping practice revenues will improve enough to eliminate the debt. Others refinance homes, increase professional lines of credit, or borrow from family members believing they simply need more time.
Sometimes those strategies work.
Often, they simply increase the amount of debt while leaving the original tax problem unresolved.
Meeting with a Licensed Insolvency Trustee does not commit you to filing a proposal or bankruptcy. It simply provides an opportunity to review your financial situation, understand all your options, and determine whether your current approach is likely to achieve the outcome you want.
Speak with Baigel Corp.
If you are a physician dealing with CRA tax debt, you are not alone, and there is no reason to feel embarrassed about seeking professional advice. Licensed Insolvency Trustees work with doctors and other professionals who have found themselves under financial pressure because of tax obligations that have grown beyond what they can comfortably repay.
Baigel Corp. www.baigel.ca provides confidential, no-charge initial consultations and are obligated to explain all relevant options available based on your circumstances. Whether repayment, a consumer proposal, or another solution is most appropriate, our goal is to help you resolve your tax debt while protecting your long-term financial future.
The sooner you understand your options, the sooner you can focus your attention where it belongs: on your patients, your practice, and your family rather than worrying about CRA collection action.
*Baigel Corporation is a federally regulated Licensed Insolvency Trustee